In the town of Spendville, lived a young woman named Sara, who, like many of her friends, had just started her first real job. Earning her own money was exciting – finally, so many possibilities opened up for financial success! But over time, Sara found herself stuck in frustrating financial patterns. No matter how hard she tried to get ahead, something always seemed to pull her back. She was caught in a maze of hidden money traps keeping her broke.
What was going on? Unbeknownst to Sara, three sneaky psychological traps—the Sunk Cost Fallacy, Loss Aversion, and Present Bias—were working against her. Thankfully, a simple mindset shift, harnessing Default Bias, was the key to help her escape and take control of her money.
The Allure of the Sunk Cost Trap
A couple of years ago, Sara bought a fancy gym membership. It was one of those full-year commitments with all the perks—spa access, smoothie bar, state-of-the-art machines. For the first few months, she went regularly. But life got busy—work, social plans, and the pull of Netflix took over, and soon she was barely using the gym.
Yet, each month, she kept paying for it.
“I’ve already spent so much,” she thought. “If I cancel now, that money will have been wasted.”
This is the sunk cost fallacy in action—the belief that because you’ve already invested money, you have to keep going, even when it no longer benefits you. But here’s the truth: that money is gone whether Sara cancels or not. By keeping the membership, she was throwing good money after bad when she could have redirected it to something she truly valued—like saving for a trip she’d been dreaming of.
Practical Tip: If you find yourself stuck in a sunk cost trap, ask: Would I buy this again today at full price? If not, it’s time to cut your losses and move on.
The Fear of Loss
Sara also struggled with her apartment. She lived in a spacious downtown unit with high-end amenities—but the rent was eating up too much of her paycheck. Downsizing would mean saving hundreds of dollars a month, yet the thought of giving up her nice apartment made her hesitate.
“What if I hate living in a smaller place?” she worried.
This is loss aversion at work—the tendency to fear losing something more than we value gaining something better. The reality? Financial stress was making her daily life harder, but her fear of change kept her stuck.
Practical Tip: Flip the script. Instead of asking, What will I lose?, ask, What will I gain? A smaller apartment could mean savings, less stress, and more freedom to enjoy life outside of rent payments.
The Lure of Instant Gratification
Perhaps the hardest trap to escape was present bias—our natural tendency to prioritize short-term pleasure over long-term rewards.
Every month, Sara planned to save money, but by the time her paycheck arrived, she convinced herself: “I’ll start saving next month.” Instead, she splurged on dinners out, spontaneous weekend trips, and trendy clothes. Her future self kept getting the short end of the stick.
Practical Tip: Make saving automatic. If you wait until the end of the month to save what’s “left over,” chances are there won’t be anything left. Instead, set up an automatic transfer to savings the moment your paycheck hits.
The Key to Escape: Smart Defaults
One day, Sara’s financially savvy friend, Maya, who had been reading up on behavioral psychology ** shared a secret:
“I don’t rely on willpower. I use default bias to my advantage.”
Maya had set up her finances so the smart decisions happened automatically:
- Savings? Automated.
- 401(k) contributions? Automated.
- Recurring expenses? Reviewed and canceled if they no longer served her goals.
- Credit card bill? Paid in full monthly- Automated.
By setting up smart defaults, Maya made good financial habits effortless.
Practical Tip: Use automation to make the best choice your default choice. Set up direct deposits into savings, enroll in automatic bill payments, and let smart defaults work for you.
Sara’s Breakthrough
Inspired, Sara took action:
- She canceled her unused gym membership.
- She downsized to a more affordable apartment, lowering her monthly expenses
- She automated her savings, ensuring she paid her future self first.
Within months, she felt more in control of her money than ever before. No longer stuck in mental traps, Sara finally had financial breathing room—and the freedom to focus on what truly mattered.
Moral of the Story: Your biggest financial hurdles aren’t just about numbers—they’re about how your brain is wired. But the good news? You can outsmart these mental traps. By recognizing sunk cost fallacy, loss aversion, and present bias, and harnessing default bias, you can make smart money decisions effortlessly. This is the key to escaping hidden money traps!
Let your future self thank you for the choices you make today! Have you fallen into any of these money traps? How did you get out? Leave a comment to help others and share your tips.
** Behavioral Psychology books such as Dan Ariely’s book, “Predictably Irrational”& “Thinking, Fast and Slow” by Daniel Kahneman & “Nudge” by Richard Thaler provided the research related to cognitive biases used in this illustration.