Too many of us are making a psychological mistake that screws up our finances

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Simplify Your Financial Life

Everyone likes to save money, no matter how much you have.

In the New York Times, Sendhil Mullainathan highlights one way too many of us might be thinking about it all wrong.

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Mullainathan, a professor of economics at Harvard University and author of "Scarcity: Why Having Too Little Means So Much" points to a common, research-backed thought pattern: The more money is on the line, the less we notice or care about small fluctuations in price.

Mullainathan gives the example of a person buying $50 headphones versus $400 speakers. Told that the headphones cost $40 at the store's other location 30 minutes away, and that the speakers cost $385 at this other location, people are more willing to make the trip and invest the time to save money on the headphones, the cheaper item.

Great, you might think. They're saving money. It's more worthwhile to save a whole 20% on the headphones than just 3.75% on the speakers, right?

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Too many of us are making a psychological mistake that screws up our finances

5. 5 unnecessary tech purchases that cost you money

When you're building a budget, the first thing to look at is non-essentials you can cut. Music, movies, books, apps and other bits of entertainment often fall into that category. However, you might not want to give them up.

The good news is that you don't have to. You can get all of these things for free if you know where to look. Learn how to get these for free, and more tech purchases you might be making that you don't have to.

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4. 3 things you're almost guaranteed better deals online 

When online shopping first started, it was a bonanza for saving money. Online stores didn't have to deal with sales tax, a large chunk of typical retail overhead and you could usually find a free shipping offer somewhere.

In recent years, however, brick-and-mortar retailers have evened the odds with price matching and other savings. So you still want to check both for deals before you buy something. However, there are three things you might buy that are almost always going to be less expensive online. Find out what they are and some good sites to find great deals.

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3. 3 secrets to dramatically lower your cable bill

When you're trying to cut non-essentials, your cable bill probably doesn't spring immediately to mind. Even though it's a huge expense every month, many people can't imagine going without their favorite shows.

Just because you're keeping cable, though, doesn't mean you should keep paying full price. Learn three secrets you can use to save big money on your cable bill, plus some cheaper cable alternatives you should consider.

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2. Test whether your ISP is slowing down your connection

Your Internet connection lets you check Facebook, send email, browse the Internet, watch online video, play online games and connects you to the single largest source of information in history. You need it to be fast, and you probably pay a hefty amount to get an Internet plan with decent speed.

But are you actually getting the speed you paid for? If you aren't, then you're just wasting money every month. Find out how fast your connection really is so you know your money is well spent.

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1. 3 secrets to getting the lowest airfare online

One of the biggest travel expenses is the airfare. Even worse, every dollar you're spending on getting to and from your destination is money you can't spend enjoying yourself while you're there. So, finding a cheap flight is definitely something to shoot for.

Fortunately, getting a great deal is easier than you think. You just need to know what sites to use, when to buy and the value of flexibility. Get the full details so you can save big on your next trip.

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That's where many of us make a mistake in perception. The discount on those headphones is $10. The discount on the speakers is $15. You're saving a bigger percentage of the original price on the headphones, but you're saving more actual dollars on the speakers. The estimated percentage of the overall price, which is where our minds tend to go first, doesn't affect your bottom line like the dollars.

Now, if you were deciding between buying the headphones and the speakers, this would be a different discussion entirely.

One group of people who tends to understand this concept better than the rest of us is those who are cash-strapped. Mullainathan writes:

For one thing, lower-income people behave more consistently as consumers than more affluent ones. Poorer people tend to value a dollar more consistently, irrespective of the context. It is not simply that those with less money pinch more pennies; it is that they are compelled to value those pennies in absolute rather than relative terms.

Whereas the well-off may dabble in frugality, necessity makes the poor experts in it. To them, a dollar has real tangible value. A dollar saved is a dollar to be spent elsewhere, not merely a piece of token accounting.

The insight here is simple: When it comes to money, stop looking at relative values and start looking at absolutes. Dollars, not percentages, matter. In this case, the well-off can learn something about money management from the poor.

Business Insider's Kathleen Elkins experienced a similar shift in mindset when she took on the "Elon Musk Challenge" to eat on $2 a day for a month. Having struggled through the $4-a-day food stamp challenge in the spring of 2015, she thought emulating the famous entrepreneur's teenage challenge would be impossible.

But in fact, she found having less to spend was easier. "When you only have $2 a day, you immediately enter survival or 'problem solving' mode," Elkins writes. "Having so little was an advantage in a way — it forced me to be painstakingly meticulous with my money and even more of a conscientious grocery shopper."

That's a highly specific example, but it speaks to Mullainathan's point: To save real money, you have to recognize that every dollar counts, no matter where you spend it. "After all," he writes, "when your shopping is done, it is dollars — not percentages — that will be in your bank account."

Read the full post at the New York Times »

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Too many of us are making a psychological mistake that screws up our finances

Automate your finances. 

Set up your finances so that money is taken straight from your paycheck and deposited directly into your savings account or a retirement savings account. You can also set up your fixed bills like your Internet and cable to be automatically deducted from your checking account. Automate your finances to save time and prevent overspending. If you see extra money in your account, chances are you’ll find a way to spend it, leaving you little to invest in your future. Automation helps keep your priorities in line so that as money comes in, it is dispersed to your other accounts immediately.

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Cut back. 

At least twice a year, look at your expenses line by line and see if you’re getting the most bang for your buck. For example, do you read the magazines you subscribe to or maximize that gym membership? If the answer is “no,” consider canceling or negotiating a better rate. Take that money you save, and apply it toward bigger payoffs like debt reduction, retirement or an emergency fund.   

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Get rewards. 

Lots of people use debit cards to make it easy to buy and budget for groceries, gas and other routine purchases. Instead of doing that, look into a credit card with a great rewards program for those daily purchases, and set it up to automatically pay the statement balance from your checking account each month. Over the course of the year, you could potentially pocket a few extra hundred dollars just by using a card with a good rewards program instead of your ordinary debit card (just make sure you’re paying off your credit card every month, so you don’t pay extra in interest).

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Boost your income. 

If you love your job and want to grow your career, it's time to think about boosting your income as well. Make it a goal to negotiate a raise this year. Consider your strengths and look at the value you've provided to your company over the last six months to a year, and discuss it during a performance review. This can feel intimidating, but it never hurts to ask.

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Get a side gig. 

Take advantage of your skills, or turn a hobby into profit. Doing so can help you generate extra income – which you can put toward reaching your financial goals. Etsy, for example, is a great place to sell one-of-a-kind products.  If you have Web design, copy editing or other creative skills, consider offering your services on freelance websites such as Fiverr or Elance. These types of side gigs will allow you to earn extra income while also growing your skills.

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Track your progress. 

You can’t save money if you don't know where your money is going. Every month, track your net worth using a personal finance tool or app that will show you exactly where your money is going. This will make you think about your entire financial picture from income and expenses to investments and taxes. With this focus, you can ultimately make the greatest impact on your finances in 2015.

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NOW WATCH: We tried the 'Elon Musk food challenge' and lived off $2 a day for a month

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