Faulty Mental Accounting

If you were shopping for a new blender that cost about $100 and just as you were going to pay, found out it was on sale for $50 a couple of blocks away, would you go? I bet you’d say yes! You did a quick mental calculation and the 50% savings is an enticing reward for your effort.

But what if you were buying a new computer for $1,375. You were getting ready to pay for it and saw a flyer advertising the same one for $1,325. It’s at a store a few blocks away. Would you go? Likely not. You might have done a quick calculation in your head and realized the percentage savings is so small it’s not worth your time.

But did you spot the error? It’s the same $50 savings as with the blender. Why would we go when it’s 50% savings vs a super small percentage, but yet, it’s the same amount of actual money?

Do you have any friends that drive all over town to save a few cents on gas but forget to factor in how much their time is worth?

Think about the percentage vs. dollar calculation the next time you’re grocery shopping, buying a car, dining out, taking a vacation or reviewing your investments with your advisor.

You might choose not to go out to the expensive restaurant with your spouse on your date night because it’s 20% more than a mediocre one. But really, it likely only means $30 between a fabulous night out and a dud. The same thinking applies to your dream vacay vs. a frugal one.

What about that car system that only costs $4,000 in comparison to the total price of maybe $50,000 for the vehicle? It doesn’t seem like much when you’re choosing your add-on options.  But ask yourself the question - if you drove off the lot tomorrow, would you spend the same $4,000 for the premium system? Likely not!

And lastly, be careful of this trap with your investments. When your portfolio is up, your advisor will likely give you the exact dollar amount that it’s increased by. But when it’s down, they might try to soften the blow by say, “oh, it’s just down a few percentage points”. However, those percentage points might equal hundreds, or even thousands of dollars!

To discover more money traps and how to correct them, get your copy of Talk Money to Me: Save Well, Spend Some, and Feel Good About Your Money in stores December 17th and available at Amazon and Chapters for pre-order now.

As the Consumer Advocate for FP Canada, I know that financial literacy is paramount to your well-being. Equally important to your long-term success is working with a qualified professional. To find a CERTIFIED FINANCIAL PLANNER® professional in your area that will help guide you on all matters of money, check out this Find Your Planner tool.

FP Canada is a national professional body working in the public interest (formerly known as the Financial Planning Standards Council). FP Canada is dedicated to fostering better financial health for Canadians by certifying professional financial planners and leading the advancement of professional financial planning in Canada.

For more on financial planning and how to get started, watch What is a financial planner? and What is a financial plan?