Five Common Money Mistakes – Dollars and Sense, Part 1

Dollars and Sense - Common Money Mistakes Part 1

I might have been born obsessed with money. Throughout my childhood, I was bookkeeping and balancing my piggy bank on a regular basis, because instead of an allowance, we received our entire annual budget at New Year’s, to do with as we saw fit. I’m fascinated by how money is created, used, acquired, and how money affects people. Even with my near academic fascination, I still made a lot of common money mistakes. Wasting money on things I know I won’t like.  Losing actual currency by being careless. Getting knowingly ripped off either out of convenience or embarrassment.  Why does this keep happening??

Dollars and Sense is about the common money mistakes we make, and why we make them. A lot of these mistakes are subconscious; we don’t even know we’re making them. So what is causing it, and how can we stop something we’re not aware of?

Full disclosure: I am a big fan of Dan Ariely’s work, so I might be a bit biased. I have read every one of his books, and I will continue to read every one of his books. (Update: I learned I had missed one, an oversight I will rectify immediately.)



We are constantly comparing things, even without realizing it. The relative value of something obscures its real value. Have you noticed, when something is on sale, businesses always include the original price? We are more prone to buying an ugly sweater that’s on sale for $80 when it’s originally $200. Without knowing the “original” price, we wouldn’t be saving 60% on a sweater we would never have purchased otherwise. Also, when we are making a big purchase, the extras don’t seem as expensive. We might not think twice about adding a $500 sound system to the $40,000 car we’re buying.

When things are bundled together, we automatically think we’re getting a better deal than buying each item separately. We end up buying things we don’t want or need because it feels cheaper to get the bundle of three for $20 than to buy only the two we needed for $15. It is also easy to get distracted by relative prices. How often have we looked at the most expensive item on the menu, and ordered the second most expensive item? Would it surprise you to know restaurants price like that on purpose?


Our minds split our money into separate accounts, the way organizations split their budgets for different departments. If we spend all the money we’ve allocated for that category, we suck it up until next month, when the account replenishes. While this is helpful in budgeting our money, it causes a problem when it comes to things like vacations. Putting everything under the “vacation” label to justifies $50 dinners, $20 taxi rides, and $2 pens that could be purchased $5 for a pack of twenty back home (I recently committed that last offense).

How we spend our money depends on how we got the money and how we feel about it. For example, money we worked hard for (i.e., salary or paycheck) will go towards responsible things like food and rent, whereas money we win in a lottery will go towards sports cars and flat-screen TVs. Money can also be emotionally laundered (aka emotional accounting) if we receive it from a less than savory source; we will first spend part of it in positive ways, like donating to charity, until the bad feelings go away. And then we will spend the rest on selfish things (duh).

Mental accounting can also be malleable: we allow ourselves to creatively justify expenses and classify them ambiguously. From the book: “Since we’re the ones who made the rules, and often the only people who know they exist, it’s remarkably easy to change, amend, or override them with new rules without any repercussion.”

Cue the Betty White memes.


There is mental pain when we pay for things. It hurts to hand over hard-earned cash. The three times we can pay for a product or service are: before we enjoy it, while we’re enjoying it, or after we enjoy it. To avoid the pain of paying, we can increase the time between payment and consumption, and decrease the attention needed to make the payment. According to Ariely, we are “willing to pay more before, less after, and even less during consumption.”  When we pre-pay, it feels almost painless when we consume it (e.g., airfare, theatre/concert/sports tickets, Amazon Prime free shipping). It’s a one-time payment, in advance, so that by the time the game or show comes around, we’ve more or less forgotten the pain of paying. But paying during consumption, such as financing a car, makes it harder to enjoy things when the payments are repeated again and again.

And paying after? We value money in the future a lot less than we value it right now; there have been studies showing that people would rather receive $10 today than $20 a month from now. This is the realm of the credit card.

Credit cards give us the illusion of time shifting twice. At the point of sale, we feel like we are paying later, and when we get the statement, we feel like we’ve already paid. This makes us more likely to spend more, make spending decisions more quickly, and forget how much we spent. It also makes us value our purchases differently: “With credit card in hand, we think about how good something will taste or how nice it will look on the mantel. When we use cash, we focus more on how fat that same dessert will make us and how we don’t have a mantel.”


The person we trust the most in this world, more than our significant others, parents, or mentors, is ourselves. We trust that we have all the knowledge to make our decisions, but we can be unaware of sub- or unconscious influences:

  • Anchoring. Anchoring is when our conclusions are influenced by irrelevant factors. The sweater on sale is an example of anchoring. Had we not known the original price was $200, we would not look twice at an $80 ugly sweater. The original price shouldn’t influence how much we value the sweater, but because it’s 60% off, suddenly it’s a great deal and we want it.
  • Self-herding. Herding is when we assume something is good or bad based on other people’s behavior (e.g., people buying Supreme tees, people avoiding gluten). Self-herding is when we base our future decisions not on what other people are doing, but on what we did in the past. Which further reinforces our self-herding.
  • Confirmation bias. Once we decide on something, we seek out information that supports our opinions. We also interpret new information in a way that aligns with our beliefs. We can see this in iOS vs Android, Mac vs Windows users; rarely do we switch over once we’ve committed to an operating system.

We value the things we own more highly. Once we think of something as ours, our personal feelings and experiences give it additional value. Ownership makes us focus on the positive aspects of what we own, and we somehow expect buyers to view it the same way. Homeowners who made renovations to the home they lived in for 20 years will list their home at a price higher than the market will pay. This is also partly due to the IKEA effect; we value our child-endangering Billy bookcase more than a pre-assembled one because we put in hours trying to assemble it ourselves.

We don’t even have to own the item to feel the endowment effect; carrying an item around a store while we shop will make us more likely to buy it. It’s why we have trouble canceling services when the trial period ends. It already feels like ours, and we don’t want to lose it. This is loss aversion. We feel the pain of a loss roughly twice as strong as we feel the pleasure of a gain, so we try to avoid losing things, sometimes at all costs.

Which brings us to sunk costs. A sunk cost is time or money put into something that cannot be recouped. Logically, if we know a project we’ve been working on is certainly headed for failure, we should stop and move on; our time and money can be spent on other things. And yet, the more time or money we put into something, the harder it is for us to give it up.


Almost all of this happens subconsciously, so the most important thing is to learn to be aware of these biases. Being aware that we automatically make these mistakes will help us pause before we go ahead and charge that ugly sweater we’ve been carrying around the store trying to convince ourselves we look great in it just because it’s 60% off. We might still buy the sweater, but at least we are able to recognize that we are susceptible to these biases. We’d be buying the sweater despite these biases.

Reframing the situation is also important. This has been proven in medical studies; describing a new treatment as having “a 20% chance of survival” makes everyone feel better than describing it as having “an 80% death rate.” In the same vein (pun intended), instead of thinking, “I’m saving $120!” we can think, “I’m losing $80.”


What do you think? Do you recall any instances where you were making these common money mistakes without realizing? Have you tried to avoid making these mistakes, and were you successful? Share your stories below!

And stay tuned for part 2 of Dollars and Sense. There was way too much to put in one post!

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Comments (2)

  • Lyn 3 years ago Reply

    Interesting things to be aware of. I was the opposite to you money wise in my youth. So long as I had enough I was happy. I remember giving away my entire bank balance to a charity one time, and starting again from scratch. (We’re only talking $200 here, but still, it was my life savings.) However my son gave me a copy of “The Richest Man in Babylon” a few years ago and I really enjoyed the style of the book and began to follow the sensible advice contained in it. So I’m much better with money now. One way we’re the same though. I used to get my entire clothing allowance monthly, as a teen, and I spent pretty much all of it on BOOKS!

    Lily 3 years ago Reply

    I have not yet had a chance to read “The Richest Man in Babylon,” but it’s on my list. Glad to hear you liked it! I too spend way too much of my money on books!

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