Is Your Brain Making You Poor? Six Financial Fallacies and How to Beat Them

How often have you started out the month with a certain budget in mind, determined to hold firm and finally save money, only to fall back on the same poor habits and end up broke before you even cash your first paycheck? That’s because, when it comes to finances, it takes more than willpower to save. Recall that my degree is in psychology; I often apply this knowledge to attempt to tackle many of life’s quandaries, and money is no exception. Today, I’ll apply an idea from cognitive behavioral therapy to finances: cognitive errors and fallacies. You may have heard that the brains of savers and spenders actually behave differently; spenders get an adrenaline/endorphin rush (basically a high) from spending, while savers get the same feeling by viewing a growing bank account. Essentially, if you’re a spender, your brain is trying to trick you into spending money, and to save works against your psychology, feeling like a sacrifice.

So, I’d like to explore some of these common mental failings and provide some tips to help counteract them. Full disclosure, I’m definitely a saver by nature, but that doesn’t mean I’ve never encountered some of these first-hand. No one’s perfect, after all. Additionally, I’ve heard many of these come up in discussions with spendy friends and family to justify their lifestyle, so I like to think I’m fairly familiar with how the mind of a spender works.

1. I earn $100 an hour at work, so my time is clearly too valuable to do this money saving task.


In my spare time, I moonlight as an amateur tile layer.

This is a common excuse to pass on doing something to save money. “Well, I could spend an hour doing this home repair that will save me $25 over hiring it out, but at work they value my time at $50 per hour, so that isn’t really worth the effort.” The rationale being, if you’re valued at $50 per hour, accepting anything less than that wouldn’t make sense. But here’s the flaw: really, what it comes down to is that your time is only as valuable as what you are actually doing with it. Sure, you might earn a certain amount while you’re at work, but unless you’re at work, earning that money, it means nothing. How much money do you earn watching tv at home on the couch? I’m going to guess probably nothing. The key is to view any money saving task as actually earning you that money. So, say your pants need hemming. You could hire that out for probably around $20, or do it yourself (provided you have the materials, which I personally do), for next to nothing. Rather than viewing this as wasting an hour, view it as increasing your earning potential for that hour. Congratulations, you are now employed to do odd jobs for yourself; every dollar you save is money right back in your pocket. As Benjamin Franklin so astutely put it, a penny saved is a penny earned; take that timeless wisdom to heart and apply it to your personal finances!

2.  Viewing savings while shopping as a percentage, rather than a concrete number.

I learned about this for the first time in an NPR article, and it really just made so much sense to me. The idea stems from the fact that we think of savings in terms of the percentage of the total item, rather than in absolute dollar values. So, at the grocery store we don’t hesitate to choose a generic item for $1.50 over name brand for $2.00. That’s a 25% savings, after all. We’ll even drive to a less convenient grocery store to save $10; which is still 10% off a $100 grocery bill. That’s all well and good; save that money everywhere you can.

The problem is on the other end of the spectrum: spending money. It can be easy to rationalize spending more money on large purchases when only considering the percentage it will add to the total cost. “I’m already spending $17,000 on a car, so I might as well get that $500 upgrade option”. It’s only 2% more expensive, so it feels like it’s not a big deal. But, even though you saved 10% in the first example vs. 2% in the second, $500 is objectively way more money than $10. Rationally, you should pick the latter option because it’s more money back in your pocket. Here’s another example: would you walk away from an electronic store if you found out the tv you were there to buy was $25 cheaper at another store? Many people would say no, even as they stop at 3 different grocery stores every single week to save $25 on their food. That’s because the same $25 savings is a much higher percentage of the grocery bill than it is the tv. Your best practice is obviously going to be to try and save as much money on every single purchase, but even simply being aware of this cognitive error can alter your mindset on spending, I’ve noticed.

3. I’ve had a bad/good/long/busy/boring/special/mundane day, so I deserve this purchase.

The urge to celebrate with spending can be strong. The urge to soothe with spending can


Hiking: one of the best, no cost stress relievers!

be even stronger, I’m afraid. And I mean, to some extent this is a valid thing. Some things are worth celebrating, and that often involves spending money. And that’s ok on truly special occasions. But when you’re “celebrating” every Friday, that’s obviously a problem. I think spending to soothe your emotions is the much more insidious component here. When you have a goal of saving money, spending money due to an emotional response is only going to leave you feeling worse. It’s like giving into a chocolate craving when you’re on a diet; you end up with a tummy ache and a whole lot of guilt. Not to mention, where do you draw the line? Which bad day is worthy of “treating yourself” and which is not? It’s a pretty slippery slope, and soon you’ll be inventing all kinds of excuses to spend. I suggest you find no cost things to comfort yourself on a bad day, like exercise or a venting/cry session with a significant other or friend. Or, if it’s a really, really bad day, maybe even a guilty pleasure that doesn’t cost much money? Coming home from a rough day at work a few weeks ago, I took a too long and too hot shower, then laid in bed and mindlessly scrolled through Facebook. Yes, I used a little bit of water, but one shower won’t even make a blip on our water bill, and it was what I needed to decompress after a stressful day at my sometimes very stressful job.

4. This is such a bargain; how could I afford not to buy it?

Black Friday comes to my mind when I think of this fallacy. I really don’t think I’ve ever been shopping on Black Friday; the one time I came close was when I seriously considered heading to Sears for an amazing deal on a washer and dryer, but my husband, John, insisted we hold out for a good used set on Craigslist instead. In a sound state of mind, I whole-heartedly agreed with him, but in frenzy of Black Friday deals, my judgment became clouded.


Our Craigslist washer and dryer!

So what fallacy was I committing? It’s a pretty common one in our society, and that is saying, “I saved $500,” rather than the more accurate statement, “I spent $1000.” Because, do you know what saving $500 really looks like? It’s putting $500 into your savings/brokerage account, and then leaving it there indefinitely. That’s saving. Spending unnecessary money will always be just that: spending money. Even if it’s a $1000 item marked down to $1, if you don’t need it, you really just wasted a dollar. Unless of course you’re savvy and buy things at a discount and then resell them for fair market value, which is something my brother-in-law happens to make a living by doing. But I’m not talking to people like that.

I’m talking about the rest of us, the people who are lured into advertisements for items that are 50%, 75%, and 80% off and who will buy anything if it’s “a bargain”. This is a fairly easy fallacy to counteract, luckily. If you don’t need it, don’t buy it, no matter how cheap it is. Of course, in practice it gets a little more complicated, because need vs. want is subjective. That’s when it helps to have a frugal partner to hold you accountable, like John did with our washer and dryer. Pick a night to discuss financial goals in a specific way, what is a want vs. a need, what you need to work on, etc. then make a pact to hold the other partner accountable. In this case, I argued and huffed that we really just needed a new (not used) washer and dryer, but he stayed firm, and wasn’t even smug when we ended up finding a very nice, very pretty washer and dryer on Craigslist for half the price of the Black Friday deal. Now that’s the mark of a good, frugal husband, my friends.

5. It’s just $5…

One $5 purchase won’t break your budget, but a few different purchases a few times a week can start to add up in a major way. Three $5 purchases a week adds up to $60 a month. Now, what if you buy a $5 coffee every single day? You’re up to $150 a month. When both spouses do it, that’s $300 a month! Even in the $60 scenario, you’re out $720 a year. If that had been invested, the interest would compound into $11,280 over ten years. To make matters worse, it’s very difficult to even notice the large impact these small purchases are having on your financial situation. It’s not like you’re buying luxury cars on credit after all, it’s just $5. But, really, it’s much more. If you can get a handle on these types of purchases, you’ll have a much easier time meeting savings goals.

Fortunately, a lot of these small purchases are just due to bad habits. You’re in the habit of buying a coffee every morning, getting fast-food for lunch, and throwing in a candy and soda from the checkout line while you grocery shop. So, replace them with good habits instead. For a single month, commit to a ban on Starbucks and bring your coffee to work in a travel cup instead, for instance. A month of repeating a certain behavior is typically long enough to form a new habit. Soon, like me, you’ll be in the habit of making a lunch to bring to work everyday, resisting the urge to go in on office takeout, and not even missing the old habit.

6. Throwing Good Money After Bad

Sometimes John watch HGTV and gawk at the poor financial decisions couples make on House Hunters: Renovations. John and I just sit back and give these poor folks the side eye, because sometimes they really make some bad choices. Yesterday we watched an episode where first time home buyers and renovation novices dove head first into a serious renovation. Not that we can judge them for this, of course, as we were once in their shoes.

It was what came next that gave us pause. “When we were buying, we assumed any renovation could be done to any house. We didn’t know that some houses were more difficult to renovate than others,” the man said. First of all, how did they not realize this? Like, that just seems obvious. When it came down to it, they really just did not buy the right house for their needs. They wanted a 3/2, and bought a 2/1 with plans to divide both the bathroom and one of the bedrooms in two. But, the estimate on the bathroom construction alone used up their entire $50k renovation budget. This didn’t even begin to cover the cost of the finishings and labor, not to mention the kitchen renovation they were also planning. In short, they made a bad financial move. They bought a house based on a set of assumptions and probably a little too much emotion, and ended up choosing the wrong place. That’s ok. Mistakes happen. It’s scary to make a mistake on a $450,000 decision, but hey, they’re only human.

Their next, and biggest, mistake was when they decided to go full steam ahead, accepting that they would go over budget, but hoping to minimize it by choosing budget finishes. Except, not. Because before long, the husband was assuring his wife that it was ok to get the expensive glass subway tiles for their shower, because, “We’ve already spent this much money; we might as well get what we want.” That, my friends, is throwing good money after bad, and it’s the next financial fallacy. When you make a financial mistake, you don’t keep just admit defeat and let yourself spend a ton more money.


Our guest bathroom (renovation still in progress). We decided to go with a vintage look and incorporate the pink bathtub into the design when we realized we were running low on our earmarked renovation money.

This couple probably should have just put their home back on the market and bought one better suited to their needs when they discovered how much construction would cost. Apparently it was a seller’s market with sometimes dozens of offers on homes in the area, so they could have made their money back quite easily. Or they could have done a modest renovation and sold for a profit. Now that’s making lemonade out of financial lemons. What they should not do is just double down and start hemorrhaging money. I know it’s hard to admit you made a mistake, but you don’t want to go into financial ruin. People use this “Well, I’ve already spent this much…” rationale quite often, especially in emotional circumstances like planning a wedding, buying a home, or having children. Yes, sometimes you spend more than you planned; it’s bound to happen when you inevitably underestimate what things will cost. But, the next decision is up to you: do you double down on your commitment to the budget you had set, getting creative and cutting costs in other places to accommodate? Or do you throw up your hands and play the victim? This is one of the most high stakes fallacies, as there’s typically a lot more money at play in these momentous occasions. It’s here that you really decide what you will do to achieve your financial goals. Short-term sacrifices are difficult, but long-term they will ensure you a happy financial future.

There you have it; some very common spending fallacies debunked. Yes, it’s much easier to say that you’ll get a handle on your spending than to actually do so. But, I’m a firm believer that understanding the rationale behind these bad decisions is the first step to ending them. The next step? A common cognitive behavioral therapy technique is to label, then dispute the fallacy. Literally argue with yourself. “No, that’s throwing good money after bad. I can find a better way.” You’ll feel a little silly, but it works! It will be work, but I’m confident you can overcome and become the saver you always dreamed you could be!


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