Mental Accounting

The tendency of people to categorise money differently based on arbitrary criteria such as the source of the money or its intended use.

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Key Insights & Principles

Personal Finance

1. Money is fungible (interchangeable). When we do mental accounting we violate this principle which can lead to poor decision making.
2. Mental accounting can be effective if used well - it can help control spending and help us save.
3. Mental accounting can weaken our self-control when we have vague rules.
4. Mental accounting can make us overspend when we have 'excess' in an account, or lead us to underspend on things that would be most valuable.

1. Automate savings and put in accounts that are not readily visible.
2. Focus on financial objectives rather than source of intended uses for funds.
3. Regularly review accounts intended and actual use of funds against objectives.

Book References