4 Lies We Tell Ourselves About Money and How to Get It Straight

The lies we tell ourselves about finances can cost us big. Here's how to change course.

Most of us lie to ourselves. Psychologists put it down to something called cognitive dissonance, the uncomfortable tension we feel when our behavior does not match our beliefs. We know that we should save for the future, protect our credit scores, and build wealth, so when we don't do it, we come up with lies to make ourselves feel better.

Here are some of the biggest whoppers we tell ourselves and how to straighten them out:

Lie No. 1: I'll begin saving next year

Truth: It never feels like the right time to save money. Perhaps your bills are due, there are things you want to buy, or the people you love need cash. We tell ourselves we'll start saving next year, believing we'll have more money to spare.

The problem is, next year will bring the same financial responsibilities and temptations, if not more. And saving money -- even if it's just a little at a time -- offers us a financial cushion against the unexpected.

The fix: Start slow. Even if it's only 2% of your income, put it in a savings account and pretend it's not there. Let's say you bring home $4,000 per month. After taxes, you have just enough to cover your monthly obligations. Still, you are determined to save 2%, which comes to $80 each month. You cancel a couple of subscriptions and minimize your cell phone bill. By the end of the first year, you have $960. It may not feel like much, but it's enough to make small car repairs or replace a broken window in your house.

Once you grow accustomed to living without that 2%, you can gradually raise the amount you save. It does grow more comfortable with time.

Lie No. 2: My credit score only matters if I'm making a major purchase

Truth: Your credit score does matter when you make a significant purchase or borrow money. But it also counts when you want a new place to live or apply for a new job. It even matters when you purchase a new cell phone or get utilities turned on.

The fix: Pay attention to your credit score.

• Pay all your bills on time. Payment history is the biggest factor in calculating your score.
• Keep your credit utilization rate as low as possible. Credit utilization is the amount of credit you're using divided by the amount of credit you have available. For example, if you have $10,000 of available credit, but only carry a balance of $2,500, your credit utilization rate is 25%. It's a good idea to keep your rate below 30%.
• Order a free copy of your credit report at least once a year. Sites like AnnualCreditReport.com provide reports from all three consumer credit reporting companies. Check each report carefully. If you find a mistake (like an account that does not belong to you), you should dispute it.

Lie No. 3: I can postpone retirement investments until I'm older

Truth: Retirement will be here before you know it, no matter how young you are. Compound interest -- earning interest on your interest -- means that the earlier you start, the more your money will be worth.

The fix: Learn the power of compound interest and apply it to your life. Let's assume that you invest $300 per month, earn an average of 7% on the investment, and plan to retire at age 67. Here's how that works, depending on when you start saving:

• If you begin at age 21, that $300 a month investment will be worth $1,104,306 at retirement.
• Wait until you're 35, and the same $300 per month will be worth $396,785.
• If you begin at 49, your investment will be worth $122,397 when you retire.

If the ins and outs of investing confuse you, make it easy by contributing to a company-sponsored 401(k) or another retirement investment vehicle. If your company matches any portion of your investment, make sure you earn the full match. If you don't, you're throwing money away.

Lie No. 4: I'll never earn enough money to build wealth

Truth: It doesn't matter how much money you make. What matters is how you spend it.

The fix: Commit to saving and investing. The only way to build wealth -- no matter how much (or little) money you earn -- is to pay yourself first.

Let's say you take a job at age 22, earn $40,000 per year, and never get a raise. Your take-home pay is approximately $2,600 per month. You're determined to build wealth on your income, so you invest $600 each month and live frugally on the other $2,000.

If you make this commitment at age 22, and your investments pay an average return of 7%, you'd have put away $295,168 in 20 years. By the time you retire at age 67, you could have over $2 million.

Obviously, it's a very simplified example -- you are unlikely to stay at the same wage for your whole working life, and you'd also need to put money into an emergency fund and cover other expenses. But if you invest in the stock market for the long term, 7% is a realistic return. And it is possible -- though not easy -- to get by on $2,000 a month.

We often lie to ourselves because it often makes life easier in the short term. The first step on the path to healthy finances is to get honest about what matters. The second is to take ownership of what happens next.