Mind your money

Adhil Shetty Posted online: Tuesday, Nov 26, 2013 at 0000 hrs
When it comes to money management, a majority of people don’t live up to the level required for becoming rational and logical thinkers. Some decisions are taken with the flow and, often, leave people wondering about what they were thinking at that moment.

Money is certainly capable of playing tricks with the human brain. Most monetary decisions, made by individuals, are based on several psychological factors and do not take rational and logical thinking into consideration.

With the ever-increasing percentage of dependency on the psychological factors for making financial decisions, it becomes important to understand the money traps that are actually based on human emotions. Luckily, in today’s world, there are entirely different fields like behavioural economics that are fully dedicated to how and why humans behave in different ways when it comes to money.

And this brings the good news that the researchers have been able to pinpoint some ways in which humans tend to outsmart their brains when taking money related decisions. People simply need to understand these typical, psychological-financial traps and alter the manner in which they take purchasing or investing decisions.

Price comparison

This is perhaps one of the most common traps that the buyers fall prey to. They tend to compare the price tags of two or more comparable things and end up purchasing the one with the lower price tag.

In some cases, buyers are likely to make the price of the item they actually want to purchase as the base price for comparison. In others, they just stick to the first quote of the product they come across in both the online as well as the physical market as the comparison price.

One thing that should be kept in mind in such a scenario is that no matter how cheap an item is priced, it doesn’t necessarily make it of a better quality. It is the quality that requires comparison instead of prices to make a non-regrettable decision at the end.

What is free might not be good for your pocket

The word ‘free’ has something magical about it. It gives birth to an irresistible feeling in humans that drives them to make totally irrational decisions. This phrase is just another typical, old-school sales trick that tends to lure the buyers into spending money on things they do not really need and would have avoided buying otherwise. This is the reason why the word ‘free’ should always be considered as a warning to spare some time and give a second thought to before purchasing anything.

Items that come for free can often be ones that are priced higher than the rates at which they can actually be acquired for. By considering the need aspect, one will be able to do the simple math and make the correct decision in the end.

Instant gratification

Most of us want to visit a foreign country for vacations. However, living the dream comes at a cost that one must save for. There are some people who cannot control the craving and proceed to seek instant pleasure by purchasing a tour package and not saving anything for the future.

They simply don’t want to sacrifice the present-day happiness for something that might or might not come 10-20 years down the line. However, one needs to try and attach instant emotions to their future goals. The aim should be to make the future as secured as possible. Making flexible, long-term money spending goals is an even better idea for avoiding being influenced by irresistible emotions.

Habit of conserving

When it comes to doing the right thing with the unexpected riches gained from one’s ancestors or any other windfall, people tend to have a soft corner for this money and prefer not locking it in any kind of risky propositions. They fear that they will lose their ‘precious’ money and, as a result, keep them in accounts that have lower chances of growing in due course of time. One needs to utilise such unexpected gains as normal income and invest it in stocks, real estate or any other mode of investment for better gains in the long run.

In the end, it is not about how much one earns. It is all about how one treats the money in due course. Keeping these psychological traps in mind and being wary of them definitely aids in better utilisation of money.

* The writer is CEO of BankBazaar.com