Overcoming the trap of ‘mental accounting’

We all have a tendency to use conceptual money jars as a quick and easy way to deal with the complexity of our financial lives, but it’s a tendency that can lead to poor financial outcomes. 

This so-called ‘mental accounting’ sounds harmless, but it has important consequences. For example, putting cash into a ‘money jar’ for a vacation or special purchase, while not paying off a hefty credit card debt, is not a mental quirk, it’s an illogical behaviour that costs money.

Money and the mind

The propensity of humans to use mental accounting is a good example of our odd attitude and behaviour towards money, explains Bri Williams, a behavioural specialist at People Patterns and author of Behavioural Economics for Business.

“We have a very complex relationship with money that often is not completely logical,” says Williams.

In our minds, it’s not just how we account for cash that doesn’t make sense, even how we feel about it’s source is weird.

“Where the money comes from is important, as it has emotional baggage attached to it. If a windfall comes from a sick relative, for example, we tend to spend it on more ‘earnest’ activities, whereas a tax refund is often seen as ‘free money’, so it is often spent on fun things,” says Williams.

Another example of our odd relationship with money is paying the deposit to use a shopping trolley.

“If people put $1 in a supermarket trolley, they will go out of their way to take it back and get their money, even though we lose $1 all over the place, all the time and never worry about it.”

Real life mental accounting

The concept of mental accounting is just one of many strange behavioural tics explored by Richard Thaler, the Nobel Prize-winning behavioural economist.

“We have a tendency to conceptualise money as if it belongs to different ‘mental buckets’. For example, having money we associate with paying the power bill and another bucket for fun or hedonic expenditure,” Williams explains.

“Compulsory super is another good example of our tendency to use mental accounting. As we have not seen or ever had the money in our hands, it’s easier to save and mentally ‘put it away’ for the future.”

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.