Loss hurts: Loss aversion and how to beat it

This guest post from Matt of Method to Your Money is closely related to our recent discussion on using barriers and pre-commitment to automatically do the right thing.

Thinking Fast and Slow by Daniel KahnemanI've done some pretty dumb things with money. Maybe you have too. What I've come to realize is that those dumb actions were controlled by my money blueprint. And maybe you'll agree with me that how our money blueprints affect the way we think and act toward money is a key factor in achieving financial freedom.

Most people know that they should be saving more. And they're well aware that they should be spending less. The average person knows that credit cards are rigged against consumers. We know this stuff, so why do so many people struggle to make ends meet (let alone save for early retirement or other goals)? How can we learn to be smarter with money?

The emerging field of behavioral economics can give us some insight.

Two Lines and Two Minds

In Daniel Kahneman's book, Thinking Fast and Slow, he describes two systems in the brain responsible for thought. They are called, unoriginally, "System 1" and "System 2". (Evidently, Nobel Laureate economists aren't the most creative when it comes to naming things.)

  • System 1 functions automatically. It's quick and emotional. There's very little effort involved, and we don't have voluntary control over it. System 1 includes things like impulses and intuitions, which can protect us from danger.
  • System 2 is logical and methodical. It involves mental activities that require effort, such as calculations. It's typically associated with things like making choices and concentrating on difficult tasks. System 2 can help us to make good decisions — but it can also paralyze us with options.

When you think of your "self", you're probably thinking about System 2. It's the system that we're most familiar with. But System 1 is always there, lurking in the background. It's hidden but powerful. It can influence System 2 and cause you to do some foolish and counterintuitive things.

Let's look at an example.

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Money story: My no-shopping experiment

This guest post from Kamie is the first in the newly-revived "money stories" feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success -- or failure. These stories feature folks from all stages of financial maturity. Today, Kamie shares her resolution to break her shopping habit in 2018.

Two weeks ago, just before Christmas, I found a New York Times article about somebody who went a year without shopping.

"Why would anyone do that?" I thought to myself -- but I kept reading. The author had some compelling reasons for her experiment:

  • It made her more mindful of her "wants".
  • It forced her to use things she already owned.
  • It helped her appreciate the things she had -- and the things she was given.
  • And, surprisingly, it freed up tons of her time.

I read the article, thought it was interesting, and went on with my day. Later that evening, though, I started thinking about the article again. I thought about how much I shop and how much time and effort I put into it. Could I possibly go a year with no shopping?


My Background

You see, I worked in high-end retail for a very long time. I went to school for fashion merchandising and was in retail management as soon as I graduated. Everything in my life revolved around fashion and shopping! Working at Nordstrom was my greatest success and worst punishment both at the same time.

As you can see, I learned to shop with the best of them. And shopping became an outlet for me.

Today, I'm 44 with two teenage boys, an amazing husband, and two dogs. I work for our family business, so I'm not exposed to the retail environment on a constant basis. But I still shop -- a lot!

Honestly, I love shopping. Shopping makes me happy. It's fun to have new pretty things, whether it's clothes, shoes, accessories (for me or the house), makeup, furniture, or even a new car. You know: anything.

Now, let me tell you, our family isn't rich by any means. We have to budget just like everyone else. Sometimes it sucks. But we're trying to teach our boys (and each other) what it means to save money, even if we're not the best at it.

In reading the New York Times article, I could relate to much of what the author said. Shopping made her happy too, but she decided there were enough benefits to a year without shopping that she wanted to give it a try. I decided that maybe I wanted to give it a try.

When I told my husband about the idea, he looked at me and smiled. He told me that he'd be incredibly proud of me if I could actually do a year without shopping. Because he and I are very competitive, we love to challenge each other. I gave it some more thought and realized that this was a challenge I wanted to accept.

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Money story: I was a frugal jerk

This guest post from the Frugal Jerk is part of the "money stories" feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success -- or failure. These stories feature folks from all stages of financial maturity. Today, the Frugal Jerk -- who has asked to remain anonymous for now -- shares the first half of his story about going from internet entrepreneur to busted and broke.

You might know me. I’m a blogger and entrepreneur. I've had tens of thousands of customers during the last decade, so it's very possible that you've purchased something from me in the past.

I've been read by millions of readers on my own sites and I’ve appeared as a guest writer on popular websites you’ve surely heard of. I've also been featured in New York Times bestselling books that may sit on your shelf. At my peak, my income was $300,000 per year. By many accounts I would be considered successful. But I’ve made many dumb mistakes with money.

We’re not going to bury the lede: At a certain point, because of a perfect storm of mistakes and problems, the smartest move was to foreclose my home. This move may have even saved my life. This is that story.

What's interesting about all of this is that I grew up fairly poor and conservative with money. If I couldn’t pay for something in cash then I didn’t buy it. I didn’t make stupid financial decisions. Those decisions were for idiots. I was no idiot! (Reality check: Everyone is an idiot sometimes.)

Buying the Hype

When I bought my home, everything was going great. In the run-up to the U.S. recession, houses wouldn't stay on the market for long. If you remember those days, you know that you could go to a first open house and the house would often be sold before you got there. It got to the point where houses were regularly selling for more than asking price. Bidding battles were not uncommon.

This should have been a warning. But I was young and dumb and flush with cash. I had a business generating almost $1,000 in profit per day. Mostly automated. All online. What to do with all that money? Home values always go up, right? It’s always smart to “Buy! Buy! Buy!” isn’t it? We all heard it daily. (You might still hear it regularly since the economy has improved lately.) Plus, it’s the alleged American Dream. Quite literally everybody around me told me to buy, particularly those who knew my income. Parents, friends, the echo chamber in the media. I didn’t hear a single dissenting opinion. (Besides my own, which I steadfastly ignored.)

So I bought a home.

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5 Ways to a Lower Mortgage Payment, According to a Realtor

lower mortgage loan payment

Are you buying a home soon? If you are, then you probably want to get the most for your money at the lowest cost, including your monthly mortgage.

Since mortgage loans are the way most people buy homes today, it's important to know how to get the lowest mortgage payment possible.

5 Ways to a Lower Mortgage Payment, According to a Realtor

What many home buyers may not understand is that until a mortgage is finalized and closed, most home buyers have some control over what their monthly mortgage payment will be.

Shop Around for a Mortgage

Lenders tend to look at a lot of similar factors when they consider a home loan application. They examine your income, assets, debt, employment history and credit record to decide what kind of candidate you are for a mortgage loan.

However, you would be mistaken to assume that every lender will offer you the same loan terms. Many would-be home buyers seem to make this erroneous assumption, 77 percent of borrowers only apply to one lender.

If you want to know what is the best loan you can get, invest the time and a little money into researching and applying to a few different lenders. You may save thousands by getting a loan with a lower interest rate, or other more favorable terms.

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7 Tricks That Helped Me To Become Financially Secure in College

saving money in college

Do you ever feel like debt and homelessness are going to overwhelm you? Me, too, or at least I did. Ever since I was accepted into college, I'd been struggling to utilise my government support effectively and managing my funds from freelance gigs and casual work was an absolute nightmare. That was until I figured out how to save money successfully, and actually make some along the way.

7 Tricks That Helped Me To Become Financially Secure in College

I've compiled a list of nifty tricks that boosted my income, and helped me to stay out of the poor-house.

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More about...Education

How to Watch NCAA March Madness Basketball Without Cable (and Save Big)

NCAA March Madness basketball tournament without cable

While the cost of pay-TV service is going up and draining savings accounts, something as popular as the NCAA March Madness basketball tournament can be easily live streamed, even if you don't have a cable subscription.

The average monthly cable bill had reached $103.10, according to a 2016 study by Leichtman Research Group. Let's take a step back and realize this is just the average, so that means there are plenty of people paying well over $100 per month for a cable package.<

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Elder Financial Abuse: Signs, Symptoms and Preventive Measures

This article is by GRS contributor Chris Kissell.

It's a form of abuse that often unfolds in silence. Its victims are often reluctant to report it. And it is likely to become even more commonplace as our society ages.

Happy older couple

What is financial elder abuse?

Financial exploitation of elders occurs whenever someone dishonestly hijacks the resources of an older adult for personal gain, such as:

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More about...Banking, Retirement

The high cost of infertility

When we asked you how to improve Get Rich Slowly, you told us you'd like an article on "The horrible, terrible, no good, very bad reality of paying for fertility treatments." We can't fit all of that into one post, but we did ask Joanna Lahey, who gave us a series on health insurance, to give a broad overview of the issue in this guest post.

Joanna Lahey is an associate economics professor at the George H. W. Bush School of Government and Public Service and a faculty research fellow at the National Bureau of Economic Research. The opinions expressed in this post do not necessarily reflect those of the aforementioned institutions.

When I found out I suffered from infertility, I was lucky enough to be living in Massachusetts and was covered by a Massachusetts health insurance plan. Lucky because Massachusetts is one of the few states in the United States that mandates coverage of infertility treatment. Every test my husband and I went through and every treatment I underwent was completely covered by my insurance. After a year and a half of poking and prodding and medication and monitoring, I knew exactly what was wrong with me. My doctors were able to give the most conservative treatment options so I wouldn't have to worry about risks with names like "overstimulation" or "rupture" or "triplets." My only out-of-pocket costs were for HPT, OPK, and a fancy thermometer. [1]

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More about...Health & Fitness, Insurance

My grandmother’s home remedies

This reader story come from SB, a regular reader and commenter on GRS. SB writes about personal finance and personal development topics at One Cent at a Time.

Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income. 

This is my second guest post at this blog. I am grateful to J.D. and his team's humble gesture in allowing me to do it. I hope to provide the same value regular writers of this blog provide to you.

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More about...Frugality, Food, Health & Fitness

10 tools and tips to save money on legal fees

This is a guest post from John Corcoran. John is an attorney and former Clinton White House writer, and he advisesentrepreneursand small-business owners on how to use networking to grow their businesses . In addition to the tips in this article, you can download his free report for an additional 10+ tools to save you money on legal fees.

Like it or not, everyone has to use a lawyer now and then. Whether you run your own side business or have income properties, or simply need a will, you will probably need legal help sooner or later.

Unfortunately, lawyers are very expensive - often prohibitively expensive.

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