Mind your money...

YOUR mind playing tricks on you with money? The term mental accounting may not be that familiar to most, but we practise this almost daily when we think about money and make choices about purchases.

Mental accounting is a term coined, pardon the expression, by behavioural economist Richard Thaler to explain the way we categorise money and spending patterns in our heads, depending where the money came from and what it is earmarked for.

Sounds a bit highfalutin and not for you? Think again.

Some examples of mental accounting:

You drive for 20 minutes to get a fiver off a €20 euro purchase, when you wouldn’t think it is worth it to do the same for a €200 purchase.

You keep an unhealthy balance on your credit card which incurs sky high interest rates, while on the other hand save furiously into an account that pays no interest.

You treat a tax refund as a “windfall” or a gift, but you should not. It is normal income.

You go into the bookies with €5. You are on a roll and your horses keep coming in and you bet the winnings again and again. You end up with €800. You put it all on a “sure thing” but it loses. You might be behind on your rent but, as this was “free money”, you don’t feel so bad and think of it as just losing €5.

You treat bonus and larger income payments as gifts and windfalls, but again these are just your income, even taxed the same way.

The solution? Treat money as “fungible” in that you must think of it as not earmarked for a particular function, but treated the same, no matter where it comes from. Money is money, no?