3 Reasons You Can Fall into the ‘Spending Trap’
Even financially savvy people can fall into the trap of spending money, such as buying a new pair of shoes that is marketed to you as a great deal on social media that isn’t worth the cost.
That’s because money can trigger emotional responses that force us to ignore cost-benefit analysis. Lotteries, attractive credit card acceptance bonuses and “free” products and services that will tempt you to overspend are all examples of spending traps. To better prepare yourself to take a break before you pull out your wallet again, consider these three reasons you’re falling into a spending trap.
1. The illusion of inflated costs
The fallacy of sunk costs is the idea that you should continue to invest your time and money in something because you have been doing so. Often, people want to make that time and money worthwhile – and they see continuity as the only way to do that. Research shows that we tend to hate losses more than we enjoy gains.
In personal finance, this behavior can manifest itself in many ways. Maybe a bonus credit card gives you rewards if you spend a certain amount, but when you’re done spending you realize you’re spending more than you budgeted for just to get the reward. Instead of stopping your spending and giving up the reward, you may be tempted to keep spending to get it. Overspending on a credit card and racking up debt that you can’t pay off quickly can be more dangerous than losing the welcome bonus reward.
Before you continue spending, force yourself to pause and calculate your potential losses and potential gains.
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2. Urgent bias
Urgency bias refers to our tendency to prioritize tasks that seem urgent over longer-term ones – even if the ones we have more time for are more important. For example, some companies use limited-time offers to encourage purchases within a certain window. They may have a special offer that expires at midnight or a “buy one, get one free” sale that only lasts a few days. Consumers may prioritize these purchases over their long-term financial goals, such as saving for a mortgage, because of the perceived urgency.
These types of promotions often work because people take the time they should to consider a purchase when they have limited time to do it. Stop and think before making any of these purchases. Some people use the “24-hour rule” where they force themselves to wait a day before moving forward with a purchase, giving them time for their heightened emotions to cool down before hitting the “buy.”
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3. The illusion of control
The illusion of control is when people overestimate their abilities to know the outcome of something – and it can be very costly.
Investors with this cognitive bias may invest in speculative stocks or buy risky options contracts and expect to be more successful than the average investor, for example. It can also be as simple as thinking you know where the stock market will look next, when even experts on Wall Street have trouble doing so.
To avoid falling prey to this bias, focus on making data-driven investment and spending decisions and get feedback on potential decisions that conflict with your own to get the full picture.
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