Why Smart People Make Big Money Mistakes (Belsky and Gilovich)

Why do we make such huge money mistakes? That is the question asked in, "Why Smart People Make Big Money Mistakes...and How To Correct Them," by Gary Belsky and Thomas Gilovich.

The biggest part of the problem is behavioral economics. That is how we treat one dollar differently depending on the value we put on it. This was illustrated perfectly in the "Legend of The Man in The Green Bathrobe." Simply put, we divide money into mental accounts based on:

Where it comes from

Where it is kept

How it is spent

This tendency to value some dollars less then others, and thus waste them. In the case, referred to in the legend, mental accounting, allowed him to think of the 7.5 million dollars he lost, as the house's money, rather then his own. Simple fact is, he turned $5 into $7.5 million at the roulette table and then lost it. However in his mind, he didn't lose the 7.5 million, only the $5. All, because he put less of a value on the winnings, that he kept on the table.

So why do we put less of a value on some portions of our money then others? That is one thing that this book seeks to address.

Warning Signs

You don't think you're a reckless spender, but you have trouble saving.

You have savings in the bank and revolving balances on your credit cards.

you're more likely to splurge w/ a tax refund than with savings.

You seem to spend more money when you use credit cards than when you use cash.

Most of your retirement savings are in fixed-income or other conservative investments.

We MUST stop this mental accounting. This includes, cutting up the credit cards and quit gambling.

This problem (mental accounting) is what is wrong with most American's finances. It is why they don't have savings and are into debt up to their eyeballs. Even if we have savings, we continue to borrow more. Wasting those dollars that we pay in interest.

Look! It doesn't matter if it's found money (gifts, inheritance, tax refund, etc) or earned. It's still money. Thus we must treat it the same. Saving not squandering it. Likewise, we must stop thinking of credit as income. Yes, as crazy as that sounds, that is what many Americans are doing. We live off credit cards. If we get a new credit card or an extension on those cards, subconsciously, we think we have more money to spend and run out and purchase something, even though we can't afford to pay for it in cash.

I encourage you to pick up a copy of this book today. Visit your local library or bookstore for a copy of this book today (or use the Amazon.com link above).

----

Look for the upcoming book giveaway, in an upcoming post.