5 Psychological Mistakes That Are Leaving You Broke
Struggling to save? Discover 5 hidden psychological traps—from present bias to lifestyle inflation—that keep you broke, and learn how to fix your mindset today.
You are not broke because you don’t earn enough money. You are broke because your brain is wired incorrectly.
Large corporations pay Behavioral Psychologists to try and manipulate your brain every day, to get you to spend more, borrow more and forget about your future.
Through creating my Personal Finance Blog and tracking my family budget I realized that your money issues are rarely based on numbers, but psychology.
If you want to stop losing your income, your UK ISA or US 401(k) then you need to look out for these hidden traps. Here are 5 psychological mistakes that are stopping you from improving your finances.
1. Present Bias
Your brain does not like thinking about the future.
A Functional Magnetic Resonance Imaging scan shows that when we think of our future self, our brains activate the same areas as someone we know nothing about. By choosing to buy that shiny new gadget instead of contributing to your retirement fund you are stealing from someone you don’t know.
This is known as Present Bias. We place a higher value on immediate rewards.
- Fix: Automatically transfer your money to your wealth building accounts. Create a Standing Order or Direct Debit to move the money on the day you receive your income.
- Reality: If you don’t push your future self into the now then your present self will win.
2. Lifestyle Inflation (The Treadmill)
You’ve received a pay increase, you’ve escaped the cost of living crisis. But your bank account is still empty?
The Hedonic Treadmill kicks in! You’ll go out and upgrade your car, your flat and start buying organic. You’ll also be upgrading your subscriptions.
"Wealth is invisible. The quickest way to become poorer is to spend to impress people."
Looking at my family’s expenditure I constantly track what I’m really spending my money on.
- Fix: Always save 50% of any future pay increases or bonuses. Only spend half.
- Reality: Real financial freedom comes from having a small discrepancy between what you earn and what you spend.
Finnly Joy
3. Mental Accounting
Are you spending your tax return as it’s “free money”? Or do you spend your windfall differently to your usual salary?
This is known as Mental Accounting. We place different values on money depending on where it has come from.
- Fix: Treat all of your money the same, whether it’s coins, bonuses or refunds.
- Reality: The money doesn’t care where it came from. Once you put it in your account it should be treated like a soldier defending your financial freedom.
4. Loss Aversion & The Security Of Cash
Inflation can be a sneaky thief. In the UK & US it feels secure to hold large amounts of cash.
It isn’t. It’s financial suicide!
As we suffer from loss aversion we feel twice as bad when our stock market portfolio falls 10% than we feel happy when it rises by 10%. Everyday savers are holding their money in low interest current accounts.
- Fix: Separate your money based on when you're going to use it. Keep your short term money safe but invest your long term money into assets to combat inflation. This could be global index funds or tax efficient accounts.
- Reality: If your money is losing value each year then it’s not secure.
Finnly Joy
5. Social Proof
You open your social media app and someone your age just bought a house, started a business or posted a picture of their crypto portfolio.
Suddenly you’re panicking and taking risks with your money to keep up.
This is Social Proof.
- Fix: Unfollow anyone causing you to feel envious. Compare your financial health to your past self. Never compare to someone you don’t know.
- Reality: Most people living a high spending life are doing so because they have high interest debt. Don’t be fooled into thinking renting is wealth.
You don’t need an MBA to overcome these psychological mistakes. You just need to be brutally honest with yourself and create simple systems.
Complete the following actions over the next week to create a bullet proof mindset.
- Audit your last 30 days – Go through your bank statement and highlight any purchases made due to emotion.
- Automate your future – Automatically transfer your money into your savings or pension (ISA/401k) the day after you receive your income.
- Set Goals – Write down your personal goals for 1 year & 5 years in a physical notebook.
- Combat Inflation – Look through your cash savings and ensure your long term money is in growth assets.
- Create your emergency fund – Have 3-6 months of your living costs in a liquid account.
The financial system is set up to make you reactive. Realize that your biggest enemy is looking back at you in the mirror. Be the master of your mind, automate your habits and let time work for you.
Stay happy and wealthy,
Finlly Joy
Finnly Joy
Disclaimer: The information provided in this article is for educational and informational purposes only and should not be construed as professional financial, investment, or legal advice. Financial situations and credit scoring algorithms vary by individual and location. Always consult with a certified financial advisor or credit professional before making any major financial decisions.
