5 Money Trip-ups That Could Be Costing You Thousands
Your brain thinks a tax refund is "free money," but a paycheck is for "bills." That's a financial bias in action. Learn to overcome it and make every dollar work for you.
What are behavioral finance biases, and why should I care?
Behavioral finance biases are mental shortcuts that make your money choices less rational than you think. They can lead to overspending, missed investment growth, or poor financial habits that quietly cost you thousands. Learning to spot them—like overconfidence, loss aversion, and anchoring—helps you make clearer, smarter money decisions that actually align with your goals.
5 Money Trip-ups That Could Be Costing You Thousands
Most of us believe our money decisions are logical. But what if the biggest threat to your financial well-being isn't the market, but your own mind? Psychology and behavioral finance show that emotions and mental shortcuts can often lead us astray in our financial well-being.
In my most recent post, "What Is Behavioral Finance?", I explained how our money mindset works. This post dives deeper into five behavioral finance biases that could be secretly draining your bank account. We all have behavioral financial biases, so you’re not alone!
By the end of this article, you'll be able to spot these traps in your own life and learn actionable ways to sidestep them, potentially saving yourself thousands.
What Are Behavioral Finance Biases?
Simply put, a behavioral finance bias is a mental shortcut that can distort our money choices. Our brains are designed for efficiency, so they rely on mental shortcuts, or heuristics, to simplify complex situations. While these rules of thumb are often helpful, they can harden into a bias, leading to costly financial mistakes.
These biases are essentially thinking and cognitive errors that make us prone to financial mistakes, and can quietly cost people thousands in missed investment opportunities, poor savings habits, or unnecessary debt. They are the unseen forces that make otherwise intelligent people behave irrationally with their money.
Let’s take a look at five of the most common biases that could be impacting your financial life.
Bias #1 — Anchoring Bias
Definition: Over-relying on the very first piece of information you hear.
This is one of the most common mistakes people make, especially if you're motivated by getting a "good deal" or being very careful with your money. Not all money mistakes are made by big spenders.
Here are a few examples to help you understand anchoring:
Everyday Life: You walk into Marshalls or TJ Maxx and find a Michael Kors bag for $79.99. The tag says its original price was $195. The lower price feels like an amazing deal because it's anchored to that initial, higher number.
Life: A house listed at $500,000 might make $465,000 feel like a "deal," even if, for its quality, it's totally overpriced. Same goes for seeing a BMW listed for $4,000. That sounds great, but if you don't know the car's issues or mileage, that initial low price becomes an anchor, pulling you in before you have all the facts.
Investments: You bought a stock because it looked good, maybe even at a high price, and now it's dropping. You might hold onto it, hoping it rebounds, because that initial purchase price is your anchor. While sometimes hoping for a rebound is smart, often, it's better to cut bait and move on to a better opportunity.
The Fix: Compare against multiple sources, not just one "anchor" price. Shopping around and comparing prices is almost always your best bet, especially for big buys like cars and houses.
I often say that fast decisions aren't always wise. It's not that they're never smart, and dragging your feet (like in the investment example) isn't great either. But thoughtful, considered purchases are the way to go. This needs diligence and consistency on your part—character traits that are tough to develop these days, especially when we're constantly pulled towards digital entertainment and just plain tired at the end of the day.
Bias #2 — Overconfidence Bias
Definition: Believing you’re less at risk or more skilled than you actually are.
This bias shows up in all sorts of ways, big and small. It's the “Everything will work out” or abundance mentality that can get you into trouble.
Examples:
Day Trading: Believing you can consistently "beat the market" is a classic example of overconfidence. You might see a few wins and think you've cracked the code, but you're probably just getting lucky.
Underestimating Expenses: Most people think they have their expenses under control just by glancing at their bank balance. This mindset often doesn't account for things like a sudden spike in the gas bill, or that dinner out you put on the credit card that hasn’t posted yet. This is especially true for people with an unsteady income, like those who work hourly or have a side hustle.
Starting a Business: Being overly optimistic when starting a new venture is a huge overconfidence trap. You might focus only on the best-case scenarios and ignore the potential for things to go wrong.
The Fix: Use humility checks. Compare your assumptions against real data and automate where you can.
One great humility check for business owners and entrepreneurs is to join a group that normalizes the messy process of building something. I have a group I participate in, Platform Launchers, that does this for me. Another simple but powerful humility check is a budget. It takes an immense amount of courage and heart to keep, tend, and abide by a budget. But it will always tell you the truth.
Bias #3 — Loss Aversion
Definition: The pain of losing money feels worse than the joy of gaining it.
This is a very real thing for many of us—myself included. We’re so hesitant to lose the hard-earned money we've obtained that we keep it in a savings account earning a tiny fraction of a percent. The fear of seeing that number go down outweighs the potential for it to grow by investing in the stock market.
Example: You have a bunch of cash saved up. Instead of investing it, you keep it sitting in a low-interest savings account. While it feels "safe," you're actually losing money to inflation every single day. The anxiety of a potential market dip keeps you from a potentially massive gain over time.
The Fix: Remember that inflation is also a "loss." If your money isn't growing at a rate equal to or greater than inflation, its purchasing power is shrinking. It takes time and knowledge to undo this bias. You have to feel confident in investing to do it with insight and wisdom, and that confidence comes from understanding the full picture. Start small, do your research, and get comfortable with the fact that markets fluctuate.
Bias #4 — Mental Accounting
Definition: Treating or Planning to use money differently depending on its source or "bucket."
This is the bias I see most often with my clients.
Examples:
You and your spouse think of your money as separate, with each of you responsible for different bills. But really, all your income is fundamentally the same and is used for the same living costs.
Another mental accounting example is thinking of a tax refund as "free money" for a trip or a big purchase. In reality, it just means you gave the government an interest-free loan throughout the year. If you had received that money in smaller amounts in each paycheck, you would have budgeted it for your necessary living expenses.
The Fix: Remember, every single dollar is interchangeable. A dollar is a dollar, no matter where it comes from. You need to align all your income with your larger financial goals.
My favorite analogy for this is eggs, from Jesse Mecham from You Need A Budget. If you know you're going to make scrambled eggs for breakfast, a cake for a birthday, and a meatloaf for dinner, you don't keep those eggs in separate spots in your fridge. You just keep them all together until you're ready to use them. You have a plan for the eggs, and when the time is right, you use them. The same should be true for your money.
Without a real, written budget, your mental accounts are just a series of plans or intentions. They don't account for unexpected expenses, the actual cost of your spending habits, or how your various "mental buckets" interact with each other. This is why a formal budget is so important; it moves you from a mental plan to a concrete one, showing you the true flow of your money and holding you accountable to your financial goals.
Bias #5 — Confirmation Bias
Definition: Seeking information that agrees with what you already believe.
You see this most often in our current political climate, but you'd be surprised how many friends and family also don't want to hear challenging ideas about how they're using their money! It's a natural human tendency to surround ourselves with people and information that validate our existing beliefs.
Example: You only listen to those (either in real life or on social media) who confirm your preferred (and sometimes riskier) spending habits or investing biases. You'll ignore or dismiss any advice that suggests you should be more conservative or budget more carefully, because it doesn't align with what you want to believe.
The Fix: Intentionally seek out opposing perspectives and consult a neutral advisor.
This is actually where a good therapist can really help. A good therapist will tell you what you don't want to hear and help you understand your behavior. They'll give you a plan to address the areas of your life that are hurting you or those around you. The same principle applies to your finances—a good financial therapist or a trusted friend who's a good money manager can give you the objective perspective you need. If you're ready to get an outside perspective on your financial life and break free from these biases, I’m here to help. Let's talk about creating a financial plan based on clarity and knowledge.
Why These Biases Are So Expensive
Small biases can seem harmless, but they compound into large costs over time. They lead to higher interest paid, missed growth, and overspending—quietly eating away at your financial future.
Here’s a quick look at how each bias costs you:
| Bias | How It Works | How It Costs You |
|---|---|---|
| Anchoring | Over-relying on the first piece of information you hear. | Leads to overpaying on purchases and chasing a "deal" that isn't really a deal. |
| Overconfidence | Believing you're less at risk or more skilled than you actually are. | Results in bad investment bets and an inflated sense of having a handle on your expenses. |
| Loss Aversion | The pain of losing money feels worse than the joy of gaining it. | Causes you to miss out on market gains and lose money growth by essentially "hiding it under the mattress." |
| Mental Accounting | Treating money differently depending on its source or "bucket." | Leads to wasted windfalls and spending money recklessly because it "comes from a different source." |
| Confirmation Bias | Seeking information that agrees with what you already believe. | Creates a cycle of reinforced mistakes, as you avoid the friction that's necessary for real financial growth. |
How to Spot and Break Free From Money Biases
Awareness: The first step is to simply notice your decision patterns. A great quote is: "That which you pay attention to moves. That which you don’t pay attention to moves you." It's nearly impossible to get ahead financially if you avoid paying attention to even very small spending. But keeping an eye on small items will help you make better financial decisions immediately.
Accountability: Talk with a spouse, a trusted friend, or a professional. If you feel like you can't have these conversations with the people closest to you, a financial therapist might be the right choice.
Systems: Use budgets, automation, or external rules to avoid "in the moment" bias traps. As you define the behavioral rules that will help you move forward, be sure to write them down. And if you use automation, don't just set it and forget it—make sure you're checking regularly to ensure those payments are coming out of your account at the right time.
Final Thoughts
Financial biases are human, and I hope you don’t feel discouraged that these are too much to overcome. The good news is that with a little work, you can learn to catch them before they cost you.
If you want a guide to help you master your financial behavior and overcome your money biases, book a free intro call with Montana Mindset Financial Therapy.
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