the Psychology of Money
Smarter and Harder
When it comes to managing money, your mindset often proves to be just as impactful, if not moreso, than advanced knowledge, skills, or expertise.
As the saying goes, personal finance is 80% personal and 20% finance.
Use these tips to better understand your money psychology and build healthy financial habits.
#1 Optimism Bias
Optimism is great, but assuming only good things will happen can lead to insufficient planning for emergencies and unexpected costs.
#2 Negativity Bias
Similarly, focusing only on negative outcomes can brew anxiety and unhealthy risk aversion, crippling financial growth.
#3 Hedonic Adaptation
Over time, luxuries become more familiar as we adapt to them. If you're not careful, this pattern can steadily erode your budget.
#4 Sunk Cost Fallacy
Don't send good money after bad. If something isn't working out, it's okay to re-strategize, rather than keep throwing money at the problem.
#5 Social Proof
Sometimes it's great to talk with peers and get their advice. But just because someone else did it doesn't always mean it's a good idea for your money.
#6 The Pesky Joneses
"Keeping up with the Joneses" is a worn out cliche, but we still do it anyway. Watch out for the influence of people around you overspending.
#7 The Gambler's Fallacy
When it comes to investing, past outcomes rarely affect future events. Invest your money based on the future, not the past.
#8 The Scarcity Mindset
While it's sometimes a good motivator, the pervasive feeling of not having "enough" ironically drives us to waste all our resources on material wants.
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