psychology

4 Myths About Economic Behavior We Don't Believe Anymore

Emily Guy Birken — Tue, 31 Jul 2018 08:00:10 +0000

I have felt vaguely guilty about a nonexistent marshmallow for several years now.

This guilt was triggered by the famous Stanford marshmallow experiment, in which psychologist Walter Mischel gave preschool aged children a marshmallow (or other treat) and told them they could either eat the single marshmallow now, or hold off for 15 minutes and get a second one. Mischel and his researchers revisited the same test subjects as they grew up, and found that those kids who could wait for the second marshmallow became successful adolescents and adults. Mischel concluded that the kids who waited were wired for delayed gratification.

So why should this study make me feel vaguely guilty? Because I've met me, and I know there was no way four-year-old Emily would have been able to hold off on eating a delicious marshmallow sitting right in front of her. (Nearly 40-year-old Emily would still struggle with this exercise, and I have the empty Jet-Puffed bags to prove it.)

Despite the fact that I have shown the ability to delay gratification when it comes to finances, education, career goals, purchases, vacations, and other important decisions, I believed that there was some aspect of my brain wiring that was suboptimal as compared to those who could wait for a sweet treat.

Except Mischel's experiment may not have proved what he thought it did. A recent study was unable to replicate his results — and Mischel's experiment is not the only one with a replication problem. It turns out, a number of the most famous behavioral science studies out there are based on somewhat shaky research. Many of the replication attempts are finding that the results from the original studies are either inconclusive, lacking important nuance, or just plain wrong. This is why it's likely we'll see more big ideas from behavioral psychologists getting challenged in the coming years.

So before you rethink your day-to-day habits, consider how these famous studies have been exposed as more myth than truth.

The marshmallow experiment

Mischel's original experiment from the late 1960s looked at too small a sample of children — 90 kids total — and all were from the preschool on Stanford's campus. The new study, by NYU's Tyler Watts and UC Irvine's Greg Duncan and Hoanan Quan, expanded the number of test subjects to 900 and made sure to include children more representative of the general population in terms of race, ethnicity, and parents' education level.

What the new researchers found was that children's ability to wait correlated most strongly with social and economic factors. A kid from a poorer family may not be able to count on food being there from one day to the next, so she has learned to take what she can when it's available — while a kid from a more affluent family may have learned that delaying gratification can be worth it.

When the researchers controlled for family income, they found that rich kids who ate the marshmallow right away did no worse in standardized tests as adolescents compared to their waiting counterparts, and poorer kids who waited did no better than those who dug in.

But the kids from higher-income families all tended to have better ability to delay gratification as adults — which means our "willpower" is less wired into our brains and more a function of how we were raised.

Ego depletion

Speaking of willpower, one of the most influential studies about willpower was conducted two decades ago by Roy Baumeister and Dianne Tice. The study set out a plate of freshly-baked chocolate chip cookies and bowl of radishes. As participants filed in, they were instructed to take either a cookie or a radish. The test subjects were then given an impossible puzzle to solve. The participants who were allowed to snack on cookies spent twice as long trying to solve the puzzle before giving up as compared to those who had to eat radishes while smelling and staring at the plate of cookies.

Baumeister and Tice described the phenomenon as "ego depletion." They believed that forcing yourself to not eat the cookies right in front of you tuckered out your willpower, leaving you less mental energy to keep working on a frustrating puzzle. If willpower is a finite resource, you can use it up by making little choices before facing a big one.

But other researchers have been unable to replicate the original study, and meta-analysis (that is, analyzing all of the studies about this phenomenon) have also found little evidence of ego depletion.

What it comes down to is that our ability to exert willpower can depend heavily on our motivations, beliefs, and mindset. It's not as simple as the original study made it sound — that willpower is like a muscle and can be exhausted like one.

Power poses

You may have seen the popular TED talk on power poses, presented by researcher Amy Cuddy. Cuddy presents some pretty compelling arguments about the power of body language to affect our feelings of confidence and power. She and her research colleagues found that standing in a Superman pose or other powerful pose for two minutes increased levels of testosterone, decreased cortisol (the stress hormone), and increased levels of risk-taking behavior.

This was great news for anyone feeling nervous about a speech, a job interview, or talking to that cute guy in accounting. Just find a private spot to pretend to be Superman for a couple of minutes, and you can enter into your nerve-wracking encounter with increased confidence, thanks to your hormones.

Except that a follow-up study which included four times the number of participants as the original has determined that there is no such hormonal effect. Even Cuddy now describes herself as being "agnostic" on the hormonal effects, although she does claim that assuming such poses does help people to feel more powerful.

Cuddy may be correct, although not for replicable, scientific reasons. Because of the placebo effect — the cognitive bias that leads people to believe something will help them because they expect it to — and the huge popularity of the idea of power poses, many who try them will find they feel more powerful after striking a pose. (See also: 5 Mental Biases That Are Keeping You Poor)

Priming

Nobel Prize-winning economist Daniel Kahneman wrote about priming in his book Thinking, Fast and Slow. Priming is the theory that subtle cues in an environment can affect an individual's behavior.

Various studies on priming found that participants would walk more slowly after hearing and using words associated with aging (like Florida and bingo); that people were more honest when there was a representation of eyes nearby when they had a choice to steal or cheat; that holding a warm drink while speaking with someone made people feel more warmly toward the conversational companion; and that seeing money will make people behave more selfishly.

However, follow-up studies have not been able to reproduce these results, suggesting that our behaviors are not nearly as impressionable as the original studies made us believe. This is good news, since it makes it clearer that human behavior is not captive to one's environment. We are more in control of our behavior and reactions than these studies suggested.

Don't believe everything that you read

Behavioral science is a fascinating field that is truly helping us to better understand why we make the irrational decisions we do. But it is important to remember that the researchers in this field are human, as are the journalists who report on their studies. There are bound to be imperfect studies, mistakes, and even frauds that are touted as the next great truth about financial and psychological behavior. Don't let those "truths" keep you from following what works for you. Especially if what works for you is eating the marshmallow right away.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What Happens When We're Not Logical With Money

Dr Penny Pincher — Mon, 04 Dec 2017 10:00:06 +0000

Traditional models of economic behavior assume that people will make logical money decisions to achieve the best outcome. But in many real-life situations, people tend to make irrational decisions with money. Consumer behavior that makes people feel happy often does not add up to the best move for them in terms of dollars and cents.

Understanding irrational decisions when it comes to money can be useful, not only to predict illogical choices that people make, but to influence economic behavior. This is something behavioral economist Richard Thaler, winner of the 2017 Nobel Prize in Economic Sciences, has studied at length.

Thaler's understanding of the quirky thought processes that result in irrational spending can help us make smarter financial decisions for ourselves. Here are some of his key insights into the thinking that drives people to defy logic when it comes to money. (See also: 5 Mental Biases That Are Keeping You Poor)

Endowment effect

Raising the price of a good when its value goes up is logical from the perspective of classical economics. But people see price increases as unfair, and consumers may decide not to make the purchase. In the 1991 paper Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, Thaler, along with Daniel Kahneman and Jack L. Knetsch, explored a few examples of this particular phenomenon, dubbed the "endowment effect."

Research showed that people found it unfair for a car dealership to raise the list price of a new car by $200. But people thought it would be fair to remove a $200 discount that the dealership has always offered for that car. The cost of the car is $200 more either way, but raising a price makes people feel like something they already had was being taken away, while removing a discount is less of a barrier to making the purchase.

Thaler demonstrated this tendency of not wanting to give up something that you already have with coffee mugs. Half the students in a class received a coffee mug. The randomly selected students who received mugs valued the mug at a much higher price than students who did not receive a mug would be willing to pay to get one. The drive to value what you already have more than something you could obtain is one of the factors that drives illogical human behavior with money.

One way to use the endowment effect to your benefit is to synchronize pay raises with increased retirement fund contributions. That way, the increased contribution to a retirement fund does not reduce take-home pay and is not viewed as a loss of something you already had.

Mental accounting

Money is fungible — in other words, dollars are interchangeable, with one dollar being equal in value to any other dollar. But people’s mental accounting systems do not treat all dollars as equal, and this can result in people acting in ways that defy simple math.

People tend to categorize funds and use them for their intended purpose even if this is not efficient. Thaler presented an example of this type of mental accounting in his 1985 paper, Mental Accounting and Consumer Choice. A couple had saved $15,000 for a vacation home that they planned to buy in a few years, and put the money in an account earning 10 percent interest. At the same time, they bought a new car with a three-year loan for $11,000 at 15 percent interest.

Simple math dictates that the couple would have come out ahead using their vacation home fund to buy the car, paying themselves back instead of paying the bank at 5 percent higher interest than they were earning. But people tend to label money with a purpose and assign value to their keeping dollars in the proper categories in their mental accounting system.

Even the source of funds can trigger people to put their money into different mental categories. Would you spend $500 of lottery winnings in the same way you would spend a $500 raise? People would probably use the lottery winnings to buy something fun, but use money from a raise to pay down debt or boost savings. It’s the same $500 either way, but people attach different purposes to money based on their mental accounting system.

Overconfidence

In a 2005 study analyzing NFL first-round draft picks, Thaler (along with Cade Massey) found that teams often pay too much for early picks based on their perceived ability to spot the next "superstar" player. Second round picks are generally a better value. So why do teams keep paying sky-high prices for first-round draft picks?

One explanation is that teams spend a lot of time studying and analyzing the high draft picks and become overconfident in their ability to pick a winner. Overconfidence can lead consumers to buy the latest and greatest new tech products at top dollar, and investors to confidently buy stocks at prices that are not in line with their assets and earnings.

Status quo bias

Momentum is a powerful force in human psychology. People have a predisposition to prefer the current state of affairs over alternative options. They'd rather hang on to what they have than risk the potential disadvantages of making a change.

An example of businesses taking advantage of status quo bias to sell more products is through opt-out subscriptions. You might get a low teaser rate on a gym membership, wine club, or magazine subscription that automatically continues at full price unless you opt out. Once you are signed up for the subscription and start receiving the benefits, status quo bias makes it more likely that you will stay subscribed rather than taking action to opt out right away.

Status quo bias can be used to help people save money, too: If employers automatically enroll employees to contribute to a 401(k) plan with a choice to opt out, participation can be up to twice as high than if employees need to take action to sign up in the first place.

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Secret to Better Money Management May Be in Your Past

Sarah Winfrey — Mon, 20 Nov 2017 09:30:10 +0000

It's easy to feel out of control with your money. It happens to the best of us. But whatever the reason you're feeling this way, it's important that you regain your footing and, maybe even more importantly, that you regain your feeling of control. After all, if you don't think you can fix the problem, you probably won't even try.

Your first line of defense is financial education. It will help you understand what actions you need to take to get back on track. But there's another tool that could boost your motivation to carry out those actions. A recent study by scientists at Creighton University shows that harnessing nostalgia can help you get in touch with your feelings, which you can use to regain control over your finances.

The power of nostalgia

The Creighton team carried out an experiment. Dr. Brad Klontz, along with his fellow researchers, divided study volunteers into two groups. One half attended a standard financial literacy presentation where they learned about saving money. The other half was told to bring an item (or a picture of an item) that they considered nostalgic.

The latter group was led through exercises to help them come up with positive feelings and memories tied to their objects or photos. They were asked to name these emotions, identify the values that went along with these emotions, and understand how these same values formed the basis for their future savings goals.

Over the next few weeks, the "financial literacy" group saved 22 percent more than they had saved before. That, in and of itself, is a significant number. But the "nostalgia" group saved 67 percent more — three times more than the control group. It would seem nostalgia and the emotions that go along with it have a lot of power when it comes to how we handle our money! The researchers theorized that the powerful emotions associated with the nostalgic object provided a deep, positive incentive for saving. Participants were able to make direct connections between saving money and the things they value most in life.

Harnessing nostalgia for yourself

If you are feeling out of control with your money, here are some steps you can take to engage your emotions via nostalgia and get back on track.

1. Find an item that has nostalgic value to you

This can be anything, as long as it is important to you. It can be an item from childhood, something passed down from a family member, something you found, or maybe something you purchased on vacation. If you don't have an item that fits the bill, go through old photographs until you find one that is especially meaningful.

2. Think about how you got that item and why it's important to you

Remember the moment you found or received the item (or took the photograph). Think about the people you were with or the poignancy of the moment. To the best of your ability, take the time to actually relive the moments in your life that have made this object or photo so important to you.

3. Name the feelings that go along with that item and your memories of it

Giving your feelings names can help them feel more concrete, rather than abstract and ethereal. When they are concrete, they are more useful to you as you continue this exercise. It is perfectly fine to have multiple feelings about your object. For instance, something your grandfather passed down to you may make you feel excited, because he chose you for this item, but also loving because of the relationship you had with him.

4. Identify the values that underlie these feelings

Once you pinpoint your feelings, you can identify the values that provide their foundation. If something came from a grandparent, it may be tapping into your value of close family ties. Something that reminds you of childhood could be important to you because you value wonder and joy and you haven't felt those things in a long time. An item from a trip could be important because it reminds you that you value excitement and adventure.

5. Connect these values to a financial game plan

When our finances are out of control, most of us know what we need to do to get them in line again. However, it's hard to find the motivation to do that when we feel hopeless and helpless in the face of financial stress. Connecting our values to the actions we know we need to take can help us find the motivation to actually tackle them.

Think about those values you identified. If you value the safety and security of a stable home, that can motivate you to do what is necessary to provide financial safety and security in your own home. If you value adventure, it can motivate you to make the changes necessary to get your money under control now, so you can afford more adventures later. If you value joy, spend some time thinking about how you will feel when you are out of your financial hole.

It's never too late to take control of your money. When you harness the power of nostalgia and emotion, you may find yourself making and sticking with financial decisions that you have struggled with before. This, in turn, will help you make even stronger decisions until your money is completely under your control again.

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This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Talk to Friends and Family About Money (Without Making Everyone Mad)

Annie Mueller — Mon, 09 Oct 2017 08:00:07 +0000

Talking about money can get awkward in a hurry. Don't believe me? Ask your friends how much debt they have at the next social gathering and observe as the silence fills the room. However, sometimes those financial discussions need to happen. Here's how you can handle them with minimal discomfort.

1. Find neutral ground

If you need to talk about a mutually owned asset, or who's going to take over the finances for an aging or incapacitated parent, get to neutral ground. Schedule lunch at a favorite restaurant or find a quiet corner of a local cafe.

A public space helps everyone stay calm: Who wants to make a scene? And the neutrality of the space can help defuse any sense of intimidation or ownership of the discussion, leaving it open for all parties to state their needs and concerns.

2. Give a three-point introduction

Growing up in the South, I heard a three-point introduction every single Sunday. It was a Baptist preacher staple in which they'd tell you, in summary form, what they were about to tell you. Three points made just about the right length for a sermon.

Use this approach by clearly outlining what you want to discuss, and take all the other stuff off the table. It will help set the other people at ease: Now they know what the conversation is and isn't about. Everyone involved will feel as if they're more in control, which in turn makes them feel more comfortable.

3. Repeat it back

The most important part of a potentially tense financial discussion is understanding. You want to be sure that the other folks involved understand what you're saying. In turn, they want to be sure that you understand their needs and concerns. As you listen, give their words all your attention. Then, repeat back what you've heard: "OK, what you said is that you think it's best to sell the family property as soon as possible because … "

This approach helps to avoid misunderstanding. As you repeat back what you've heard, they get a chance to listen to their own words and revise them if needed. And, by repeating back what you've heard with the intent to understand, you put yourself in the position of advocate, or ally, rather than enemy. You may not agree with the point they've made, but by striving to understand before you argue or correct, you lay the groundwork for a calmer and more productive discussion.

4. Use facts, not feelings

Feelings matter, of course. But when you're discussing finances, don't argue on the basis of feelings, intuitions, or preferences. Instead, if you disagree with a point or opinion, strive to explain why you disagree with facts. This helps to keep the discussion from becoming personal or offensive.

For example, if you don't want to split the check evenly because you only got an appetizer and everybody else got an entree and a drink, don't say, "I'm not doing that, guys! It's not fair and I don't want to pay for half of Melinda's cocktail again!" Instead, say, "Actually, my appetizer was only $8, which is less than 1/5 of the total bill." That's a calmly stated fact, rather than vented frustration and a thinly-veiled insult of Melinda.

5. Suggest a specific action

Specific actions are the way to move things forward and solve problems. In fact, many times people end up in arguments not because they disagree on the major point ("We need to pay the bill"), but because they're not sure exactly how to make it happen. We stumble over anthills more than we do over mountains. In the scenario above, you could follow up your calmly stated fact by suggesting a specific action: "I'll put in $10 to cover my part, and you guys could split the rest evenly."

By suggesting a specific action, you've solved the problem of too many options, which can be very unsettling for us humans. When we feel unsure and unsettled, it's often easier to fight than to move forward, which is why financial discussions can degenerate into insults so easily. Suggesting an action helps move people forward and give everyone a clear next step, which can prevent that discomfort and conflict.

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This article is from Annie Mueller of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Find the Savings Strategy That Works For You

Emily Guy Birken — Mon, 18 Sep 2017 08:30:05 +0000

Creating a savings strategy may sound like an odd concept. Saving money seems like a simple task — one that doesn't require much strategy on your part.

But saving money, like any other financial skill, can be set up to either fit in with your psychology, lifestyle, and preferences, or go against them. And just how successful can your savings plan be if your savings strategy doesn't work for you?

If you've ever struggled to save money, you might have been using the wrong strategy. Instead of following the same old failed savings path, try a strategy that works for you:

If you like getting something for nothing: Use a change jar or roundup app

When I was in high school, I was the person holding up every transaction by counting out exact change to the cashier, while my friend thought nothing of breaking a $20 bill. For a long time, I thought my friend was bad with money — until I learned what he did with all the loose change he gathered by breaking bills. Every few weeks, he'd take his change to the bank and deposit the money into a savings account.

My friend's habit was an excellent way for him to set money aside. He got to avoid counting out change at every transaction (which he hated doing), and he felt like he was getting a nice financial bonus every few weeks.

In 2017, change jars may not be as practical as they were in the 1990s, but you can consider using an app that offers a similar strategy. Apps like Acorns and Qoins recreate the feeling of throwing change in a jar. These apps round your purchases up to the nearest dollar, and use the difference to build your savings account or pay down debt. (See also: Spare Change Apps — Are They Worth It?)

If you like seeing progress toward a goal: Manually transfer your savings

Sometimes, the best motivation to do something is the same one your elementary school teacher offered: gold stars on progress charts. If this describes you, consider manually transferring money to your savings account every payday.

This may sound counterintuitive, since so much personal finance advice suggests automating your savings so you don't have to think about it. But if you're someone who feels great about seeing the progress made on a goal, manually transferring your savings will make you excited about doing it in the first place. It will motivate you to stick with it, and maybe even put more money aside.

In addition, actually creating a savings chart or other visual representation of your goal will help you stay on track and inspired to find more ways to save. That's because tracking your progress helps build a chain of good habits, and you want to keep that chain going until the good habits become second nature.

If you don't want to think about saving money: Deposit your whole paycheck into savings

Some people have trouble saving money, no matter how hard they try. If this describes you, why not set up your finances so that your money goes into savings before it hits your checking account?

Under this system, your entire paycheck is deposited into your savings account on payday. Once a month, you'll transfer the amount you need for your regular expenses and bills into your checking account.

When you follow this strategy, you'll automatically spend less than you earn and save money every month without having to think about it. The money has already been saved for you.

If you correctly calculated the amount you need to cover your monthly expenses, the money in your checking account should last until the following month. If you are running short before the end of those 30 days, you can decide to move more money from your savings account, or go on a spending ban (make no unnecessary purchases until the next month begins).

If you find that you're regularly adding a second transfer near the end of the month to make ends meet, take time to re-evaluate your expenses.

If you want to productively ignore your savings: Automate and use savings apps

Part of the problem with saving money is the fact that it becomes just another financial decision you have make. How much should you set aside? When should you make your transfer? Where will you find the money to put into savings?

If you'd rather skip the whole task of saving money instead of answering these questions, then automation is the right savings strategy for you. Setting up an automatic transfer from your paycheck into your savings account means that you don't have to think about putting the money aside. It's a seamless transfer of your money to savings.

Digit is one way to do this. Digit is an app that analyzes your cash flow. After syncing your accounts, about twice a week, the app will determine an amount of money ($5–$50) that is safe to transfer out of your checking account and into an FDIC-insured Digit deposit account. This is a simple way to save money without having to think about it. Digit is free for one month, and $2.99 per month thereafter. (See also: 5 MicroSaving Tools to Help You Start Saving Now)

If you have trouble prioritizing yourself: Treat your savings like a bill

Many of us have trouble putting ourselves first, including paying ourselves first. If you're someone who prides yourself on always paying bills on time, but who struggles to prioritize savings, then start treating your savings like a bill to pay.

Set up a reminder to transfer money to savings on the same day you pay your other regular bills. Making "savings" a bill when you are paying all your other bills makes it feel like a nonnegotiable, which will help you make it a priority.

If saving money bores you: Create targeted savings accounts

If you have trouble getting excited about saving money when there is so much fun stuff you could spend your money on, you're not alone. Having money funneled into a savings account can feel pretty boring if you don't have any specific plans for the cash.

You are much more likely to get excited about saving money if you have a set goal for your savings. This is partially due to something known as mental accounting, which is our tendency to value money differently depending on how it is physically and mentally labeled. You might not hesitate to "borrow" $400 from your general savings account for a couple of tickets to Jay-Z's 4:44 tour — but taking that money from your new car fund, on the other hand, would hurt.

Many online and traditional banks will allow you to create several targeted accounts, each with its own nickname. Taking the time to put a name to each one of your savings goals can help you save more and spend less.

Know thy savings self

Finding the best savings strategy for you starts with understanding your psychology and preferences when it comes to money. Working within those preferences makes saving money a much easier and far more satisfying prospect.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Your Daily Latte Won't Sink Your Retirement Savings

Emily Guy Birken — Fri, 15 Sep 2017 08:00:05 +0000

If you pay attention to personal finance literature, you have undoubtedly come across some iteration of the "latte factor" — the idea that forgoing a daily small luxury will add up to big savings over time. Financial author David Bach coined the term over a decade ago to help consumers better understand the high costs of little luxuries. (See also: 9 Ways to Save Money on Your Daily Cup of Coffee)

The personal finance sphere has taken Bach's idea and run with it. In fact, you can't swing a bag of artisan coffee on the internet without hitting an editorial, think piece, or other article explaining how the latte factor is costing you your future.

But giving up your daily coffee will not mean the difference between enjoying a comfortable retirement and working until you're 80. There is a lot more going on than just the fact that $5 per day adds up to a great deal of money per year.

Here's what most latte factor articles fail to take into account.

Financial shaming can make savers give up before they've started

While David Bach's original intent with the latte factor was to empower consumers to make more mindful choices with their money, his idea has often been used to shame people for their financial choices.

Shaming is an unproductive way to motivate a person because it generally backfires. The constant drumbeat of the latte factor can make it sound like the only way to save for retirement (or any other big investment) is to give up daily luxuries. Individuals who feel guilty about their latte habit might decide that it's not worth trying to save for retirement if it means giving up their favorite luxury.

The fact of the matter is that people can save money for their futures while also enjoying a daily latte. But the use of shaming language about having little luxuries can make it sound like these financial priorities are mutually exclusive.

Your money psychology can make it tough to see these savings

The latte factor math is unassailable. If you purchase a $5 latte every work day for 50 weeks out of each year, that adds up to $1,250 — which could certainly be a nice addition to your retirement account.

The problem is that the latte factor math assumes that you can keep track of the daily $5 that you are spending. Most people's brains don't work like that. A cognitive bias known as the denomination effect makes people less likely to spend big bills compared to small ones. Five dollar bills can be quite difficult to hold onto, because they seem to be worth so little — even though the end result of $1,250 is quite big.

Adding up those unspent five-spots to put them into a retirement account requires a certain type of money psychology that is exceedingly rare. For most people, refraining from buying a $5 coffee would just mean you spend the money on something else, rather than putting it aside for retirement savings.

It's easier to save money on big costs

People who actually spend $5 every single day on coffee are probably not paying close attention to where any of their money goes. If you are spending money every day on a small luxury, you are probably also spending money regularly on big luxuries — and those are a great deal easier to cut out than the small ones.

Rather than focus on the difficult-to-track $5 holes in your budget, start with ways to reduce the bigger line items in your budget. Are you overspending on housing, food, transportation, entertainment, or utilities? Making a cut in one of those areas will not require you to keep track of small amounts of money to see a big difference, which make them a much smarter place to find extra funds to send to your retirement account.

Even if you are a generally frugal person, you don't need to ax your beloved small luxuries to find extra money in your budget. Instead, spend some time thinking about which purchases and experiences are the most enjoyable or meaningful for you. Deciding what you want to spend your money on makes it easier to let go of the spending that doesn't matter as much to you. You'll enjoy your spending more that way, while still having savings to send to your retirement accounts.

Automating your savings allows you to have your latte and drink it, too

One aspect of David Bach's advice that often gets lost in discussions of the latte factor is the importance of automating. Bach suggests cutting out your daily indulgence and setting up an automatic transfer of the savings to your retirement or savings account — which would solve the whole problem of trying to keep track of those saved $5 bills.

However, you don't need to give up your daily luxuries to be able to harness the power of automation. Once you have identified any spending items you're willing to cut, funnel the savings into your retirement account. If a daily latte is your favorite part of your morning ritual, then feel free to keep it and cut something else to automate that savings.

Daily luxuries can help keep you motivated to save

Living on a shoestring is exceedingly difficult. You have to say no to yourself constantly, which can lead to something called the "what the hell" effect. This effect describes how we tend to believe that refraining from spending money is an all or nothing proposition, so the moment we give in to temptation a little bit, we might as well throw our own guidelines out the window: "What the hell, I've already bought myself a latte, I might as well go buy some new shoes!"

It's easier to go the distance while saving for retirement if you let yourself have some indulgences. You will no longer feel like the slog to retirement is going to be a daily misery that you might as well rebel against. Instead, your daily latte can make any other sacrifices easier to bear, and help you adjust to a new savings normal. Cutting out the latte on top of anything else can trigger the "what the hell" effect and make it even harder for you to save.

Enjoy your simple pleasures

The latte factor is an important thought exercise, but it should never become a hard-and-fast rule for how to live your life. Building daily luxuries into your life is an important part of enjoying your time, both during your career and after you retire. As long as you are willing to be mindful about your spending in general, you don't need to sacrifice small pleasures to afford retirement.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways Science Says Money Affects Your Mind

Annie Mueller — Tue, 05 Sep 2017 08:30:10 +0000

How we think about money can make it easier — or more difficult — for us to handle our finances well. These studies reveal some interesting information on our money mentality, and how these thoughts can affect our day-to-day money decisions.

1. When you don't have enough money, you don't think as clearly

Without the money you need to pay your bills and meet your regular expenses, something strange happens to your brain. Because of the stress induced by financial scarcity, you can actually lose some cognitive functioning ability. That means you're less able to process information, analyze and prioritize conflicting needs, and make long-term decisions. (See also: Poverty Makes You Stupid)

In 2013 researchers conducted two different studies. One involved shoppers at a mall in New Jersey who were asked to consider a hypothetical problem, such as how to pay for a car repair. They were then given unrelated spatial and reasoning tasks to complete.

In the study, lower-income individuals performed poorly on those unrelated tasks if the cost of the car repair was high. They did better on the tasks when told the cost of the repair was lower. Higher income participants performed well, no matter what the cost of the hypothetical repairs were. The greater stress the lower income participants felt when faced with high repair costs seems to have affected their ability to perform other kinds of tasks.

In another experiment on the other side of the world, sugar cane farmers from India were asked to perform a series of tasks both before their harvest, when they were poor, and after the harvest, when they were rich. The farmers performed better at cognitive tasks after the harvest than they did before. Researchers concluded that poverty-related concerns leave less mental resources for other types of tasks.

You, most likely, are neither a New Jersey shopper nor a Tamil Nadu sugar cane farmer. However, your brain responds in the same way to financial stress. When you lack the resources to pay bills and buy groceries, or to handle a financial crisis of some sort, a huge amount of your cognitive ability is taken up in figuring out how to handle the problem. That means, of course, that you have less cognitive ability left to make decisions in other areas of your life.

Take-away

As much as possible, avoid making big decisions in any area of your life when you're under financial stress, whether it's temporary or extended. Try to give yourself more time, and get help when possible until your financial situation is resolved. Realize that the financial stress will have a direct effect on your cognitive ability, and normal tasks may seem harder. Reduce any obligations you can.

2. When you have a lot of money, you think you deserve all your advantages

You work hard for your money; so, in a sense, you deserve the advantages you gain from it. However, other advantages and the results of chance or "good luck" aren't something you earn or deserve. When you're doing well financially, however, you'll tend to give yourself credit for all the good stuff that comes your way, no matter how unrelated it is to your hard work or financial smarts.

In 2012, psychologist Paul Piff conducted an experiment on wealth's impact on ethical behavior. Stationed at the University of California, Berkeley, Piff had over 100 participants play a game of Monopoly. Anyone who's ever played Monopoly with competitive family members knows how dangerous that can be. In this situation, however, one player had almost no chance of winning; the two players were given different rules.

Player One got $2,000 at the beginning of the game, received $200 every time he passed Go, and got to roll two dice. Player Two, on the other hand, received only $1,000 at the beginning of the game, got only $100 on every trip past Go, and got to roll only one die. The mood of the game was interesting; as the players progressed, Player One, who was advantaged, became increasingly dominant and rude toward the other player, smacking pieces around the board and loudly celebrating their victory.

What does this mean for you?

It means that, if you're human (and we assume that you are), you, too, are subject to this type of mental attitude toward having plenty of money. The more financially secure you feel, the more you might assume you have the right to be financially secure. This cognitive bias could easily affect your financial future by leading you to treat your money casually and assume that everything will work out for the best.

Perhaps more chilling is the effect that this mental response can have on how you treat other people. A 2012 study by The Chronicle of Philanthropy showed that, surprisingly, lower-income households give a bigger portion of their discretionary income to charities than the wealthy do. In other words, not only can plenty of money make you think you inherently deserve all the advantages you have, it can make you think others don't deserve them … at least, not quite as much as you do.

Take-away

It's easy, and almost automatic, to feel invincible when you're in a good financial position. But this feeling of invincibility can prevent you from doing important financial planning, making prudent decisions, making wise investments, etc. You may also become less generous and less empathetic to the needs of others if you're feeling quite wealthy.

Generosity, however, is a key way to strengthen your social network and build a support structure that will be with you even through difficult times. You should never assume you'll always have the advantages of wealth, or that they're inherent to you somehow.

3. Thoughts about money ease pain and social distress

Money does matter, and we wouldn't pretend otherwise. But you know that money isn't the only thing that matters in life. You can have plenty of money, but without fulfilling work and deep relationships, you'll be missing out on what is essential for a happy life. Unfortunately, your brain is often convinced otherwise, and thinks of money as a substitute for connection and as a valid way to relieve pain.

In a 2009 study on money's impact on pain and social distress, participants were invited to a lab where they were told they would be tested for finger dexterity. One group was tasked with counting a stack of currency; the other group got to count blank pieces of paper. After they counted, some of the participants were asked to put their fingers in a bowl of hot water — 122 degrees F — and rate their level of discomfort.

The results?

The participants who had counted currency expressed much lower levels of discomfort than the participants who had counted paper. The study, combined with earlier research, points to a strange tendency we have to equate money with strength, acceptance, and social connection.

Take-away

When you have plenty of money, be aware of the tendency to focus on your wealth and ignore the other needs in your life. It's great to have things that make you feel better, and there's nothing wrong with being appreciative of your financial security. However, put effort, thought, and attention into the relationships and community that surround you — those last longer and ultimately do more for you than money ever could.

4. You think money improves the odds of getting what you want

It can be intimidating to ask other people for help. You don't want to be a burden. You don't want to inconvenience people. And you don't want others to help you out of some sense of obligation, when secretly they're fuming over the delay and effort. It's easier to ask people for help when you can offer them something in return; that way, you think, it's not so much "help" as it is a trade. And what better to trade with than cold, hard cash?

Past research has shown that people tend to underestimate their ability to get others to help them, or, in other words, to say yes to whatever is being requested. In five different studies, researchers showed that the requesters don't underestimate their ability to get others to comply as much when they're able to offer money in exchange.

In the various studies, participants were asked to make a small request of others; before they did so, they were asked to estimate the likelihood of their success. When the participants knew they could offer a monetary incentive in exchange for the request, they were much more accurate in their prediction. In other words, participants equated the ability to offer money with their own chances of success. Also interesting is that being able to offer money made participants feel more comfortable with making a request.

Take-away

You may think you have to offer value, in particular cash value, in order to get cooperation and help. However, while money is motivational, it's not the most powerful motivation by any stretch. The studies showed that monetary incentive helped the requesters more accurately assess their own ability to get help. That ability was always there; they just weren't able to accurately see it until they had cash-in-hand to offer.

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This article is from Annie Mueller of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Reliving Past Money Mistakes Hurts Your Financial Future

Emily Guy Birken — Thu, 31 Aug 2017 09:00:06 +0000

Past money mistakes are a little like zombies: Just when you think you've finally destroyed them, they rise again.

It's time for you let those old mistakes go. Not only does focusing on your past money mistakes make you feel bad without actually improving the situation, but spending time thinking about your past misjudgements makes you more likely to repeat them.

Here's how focusing on past money mistakes keeps you shambling from one bad financial decision to the next, and how you can avoid that fate.

Shame can be a downward spiral

In many cases, when you are focused on a money mistake you made in the past, you are using the word "should" to describe what happened. For instance, you might be thinking something like:

I shouldn't have co-signed a loan with my shiftless brother-in-law.
I should have started saving for retirement much earlier.
I shouldn't have used student loans to go on spring break.

These "should" statements aren't necessarily wrong — they're just useless. You are probably correct that you should have acted differently in the past, but since it's impossible to go back in time, all you are doing is making yourself feel bad for something you can't change.

This thought process can cause further financial damage, too. For instance, if you feel like you should have started saving for retirement earlier, that fact is only going to make you feel terrible about not having done so. From there, it's an easy jump to think that there is no point in starting now since you are already so far behind. (See also: 7 Retirement Planning Steps Late Starters Must Make)

Ask yourself "Now what?"

Feeling ashamed of the things you've done in the past is a form of sunk cost fallacy. Sunk costs are the time, money, or resources that have already been spent and can't be recouped. The sunk cost fallacy is when we value sunk costs over future choices.

When you're feeling ashamed of a past decision, you're overvaluing that past decision and allowing it to affect your current emotional state and decisions. Instead of simply thinking "I shouldn't have co-signed that loan," it makes more sense to complete the thought. "I shouldn't have done it, but I did — so now what?"

Instead of getting caught in your shaming thought process, asking yourself "Now what?" allows you to start making decisions based on what the situation actually is.

Trying to learn from mistakes can backfire

What if you are focusing on your past mistakes in an attempt to learn from them? You understand that you can't change the past, but you can certainly learn from it, right?

Well, not necessarily, according to a 2016 New York University study. When you focus on trying to figure out why you made a mistake in the past while trying to make a similar decision in the present, you don't have as much mental bandwidth to devote to the decision at hand. Thinking about your past mistake "triggers a cascade of computations" which distract from the decision at hand, Roozbeh Kiani, assistant professor at New York University's Center for Neural Science, told The Atlantic in 2016.

Let your brain reset

The best way to keep yourself from being distracted by your past mistakes when making a similar decision in the present is to take a little time away from the problem. In Kiani's study, participants didn't get overwhelmed by negative feedback after a mistake if they took a break before trying the task again.

So, think about something else for a while and come back to your financial issue after you've let your brain reset. That will help you make a more rational decision.

You can fall for feel-good mistakes again

Another major problem with letting ourselves focus on past mistakes is that our brains are wired to repeat actions that were rewarding once, even if they are no longer rewarding — anyone who has tried to kick a sugar, cigarette, or debt habit can attest to that. (See also: It's Never Too Late to Fix These 5 Money Mistakes From Your Past)

According to Susan Courtney, a cognitive neuroscientist at Johns Hopkins University and a co-author of a 2016 study into this phenomenon, this can be a hard thing to overcome. "When my gaze drifts toward the doughnuts in the mailroom," she told The Atlantic, "that triggers a thought process of what it would be like to taste that doughnut. That makes it harder to resist."

If you are regretting past mistakes that felt great at the time, focusing on those past mistakes will do nothing but further entrench your interest in them and awareness of them. The more you think about how much you regret buying all of those shoes (which you enjoyed at the time), the more likely it is that your attention will be caught by shoe sales in the future — making it that much harder to change your spending habits.

Focus on the future

Rather than thinking about these felt-good-at-the-time mistakes, it makes more sense to think through what you want your future to look like. That kind of thought process will not only distract you from the enticing potential mistakes that surround you, it can potentially also start charting a different neural wiring that will reward you for intelligent financial behavior.

Letting go of your mistakes

Past financial mistakes don't need to keep coming back to haunt you. Let go of your shame, take a break from thinking about your finances, and don't assume that obsessing over old mistakes will help you learn from them. Instead, focus on your future and let your past stay in the past. (See also: 20 Money Mistakes Everyone Makes But No One Talks About)

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Want Your Investments to Do Better? Stop Watching the News

Matt Bell — Mon, 13 Mar 2017 11:00:09 +0000

If you pay close attention to investment news, it'll either make you laugh or it'll drive you bonkers. Within the same hour, and on the same market news website, you will often see completely contradictory articles. One says the market is headed higher; the next says the market is about to tank.

What's a smart investor to do? Be very careful about your information diet.

More Information, Less Success

In the late 1980s, former Harvard psychologist Paul Andreassen conducted an experiment to see how the quantity of market information impacted investor behavior.

He divided a group of mock investors into two segments — investors in companies with stable stock prices, and investors in companies with volatile stock prices. Then he further divided those investors. Half of each group received constant news updates about the companies they invested in, and half received no news.

Those who received no news generated better portfolio returns than those who received frequent updates. The implication? The more closely you monitor news about your investments, the more likely you are to make changes to your portfolio — usually to your detriment.

In another study, renowned human behavior researchers Daniel Kahneman, Amos Tversky, Richard Thaler, and Alan Schwartz compared the stock/bond allocations of investors who checked on their investments at least once a month against those who did so just once a year. Those who took in the least information about their portfolios made fewer investment trades and generated higher returns.

When Helping Hurts

One factor at work here is "loss aversion." First quantified by Kahneman and Tversky, it's the idea that people feel the pain of loss more acutely than the pleasure of gain. The frequent monitoring of investment portfolios brings every downward market move to the attention of investors, who tend to react by moving money into less risky assets (bonds instead of stocks), thereby locking in their losses. (See also: How to Trick Yourself Into Better Credit Card Behavior)

Misinformation Is Not Power

Another factor has to do with the tales told in the investment press. Each day's market performance is reported — what happened, and why. The first part is factual. The market either went up or down and by a certain amount. The second part is mostly opinion. No one can say with certainty exactly what moved the market. Was it fear over the growth rate of China's economy, a contraction in the oil supply, or that XYZ company missed its quarterly earnings projection by a penny? No one really knows. But that doesn't stop the explanations from flowing across the pages of investment news sites.

Late December and early January are especially dangerous times to read market news. That's when market forecasters spin their yarns, undaunted by their previous year's miss or economist John Kenneth Galbraith's scolding that "The only function of economic forecasting is to make astrology look respectable."

We pay attention to such forecasts — and even worse, we change our portfolios because of such forecasts — at our peril.

Selective Listening

You can't control the stock market or what is said about it, but there are certain factors you can and should control, such as:

Estimate how much you need to invest each month in order to accomplish your goals;
Determine your optimal asset allocation;
Choose a trustworthy investment selection process;
Add to your portfolio regularly;
Expect market turbulence;
Be very, very careful about what investment news you take in and how much;
Keep moving forward.

Of the many factors involved in successful investing, selective listening may be the most important.

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The One Thing That Will Help You Actually Save Money

Sarah Winfrey — Wed, 08 Feb 2017 10:00:09 +0000

At least 66 million American adults don't have anything saved in an emergency fund. Whether you have one or not, that is a whopper of a number!

Saving is hard. There are so many legitimate places to spend our money, and so many things we want on top of that. It can be difficult to figure out how to set anything aside, let alone to leave it there when a new need or want pops up on our horizon.

Lucky for us, there is one very simple way to help ourselves save more money.

Positive Encouragement

The Rand Corporation recently published a study examining the role of positive encouragement in savings. Study participants were randomly given $50, $100, or $500 just for participating, but they had to put at least a portion of that into savings. They were able to choose the portion, as long as some of the money got saved for the six-month duration of the study.

Each saver was assigned one of three different types of savings account: A traditional savings account, earning 30% interest and allowing the participant to withdraw the money at any time; a hard commitment account, also earning 30% interest but disallowing withdrawals; and a soft commitment account, which was the same as the traditional account except that it also included encouraging nudges designed to potentially help participants save.

These nudges weren't anything huge. The folks running the study just reminded people why they were saving, helped them see themselves as good savers, and helped them think about how good it would feel to reach their savings goals.

In addition to all of this, every participant got an update on their money every month, and they were also asked if they wanted to save more. The results? The folks with the soft commitment accounts were the most successful savers early on, while those with the hard commitment accounts enjoyed the greatest return at the end of the study.

That's not the only good news! The people who seemed to benefit most from the encouragement they received were "impatient" people, a group less likely to successfully reach a savings goal.

Encourage Yourself

Since we can't all be part of a study like this, what does it mean for us? Is there a way to apply these ideas so that we can motivate ourselves to start — and continue — saving?

1. Find a Goal

Before you can know how it feels to reach a goal, you have to set one. Even if you are saving for something less glamorous, like an emergency fund or a new water heater, set that goal firmly in your mind. It is what you need, and it is the reason you are putting money away.

2. Think About Your Goal

When it comes to financial goals, don't just set it and forget it. Instead, remind yourself of your goal regularly. This can mean writing "Hawaii" on a sticky note and putting it on your bedroom mirror or your computer monitor, or it can mean setting daily reminders on your phone. Do whatever works for you, but make sure your goal comes to mind at least every few days.

3. Feel Good About Your Goal

Positive feelings are important when it comes to feeling encouraged, so don't just analyze your goal, but think about how you will feel when you achieve it, too. If you're saving for a new car, picture yourself driving it to work feeling happy and proud. If you need an emergency fund, imagine yourself feeling safe and secure, even in the face of a medical bill or a massive auto repair.

It can help to write these scenarios and feelings down, too. Writing has a way of making things feel more real, of making them tangible. If you struggle to meet your goals, giving yourself a tangible reminder of why you're pursuing your goal can help make it more concrete in your mind.

4. Affirm Yourself

In addition to focusing on your goal, spend some time focusing on yourself, too. Say and write down statements like "I am a good saver," and "I will reach my financial goals." You might feel silly, but doing these things will help you come to believe these things about yourself. Saying it once won't make it true, but saying it over and over can help you change what you believe about yourself.

Be sure that your statements are all positive. Keep away from statements that include words like "I won't…" or "I will stop..." These can be harder for our brains to process, and can sometimes backfire. You can turn any statement into a positive one with a couple moments' work, thus avoiding any accidental confusion in your own head.

Saving may feel like a gargantuan task for you, but you can get started today. Set aside a little bit of money — open a new account if you need to! — and jump in with these positive reminders. You may be able to save more than you think!

This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Reasons to Cut Yourself Some Slack Following a Financial Setback

Sarah Winfrey — Mon, 23 Jan 2017 10:00:17 +0000

So, you fell off your financial wagon. It's particularly easy to do this time of year, though financial mistakes aren't necessarily seasonal.

It's easy to beat yourself up over these things, even if you understand why your mistake happened. But what purpose does that serve? Does making yourself feel bad about a mistake actually make it less likely to happen again, or help you fix it?

Whether you messed up because you are stressed, going through a difficult time personally, or wanted to give your kids an extra-special Christmas, stop berating yourself. Still prone to indulging your shame and guilt? Here are some good reasons to let it go.

Failure Almost Always Precedes Success

While true overnight success does occasionally happen, it's often more fluke than anything else. True success — even when it looks like it comes quickly — usually happens after many rounds of failure. In fact, ultimate success may be more about perseverance than it is about talent.

Even well-known people, like Steve Jobs and Bob Dylan, faced setbacks and failures before they became successful. So, rather than being frustrated with yourself, see yourself as normal. Then, when you're ready, get up and try again and again and again until you find a way to meet your goals.

Failure Helps You Become Resilient

Being resilient means that life can knock you down, but you always get back up stronger than before. It means surviving and thriving in a world that often doesn't give you what you need or want. Some people seem to have this characteristic in spades, but the rest of us have to develop it.

Failure is one way to become more resilient. As you weather failures, you learn how to deal with them and with yourself. You will learn how to let life's disappointments wash over you, and then how to step out again once they're done.

If you've failed financially, whether your fall was spectacular or quiet, remember that each failure makes you a little more resilient, and then determine to get yourself back on your feet, no matter what.

Failure Invites Creativity

When we fail, it means that the solution we used to try to solve whatever problem stands before us didn't work, and so we have to figure something else out and try again. When we do this, we are exercising our creative muscles, because we are coming up with multiple ways to solve the same problem.

Look at your financial failure as the problem to be solved. Whether you want to save more, spend less, pay off a debt faster, or something else, failure means that the plan you're currently using is not one that is working for you. So take a deep breath and start brainstorming. Think of other ways to achieve your goals, even if they seem a little crazy right now.

Once you have a list of ideas, pick one to try next. For instance, if you struggle to save an emergency fund, consider using an app that saves for you automatically. If you want to spend less on drinks after work, come up with alternate activities to try with your coworkers. Most problems have a solution; you just have to find the one that works best for you.

Failure Teaches Us

If nothing else, failure often teaches us. Not only does it show us what does not work to solve a problem, but it also teaches us about ourselves. Failure can show us our limitations, it can reveal our resiliency, and it can tell us a lot regarding how we feel about ourselves.

There is a lot of focus on learning from failure as part of the pathway to success and, while that can definitely be true, learning from failure can also redefine success. Let's say you want to save up enough money for a luxury car. You're diligent about putting away what you can, until Christmas comes around. Then, you see all sorts of awesome gifts you want to give to the people in your life. To buy them, you will have to dip into your savings… and you do it without a second thought.

Sure, you may feel like you failed. After all, you didn't reach your goal. And you may have learned that you need to make your savings less accessible, so you can't dip into them so easily. But you also may have learned that you care more about people than you do about cars, and so you may choose to redefine success from "saving enough for a luxury car" to "having plenty saved to buy luxurious Christmas gifts."

Whatever failure has to teach you, stop beating yourself up and learn it!

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This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Mental Habits That Make the Rich Richer

Ashley Eneriz — Thu, 29 Dec 2016 10:30:37 +0000

The mind is a powerful thing that should not be underestimated.

Many successful people believe that if you can change your thought patterns, you can also change your bank account size. Here are five mental tricks that rich people use to make even more money. Try adopting these thought patterns to see if they work at boosting your income.

1. They Think of Money as a Game

Rich people tend to think of money as a game, calculating where to spend and where to invest. Successful people love to win, which is why they are continually trying to do better, do more, learn more, and grow. The average earner gets in trouble when they become stagnant in their career and finances. If you drag yourself to work each day for just a paycheck to survive, then don't expect much more than that. (See also: How to Retire Rich)

2. They Set Big Goals

Rich people are not afraid of setting big, somewhat unrealistic goals because they know they can conquer them. Why are we afraid of setting big goals for ourselves? Is it because we don't believe they can happen? Is it because we know we will hit our financial expectation if we set it low enough?

Set big, scary goals for all areas of your life and look at them as a challenge. What if you don't meet those goals? There is always going to be a possibility of setting a huge goal that you never meet, but what if you try and get halfway there? When you set the bar high, you force yourself to grow as a person.

For example, you can set two different financial goals this next year. One goal is to save $1,000, and the other to save $20,000. There's a big difference in the two goals, and for some, the latter seems impossible. However, if you set the $20,000 savings goal and then tried your best to achieve it, you are going to surprise yourself. You might not hit the $20,000 mark, but you might hit the $10,000 or even $15,000 mark, which are all so much greater than the low-expectations goal of saving $1,000. Don't be afraid to set big goals for yourself. Shoot for the stars, not the dirt.

3. Fear Is Not an Option

One of the biggest emotions that keeps people from achieving great things is fear. Rich people block out fear and take smart risks. Do they fail? Yes! Every rich and successful person has a list of failures to their name, along with even more accomplishments and achievements. When you are trying to battle your fear, ask yourself, "What is the worst that can happen?" Many times, the worst isn't that bad at all.

4. They Deserve to Be Rich

The rich think that they deserve to be rich. They view themselves as worthy of having money. On the flip side, those stuck in middle class don't feel worthy to be rich. They don't view themselves as anyone important or of value.(See also: 5 "When You're Rich" Dream Buys That Aren't That Great)

This isn't just some lofty thought to have. Think of your current job position. Can you be replaced easily in your company? If you answered yes, then figure out how you can become a valuable asset to your boss. If your company doesn't want to lose you, they will pay more to keep you. This can apply to almost any position, so don't think you need to go back to school to get a better degree to make this true for you.

5. Money Is Their Friend

Wealthy individuals realize the power that money has, knowing that it can solve problems and make their lives better. Those who earn less view money as the enemy. They work so that they can pay bills, they pay bills so that they can live, and so on. The cycle never ends, and they are miserable.

Obviously, money is not the answer to happiness, but those who are smart with their money can leverage their paychecks to make their lives better.

These mental tricks aren't magic. Instead, they help rewire your brain to value yourself and your work — which in turn means you will earn more and spend your money better.

This article is from Ashley Eneriz of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Your Brain Is Keeping You in Debt (And How to Fix It)

Dan Rafter — Mon, 21 Nov 2016 11:00:06 +0000

Your debt never seems to shrink. Each month you resolve to ditch your credit cards, spend less, and devote more money to paying down your outstanding debts. When next month rolls around? You're staring at even more debt.

What's the problem? Blame your brain.

Recent research from Scientific American suggests that our brains are wired so that when we do decide to pay off our debt, we tend to focus on our smallest ones first. But it'd make much more sense to pay off highest-interest debt first.

Your Brain on Debt

Scientific American, which published the results of its debt study in February of this year, started its research by concluding that the most effective way to battle debt is to pay off those debts that come with the highest interest rates first. Usually, that'd be the debt piling up on one of your credit cards.

The reason that this makes the most sense is that higher-interest-rate debt grows more quickly. If you pay that debt down first, your overall debt load will not rise as fast.

But instead of attacking higher-interest-rate debt first, consumers usually focus on paying down what they consider the most manageable of their debts, generally the smallest ones they face. They do this even if the interest rates attached to these smaller debts are lower.

How did Scientific American determine this? They performed an experiment in which participants were asked to pay multiple debts, all of which came with varying interest rates. Researchers gave these participants a paycheck at the beginning of each round of this game, asking them to use it to pay off their imaginary debts in whatever way they deemed best.

According to the study, only 3% of the participants — just five out of 162 — focused on paying down the debt with higher interest rates. Scientific American reported that the majority of participants paid off their smaller debts, instead.

This isn't just bad money management. It's psychological. Your brain does you no favors when you're battling multiple debts.

The Scientific American story says that people are naturally averse to debt accounts. This means that consumers with many different debts naturally want to reduce the total number of these accounts. This pull is so strong, it overwhelms the more rational approach of first paying down those debts that cost the most.

Teach Your Brain to Battle Debt

Can you fight your brain? Can you resist the natural temptation to close out those smaller debt accounts first? Sure, if you focus.

Consider the avalanche approach to debt repayment: Consumers pay off those debts with the highest interest rates first, making only the minimum monthly payments on the rest. Once they pay off the debt with the highest interest rate, they then move on to the debt with the second-highest rate. (See also: Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?)

The benefit here is obvious: Debt with higher interest rates cost consumers more. Eliminating it first saves lots of money in the long run.

And if you want to outwit your brain's natural tendency to steer you in the wrong direction? You'll go with the avalanche method, too.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's Why Multitasking and Money Don't Mix

Dan Rafter — Mon, 17 Oct 2016 09:30:21 +0000

Think you're good at multitasking? You're not.

Plenty of research has shown that multitasking simply doesn't work. Our brains can't focus on more than one thing at a time. We might tell ourselves that this isn't true, that we can concentrate on several tasks at once. The truth, though, is that we're fooling ourselves.

Multitasking is especially dangerous when it comes to managing our money. You might think that you can juggle several financial tasks at once, everything from building an emergency fund to paying off your credit card debt to saving for the down payment on your first home.

But just as your brain can't juggle multiple tasks at once, neither can most people's finances.

Here are three reasons why you should never multitask when it comes to managing your money.

It Doesn't Work

In 2014, Psychology Today ran a fascinating feature story about multitasking. The story pointed out that the human brain can't take on simultaneous tasks. We might think we can hold a conversation on our smartphones, surf the Web on our laptop, and text another friend on our tablet at the same time. But we can't, at least not effectively.

According to the Psychology Today story, when we multitask, our brain just switches from task to task more quickly, employing a sort of stop/start process. This makes us sloppy, meaning that we make more mistakes. It can also sap our mental energy over time.

So what happens when we try to multitask with our finances? We try to pay off debt at the same time we try to build an emergency fund? We get sloppy and we make mistakes. We forget to pay our credit card bill and incur a late fee, or we go months without making a payment into our emergency fund.

The better approach? Ditch the multitasking and take on one financial job at a time.

We Don't Get Anything Done

You might think multitasking means you are being more efficient. Actually, it's the opposite. When we take on several tasks at once — say writing a report at work, answering email messages from colleagues, and trying to schedule dentist appointments for our kids — we tend to get none of these jobs done in a timely manner.

The better approach is to again move away from multitasking and attack these jobs one at a time until we finish each of them.

When it comes to managing finances, completing one task at a time again pays dividends. Most financial experts recommend that you pay off high interest rate credit card debt first by sending extra money at these bills until you eliminate them. It's hard to do this if you're diverting some funds to building an emergency fund at the same time.

Money experts recommend creating a plan that starts with eliminating credit card debt, then moves on to building an emergency fund with at least six months' worth of living expenses in it. Once you complete these two tasks, you can then start saving for retirement or for a down payment on a new home.

We Get Depressed

Multitasking is exhausting. If you're constantly juggling three or four tasks at once, it's difficult to focus on any one thing. It's also difficult to take a breather to enjoy life. The constant stress that goes along with multitasking can make you depressed.

The same holds true when we multitask money matters. If you are constantly alternating between paying down your credit card debt, saving for retirement, and investing in the stock market, you'll feel like you're not doing a good job at any of these tasks. As your credit card debt continues to grow and your retirement savings don't, it'll be easy to fall into a funk.

But if you take on one of these financial tasks at a time? You'll feel a sense of accomplishment when you are able to check off your goals one by one.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How "Radical Implosion" Can Help You Get Ahead at Work — and Everywhere Else

Sarah Winfrey — Mon, 03 Oct 2016 09:30:20 +0000

Do you ever feel like there's something holding you back at work? Maybe it's social anxiety that keeps you from speaking up in meetings, or a fear of rocking the boat that keeps you from asking for that raise you really deserve.

If you're like most people, you probably feel like you've tried everything. You've taken your deep breaths, said your mantras, posed in power positions. And it still didn't work. You just couldn't overcome the fears and insecurities deep inside.

Are you serious about making some changes? And committed? Then there's one more thing you might try. It's a technique called radical implosion, and it can help you change for the better — even in areas where you feel really and truly stuck.

Radical Implosion Explained

Radical implosion is the idea that overcoming a challenge much more difficult than the one you're actually afraid of makes your fear dissipate. Psychologist Albert Ellis pioneered this approach in 1933 when, desperate to learn how to talk to women, he decided he would talk to every woman he found sitting alone on a bench in the New York Botanical Gardens. And over 230 women later, he had overcome his fear.

Will Farrell did something similar when, frustrated with his shyness and the ways he felt it was holding him back, he started doing embarrassing things in public on purpose, until it didn't bother him anymore when people laughed at him. Sure, it sounds crazy, but we all know where it got him!!

Radical Implosion at Work

To apply radical implosion at work, you first have to determine what it is you're afraid of, and then you have to find a way to address that fear from an implosion perspective.

During Meetings

Speaking up in meetings can be terrifying. All of a sudden, there are several people looking at you, focused on you. What if you say the wrong thing, or you can't explain your ideas, or everyone thinks your idea is stupid?

To address this from an implosion perspective, think about other times and places where you could stand up, speak, and have the attention of a crowd. Maybe you decide to give an impromptu speech in your local park every Saturday at noon, or try your hand at karaoke, or approach random strangers on a street corner to explain your point of view on something.

No matter which of these options you choose, once you've done it, talking to your co-workers in the confined space of a meeting should be a piece of cake.

Asking For a Raise

It's easy to be terrified when asking for more money. After all, if they thought you deserved more, wouldn't you be making it already? And what if they refuse you, or ask you a question you hadn't anticipated, or laugh in your face?

One implosion technique to apply here would be to approach random people and ask for something. You could start with the time, and move on to requesting money or food or larger items. When you've done this quite a few times, asking your boss to consider a raise won't be nearly as intimidating.

You could also implode this fear by asking a few other people for relatively big things. This requires you having some things that you need or want and people who could give them to you, but it would also make that raise request seem much easier.

Networking

It's hard enough to make friends as an adult, and sometimes networking seems even harder. What if you seem fake, or you can't explain what you do and where you want to go, or you forget your words entirely and speak gobbledygook?

Start imploding these fears by approaching random strangers. Pick a number, like 50, and don't go home until you've explained what you do to that many people. Take your business cards with you, because you might end up networking by accident! And when you're done, attending that seminar or meeting with that group with the hopes of making some new connections won't seem so frightening anymore!

Radical Implosion Elsewhere

Work isn't the only place where you can use radical implosion techniques to achieve your goals.

Money

People have many, many fears surrounding money. Some are afraid to spend on themselves, while others are afraid of the chances they will miss if they save. While these aren't necessarily social fears, they can still be attacked with implosion.

If you are afraid of budgeting, try budgeting every single dollar for the next six months and see if it kills you. If you are afraid of spending money on yourself, buy the most luxurious vacation you can afford. And if you are afraid of what you will miss out on if you save some of your money, try saving as much as you possibly can for several months.

The point here is to go over the top. Don't ease yourself into attacking your fears, but tackle them head on. That way, you will know for sure that whatever you're afraid of isn't actually so bad.

Romance

Does talking to a potential romantic partner make your hands sweaty? Do you get so tongue tied on a date that you end up saying nothing?

Radical implosion can help you. Be like Ellis and begin approaching people you might want to date, not to necessarily get a date, but to learn how to strike up a conversation. Or go to a party and make yourself carry on a five-minute conversation with at least 10 potential dates. Over time, you will learn that you can do whatever you felt like you couldn't.

These aren't the only situations where radical implosion can help you grow and achieve your goals. This technique, once learned, can help you overcome many fears by showing you that they are not, in fact, deserving of your fear after all.

This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: