Economic Behavior Saves Money
Most people know about the importance of saving for emergencies and investing for retirement. It is difficult to accomplish savings goals unless you have the knowledge, understanding and behavior to take steps toward that goal.
Savings Mistakes to Avoid
Obstacles can be difficult to overcome. They range from income, spending habits, level of debt and housing situation. Recent developments in the field of behavioral economics identify some of the biggest pitfalls.
Savings habits became part of our life during childhood. These habits present the biggest obstacle to building wealth. Three mistakes affect the accumulation of cash savings:
- Late start to saving money
- Spending to money you save
- Using traditional sources for savings
Financial mistakes incur large monetary losses that could impact savings. Behavior economists address this issue by equating present behavior with previous experiences and inbred emotions. Those mistakes rarely result from a single error. It takes the accumulation of a steep stack of missteps before the mistake becomes obvious.
Behavior economists identify some of the most common pitfalls. Avoid these pitfalls and you will gain peace of mind along with a semblance of wealth. Behaviors they identify include:
- Mental accounting – making deposits followed by withdrawals
- Loss aversion – becoming obsessive about safety
- Cracked crystal ball – questioning what the worst scenario could be instead of wondering what is likely to happen
- Procrastination – failing to deal with finances in a timely fashion
- Sunk-cost reflex – tossing good money after bad
- Overconfidence – thinking you know everything about finances
- Herding – everyone cannot be wrong so you follow the crowd
Mistakes to Avoid
The first mistake could cost a bundle of money in a crisis. It is important to begin a savings plan early in life. It could become a problem later when you lack enough money to fund an emergency or retirement. The second mistake is saving some money but immediately taking it back and spending it. When you live below your means, it is easy to build a sizable emergency/retirement fund.
Finally, do the research necessary to locate the best savings account. Perhaps, saving money would be safer if you use a credit union instead of a traditional bank. They usually give better interest rates, which is important if you have some long-term goals. Search for a savings account without excessive fees, but still offering a decent return on investment.