Last month, you over-spent, over-ate, and partied like it was 2017. Now it's January and you're wondering if there could possibly be a life outside of those stretchy sweatpants. Will you ever pay off that December credit card bill?

Well, I don't have experience achieving that perfect beach bod (I hear it's a combination of diet & exercise), but I will offer some tips on how training your mind can actually help you save money in the new year. Making changes to your mindset will really help change some habits and produce  positive results. It might not be as dramatic as taking the red pill in the Matrix, but are you ready to learn about the reality behind spending?

1) Avoid Anchoring Bias

Anchoring is our tendency to attach our thoughts on a reference point - even if it is irrelevant to the decision at hand. For example, the use of mark-ups and mark-downs is a retailer's way of taking advantage of the common human tendency to base decisions on the initial piece of information (original price, "anchor") offered.  Suddenly, any "sale" will look great in comparison, which causes impulse spending.  

Other examples include:

• Waiting for a certain price before buying stocks. Just because a stock used to be a certain price, it doesn't mean it will ever return to that price. Base your decisions on the facts now. 
• Postponing vacations or investing based on the US/CDN exchange rate. Sure, the dollars were at par in 2013. And $0.79 might seem "low" now in comparison, but given the current economic environment, we can't hold onto the idea of "par" forever!
• The house across the street that sold last year for $1.2M. You can bet the whole neighbourhood is now "anchored" to that value, while the rest of the housing market might not agree!

How do we overcome anchoring bias?  In a nutshell:

1. Research. Know the market rate, shop around for similar items, compare pricing at different retailers, analyze features, look for any 'catches' or defects.
2. Decide if it's in line with your goals. Ask yourself, "Do I need this? Is it worth it? What are the tradeoffs?"
    

2) Use Cash vs. Credit (It hurts more)

If you are trying to cut down on overall spending, the credit card is not your friend. Recent studies have shown, consumers spend 12%-18% more when they use credit card vs. cash. The amounts spent frivolously far exceed the credit card rewards earned, so even though you might get a warm & fuzzy 2% kick-back, that's pretty much all it is -  a hug at month's end. 

If you're trying to control spending, you can still use a credit card, but use it sparingly. If you're on a diet this month, you can still eat cake, but very little. Do you know how hard that is? It's so easy to use a credit card, but nothing hurts more than using cash.  It's so easy to eat cake (especially if your wife bakes really good cake), so eat something that hurts - like celery. 

1. Use cash whenever possible. Give yourself a weekly allowance and withdraw that amount on the same day of the week each week. 
2. If you're planning to use a credit card, pre-decide how much you are willing to spend before you spend (before that restaurant meal, before the grocery trip, etc.). Do a quick calculation before you order, or line-up to pay.

3) De-frag your Money Buckets

Mental accounting is the tendency to separate our money into different 'buckets' and thus valuing and treating them differently depending on the source or intended use. This fragmented categorization of money causes us to make illogical decisions on how we spend or save.

Does this look familiar?:

• Gift money from grandparents: Spend freely!
• Money from regular paycheque: Invest sensibly
• Year-end bonus: Throw a big party or buy a couple rounds for the gang
• Tax refund: Vacation fund

OR

• Mortgage (~3% interest): Pay off diligently and aggressively
• Credit Card debt (~20% interest): Make minimum monthly payment
• Line of credit (~4% interest): Borrow to invest?
• Student loans (~6%): No rush!

Do you see any illogical patterns here? Why do we treat our resources differently based on their origin and/or intended use? Money is money, a dollar is a dollar. If equal worth is given to each dollar (Spoiler alert! It's always going to be $1.00), we won't attach our feelings and aspirations to the numbers just because of where it came from. Mentally consolidating the funds, and then consciously deciding how best to use each dollar will create a more sensible plan for your household.
 

4) Protect your future self, from your current self

Most of us are rational and thoughtful when making money decisions about the future. However, how often have we made impulsive and irrational expenditures for short term gratification? Protect your future by limiting the damage you can do now. You can set up pre-authorized investments to pull from your account, or you can build a money system that limits your 'allowance money'. Out of sight, out of mind! Taking the will out of will-power - and what's left?

Some of you reading this will be too young to remember the Freedom 55 Financial commercials from the late 80's. A future "you" appears, retired early at the age of 55, looking great and enjoying freedom at last. The purpose, to congratulate yourself on your wise investments in the past, to enable this future lifestyle.

If you want to enjoy all the freedom and spending now, guess which future-self will be visiting you in your commercial? My guess is that they'll be knocking on your door demanding payback + interest! With or without a baseball bat, that's a scary thought. 
 

Perception is your reality

More often than not, it's not the amount of money we have/don't have that is the problem. How we make decisions on how that money is used is where problems start. When you take a step back and realize how your decisions are made, you can quickly see where a slight change of mind can help reduce spending and increase efficient saving.