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3 reasons why even smart people have money problems
Researchers have concluded that no matter how much education and experience we have, we are all equally likely to make similar mistakes. We fail to consider the real value of money, succumb to emotion, and seek quick rewards.Such problems and mistakes leading to the loss of money are also commonly referred to as cognitive distortions. Here are a few examples:
On payday you see a large amount on the card and think that now you can buy everything. Because of this a lot of money is spent on nonsense, and by the end of the month you have to save money;
You agree to get less for your work, but right now, than to wait a while for more pay;
You feel sorry for the money for a big purchase, but you easily spend on many small ones.
If you have experienced something like this, I encourage you to read this article.
What is cognitive distortion?
In scientific writings, cognitive distortions refer to systematic errors in thinking or pattern deviations that arise from dysfunctional beliefs embedded in cognitive schemes, or when people are used to thinking automatically, on autopilot. The existence of most cognitive distortions has been described by scientists, and many have been proven in psychological experiments.
Cognitive distortions are examples of evolutionary behavior. Some of them serve an adaptive function, as they facilitate more efficient actions or faster decision-making. Others appear to stem from a lack of appropriate thinking skills or from inappropriate application of skills that were adaptive in other contexts.
The development and application of methods to correct cognitive distortions that cause problems of an emotional, personal, and social nature is the subject of various strands of psychotherapy, particularly cognitive psychotherapy.
How do cognitive distortions affect our money?
Very much so. And the problem becomes larger because we often make purchases, investments, actions quite unconsciously, on autopilot.
1. We fall prey to the illusion of money
We forget that our ability to buy something does not only depend on the number in our account, but also on the fluctuations of prices. If you have gotten a raise, it doesn’t mean that you are any richer. After all, inflation has caused the price of goods to rise as well. That is the money illusion.
This phenomenon was first discussed in 1928. Economist Irving Fisher described it as “the failure to understand that the value of the dollar or any other unit of money goes up and down”. It even affects our satisfaction with our position.
In 1997, behavioral psychologists confirmed this in experiments. They described the following situation to the participants: there are two people, they have the same education, position, and starting salary. The difference is how much they got a raise in their second year and the inflation rate where they live:
First: salary 3,000, inflation 0%, increase 2%;
Second: salary 3,000, inflation 4%, increase 5%.
Three groups of participants were asked to answer one of the questions: whose position is economically more advantageous, which of these people is happier, and whose position is more attractive. In terms of real income, the position of the First is more advantageous. After deducting inflation, his salary is higher than the Second’s. Most of them answered this way, when asked about economic benefit.
But when asked about happiness, they answered differently – they said they were happier than the Second. This is how the money illusion plays out. People think that a higher raise means more money, and therefore more happiness. It also makes them think that Second’s position is more attractive.
This proves that we are still capable of taking into account the real value of money when we are reminded of inflation. But under normal circumstances we forget about it and judge money incorrectly. We think we have more of it than we really do, and we make rash purchases.
How do you deal with it?
When making financial decisions, try to think rationally. Don’t give in to emotions. Remind yourself of inflation and the real value of money.
So that you don’t blow your entire salary at the beginning of the month, start budgeting. Calculate how much you spend on food, utilities, medicine and entertainment. Plan the rest of your purchases based on what you have left over.
