Smart people routinely make financial mistakes and poor decisions about money because they are swayed by powerful, underlying emotions that they may not even be aware of. Common mistakes: Overspending and running up your credit card debt…keeping your cash in bank accounts earning near-zero interest…living way more frugally in retirement than you need to.

We often feel powerless to make changes. But Sarah Newcomb, PhD, who specializes in addressing psychological money barriers, says that if you can figure out the unspoken needs driving your financial behavior, there often are effective ways to fix these mistakes…


Mistake: You’re still getting near-zero interest on your savings account at your big bank. You know that with just a little effort, you could be earning 4% in an FDIC-insured account elsewhere.

Why you do it: Inertia. Failing to manage money productively often is attributed to laziness and indecisiveness. But it also is emotionally easier to do nothing—even if there’s an apparent benefit to taking action. Switching accounts requires you to confront all kinds of small but uncomfortable frictions. You have to research online banks you’ve probably never heard of…compare rates…then figure out the logistics of transferring that money. Research shows bank customers stick with the same primary checking and savings accounts for an average of 17 years. Unless the benefit of switching banks feels greater than the perceived effort, you’re likely to maintain the status quo. Smart strategies…

Make the benefit feel more tangible and rewarding. The notion of getting 4% interest on your money is too abstract to sufficiently motivate you. Instead, write down how much you earn in dollar terms from your big bank (a typical 0.2% APY on a $50,000 deposit pays $100). Then write how much you could earn at a bank with a 4% annual percentage yield ($2,000 on a $50,000 deposit). For even more motivation, plan what you want to do with that extra $1,900 in the coming year. Helpful resource: Go to to research the highest APYs from banks and credit unions nationwide.

Make yourself accountable to ­others. Tell your family and friends that you’re going to earn an additional $2,000 on your money for just 30 minutes’ worth of effort. Simply not wanting to disappoint them often is enough to overcome your financial inertia.


Mistake: You spend excessively. This has even more serious consequences recently because the average cost of carrying a balance on a credit card hit its highest levels in nearly 40 years. Most people think the problem is lack of discipline, so they search for solutions to enhance their willpower. But like dieting, this only leads to a vicious cycle—you inevitably slip and experience feelings of shame and failure, which requires even more shopping and spending to feel better.

Why you do it: Poor emotional coping. You overspend because you have deep, basic needs that aren’t being met. These needs may include having fun, surrounding yourself with beauty and comfort, connecting with others, feeling safe and achieving status among your peers. When you try to deny a deep need, it actually becomes stronger. Smart strategy…

Identify the true need driving your overspending, and satisfy it in ways that don’t ruin your credit rating. Check out the list of the most common needs (known as Maslow’s Hierarchy of Needs) at to identify what is driving your spending. Example: When I started doing well in my career, I considered buying a new, high-­performance luxury convertible even though I knew the monthly car payments would be unmanageable. I realized that what I was really looking for was adventure and escape after years of living on a graduate-school budget and driving economy cars. I was able to satisfy that need for adventure and still be fiscally responsible—I bought a BMW 3 Series convertible with 75,000 miles on it for $10,000.


Mistake: Small financial disagreements with your partner over saving and spending escalate into huge arguments that damage your relationship.

Why you do it: Money is closely tied to your aspirations and identity. If your partner’s financial behavior undermines your sense of self, your reaction can be intense because you feel your identity is being threatened by the person closest to you. Smart strategy…

Brainstorm ways to meet both partners’ needs. Example: A man argued with his wife over how much money he spent on his boat each year. She enjoyed sailing but much preferred to save that money for their retirement. For the husband, the boat allowed him to relax in nature and feel passionate about something outside the office. Their solution: The man offered sailing lessons to some of the teens at his yacht club. This allowed him to share his sailing knowledge with a new generation of enthusiasts and to offset the cost of the boat. His wife could then deposit the money earned from the sailing lessons into their 401(k) plans. You and your partner will know when you have found the right resolution to your conflicting needs when you are both excited about putting your plan into action.


Mistake: You live more frugally in retirement than you need to. After decades of scrimping to build a nest egg, many retirees refuse to reward themselves. They stress out over minor expenses even if they have seven-figure portfolios. At the same time, they feel frustrated and resentful that they aren’t able to travel and enjoy expensive leisure activities when they are still healthy.

Why you do it: Fear of losing control. When you were working, you had the earning power to cope with financial unknowns such as inflation and market volatility. In retirement, your income is passive and fixed. You don’t know how much money you’ll need because of additional unknowns such as your life expectancy and health. Spending as little as possible becomes a way of feeling in charge. Smart strategies…

Focus on other solutions that give you a sense of control instead of just frugality. Examples: Set up a separate account to cover specific costly events in the future, such as a child’s wedding or long-term-care costs. Create more ­pension-like income such as annuities—the guaranteed payouts from annuities allow you to spend more freely with the rest of your portfolio. A recent JP Morgan study found that clients who received 60% to 80% of their monthly income in regular payments spent 26% more in retirement than those who got only 20% to 40% of their income from regular payments.

Turn What if? into So what? Many retirees are panicked about the long-term viability of their nest eggs if the stock market crashes…or if inflation stays high for the next decade. You can help quell this catastrophic thinking by carrying those thoughts further to address what actually would happen. Example: What if the market crashes? As long as your portfolio is well-­diversified, you won’t lose everything. You may have to make adjustments or cut back on your lifestyle, perhaps even move. But the reality is you would survive and be far more resilient than you fear.


Mistake: You treat “found money” (a tax refund, lottery win or inheritance) frivolously. You’re apt to fritter it away rather than use it in ways that could make a long-term difference in your life such as paying down debt or saving for the future.  

Why you do it: Mental accounting—the psychological shortcut your brain uses to assign meaning and order to the world. If you earn money through work or investing, you are more likely to put it to practical and planned-for uses. But if the money comes to you unexpectedly, it often leads to illogical financial decisions. Example: I met a man who received a large inheritance when his mother died. Even though he and his family needed the money, he was considering giving it all away to charity. He associated the money with his mother’s legacy, and he wanted to make it “mean” something worthy of that legacy. Smart strategies…

Leave a large inheritance or lottery win untouched for six months or more. Put it in a CD, and allow yourself to work through your emotions before you attempt any financial moves. This forces you to separate intense or irrational feelings from the found money. It also allows you to establish limits with friends and family who ask for gifts or loans. You can honestly tell them, “The money is tied up, and I can’t touch it right now.”

Redefine “found money.” Assign it a different purpose. Think of it as “found security,” which allows you to use it in ways that benefit your long-term financial stability. Another example: I know one person who saw his inheritance as “found venture capital,” a way for a loved one to support him as he transitioned to a different, more fulfilling career.

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