To successfully navigate the complex world of personal finance, it’s crucial to be aware of the pitfalls that can derail financial stability. Understanding these challenges is the first step toward building a strong and resilient financial plan.
It can be easy to fall victim to the 9 common money traps we’ve listed below, but arm yourself with awareness and you’ll be prepared to avoid an ambush. Let’s get into the details — that way, you can take control of your finances.
1. Falling for “Free”
The allure of free knows no bounds. Even the savviest of consumers can be duped by the offer of a “free” service or product. If you ever find the offer of free oil changes tipping the balance in your decision to buy a car or a free hair dry causing you to consider getting a haircut at a new salon, take a step back. Is it really “free,” or are you being led into buying a product at a premium price that you wouldn’t normally consider?
2. Sticking With a Loss
It can be difficult to admit to ourselves when we’ve made an error in judgment, and admitting such errors publicly by divesting ourselves of a failed investment or purchase can be even harder. The key is to not make these mishaps personal—they are not a measure of you, but a simple mistake that can be rectified. So if you’ve bought a home that requires renovations above and beyond both what you expected and what you can expect to get a return on, don’t stick with it. Sell and move on.
3. Buying New
Buying new is both a money trap and a bad habit. Get out of the habit of buying new by recognizing those areas of your life that don’t require brand-new, top-of-the-line purchases. So if you’re looking to buy a set of screwdrivers for the occasional repair around the house, find a quality used set. If you’re not a professional repairperson, you won’t get a return on your investment by buying new. New cars are another big purchase that may be best to skip.
4. Confusing Fractions for Real Dollars
Consider this scenario: A woman is redecorating her home and decides to drive 30 minutes further to get a rug that is $100 at the nearest store for half the price. Good decision, right? Now imagine that she is purchasing a new sofa. It’s $5,000 at the closest store and at the other, it’s 1% cheaper. Should she drive there for that 1% in savings? Of course! Because in both cases, she’s saving $50. Don’t let fractions of a price confuse your purchasing decisions — think in terms of real dollars.
5. Leasing a Car
Leasing a car is the most expensive way to drive. Simply don’t do it.
6. Instant Gratification
Making purchases to fill a short-term need or want is hard to kick—we all do it sometimes. But be careful about how often this happens, and how much you spend when you do give in to impulse.
7. Buying “Top of the Line”
Don’t be the type that falls into the “top of the line” trap—not everything you own needs to be the best product on the market, and trying to keep up with the Joneses by having high-end brand names on every appliance, piece of clothing, and furnishing in your home will only cost you thousands in money you could be saving, or better yet, investing.
8. Treating Investment Gains as Unearned Money
Have you ever heard of a gambler winning a lot at a casino, and then gambling it all away within an hour? Sometimes investors can behave this way as well—when she or he wins a gain on a canny stock investment, it can feel as though it’s somehow unearned or extra money. As a result, she or he might be less cautious with it by spending it or reinvesting recklessly. Always consider money a return on your time, expertise or effort and you’ll not fall victim to this money trap.
9. Being Beguiled by Anchor Prices
People often tend to subconsciously set the first price they encounter for a product as its “anchor price;” when they encounter the same product at a lower price they’ll think it’s a steal, without actually having done any research to determine either price ranges or the value the product offers them personally. Beware of this anchoring effect, especially when shopping for something you really want, but know you don’t actually need.