Why are so many Americans who make a decent living drowning in debt, unable to save money, and frustrated by their finances? Two reasons are rooted in the way we think.

#1 Someone asks you, “How much money do you make?” You say, “Fifty thousand dollars.” …Then you go around thinking that’s what you make. So you walk into a dealership and say, “I can afford this car with $50,000 a year”. But really, you don’t make $50,000 a year and you can’t afford that car. You make $37,000 a year-NET.

Now, if you walk into that dealership thinking, “I make $37,000 a year”, then your buying decision will be completely different. You will think, “I can’t afford that car with $37,000 a year. However, we don’t think like this. Psychologically, we inflate our spending capacity by basing it on our gross, rather than net annual income.

#2 Your friend asks, “How much did those shoes cost?” You say, “Just under $100.” But actually, those shoes cost you $125, because you had to earn that much in order to have the $99 in the bank to pay for them. If you originally thought of them as $125 shoes, you would have hesitated to buy them. However, we don’t think like this. Psychologically, we deflate our spending selection by basing it on the net, rather than grossed up price.

So where does your psychological spending need an adjustment?