Simple Psychological Hacks to Break Your Bad Money Mindset
By: Monica Galvan
Tags: Finance, Psychology, Self Improvement, Money, Economics

Hide your money

The number one mistake most people make is to leave all their money in one banking checking account. Instead, think about your checking account as a funnel. It’s a place where money from your job or business comes, but it doesn’t stop there.

Always keep about 1.5–2x of your monthly expense in this main account. For every dollar over that amount, transfer to a high-yield savings account. Be sure to do your research on which one to choose, but if you want a quick answer, I use Ally bank.

Savings rates change all the time. Last year Ally offered 2.2% interest. As 2020 draws to a close, Ally now offers 0.6%. This is to be expected due to the economy and state of the world right now. A good rule of thumb, the cheaper money is to borrow (right now, it’s hovering around 2.75%), the lower the return on interest rates.

Besides earning a small interest rate, why should you funnel all your money into another bank account? So you don’t have easy access to your money, and you don’t see how “rich” you are on a daily basis.

If all you see is the 1.5–2x of monthly expenses amount in your main checking account, you won’t feel as compelled to go on an Amazon shopping spree and buy things you don’t need.

Of course, the funnel shouldn’t stop there either. You should also transfer some of that money into an investment account, but the point is to hide your money and forget about it, so your nest egg grows in the background.

Add tax to your personal expenses

Let’s say you’re thinking about upgrading to a new smartphone. An average iPhone is about $999 + tax for a total of ~ $1100. How many hours of work will it take you to pay for the new phone?

For this example, let’s say you make $40 per hour. $1100 ÷ $40 = 27.5 hours. But it doesn’t stop there. To pay for that $1100 phone, you would need to work more than 27.5 hours due to taxes.

At $40/hr, you’re making roughly $80,000 a year, which puts you in the 22% federal tax bracket. Depending on what state you live in, your state tax rate will vary. I live in California, which means at $80k per year, add on a 9.3% tax for a total of ~31%.

In actuality, your tax rate will probably be less since the US uses a progressive tax system, but this is just an example for argument’s sake.

We need to add that 31%, which is $341, on top of the $1100 purchase to earn enough money to pay for it. In total, you would need to work 36 hours to earn $1441 to pay for the new iPhone. Now it’s up to you to decide, are 36 hours of work worth the return of a new iPhone?

Once you start thinking about your personal expenses this way, you might start to think twice about following through with them.

The 30-year rule

Whether it’s stocks, bonds, or real estate, how do you know if it’s a good investment?

Ask yourself this question:

In 30 years, will I still view this as a good investment?

If the answer is yes, buy it. If you’re not sure, then you might want to think about it more before investing.

Thinking about investments in the longterm will help you make the right choices. Don’t buy stocks in the short term just because everyone else is, then expect them to rise in value and cash out in a few months. Unless you’re a skilled investor or have been buying stocks for quite a while, this is a recipe for disaster. Why would you want to gamble with your hard-earned money?

Start early, contribute often

I’ve been investing in low-cost index funds like the target-date fund and an S&P 500 index fund ever since my first full-time job. I started with small contributions of 1–3% of my salary. As I’ve earned more through the years, I slowly increased my contributions.

I had no idea what I was doing at the time. I just followed the advice everyone gave me “contribute to your 401k”.

Looking back, I wish I contributed much more aggressively. You just can’t beat the advantage of compound interest. Those small contributions from 7 years ago have grown substantially.

But instead of wishing I invested more in the past (and with after-tax dollars instead of pre-tax), I use this experience to make better investing decisions in the future. Now I prioritize investing. Every time I earn money, whether it’s from my full-time job or side business income, I funnel a set percentage into investments.