Mental Accounting: Why Smart People Make Big Money Mistakes
Of $300 and retch at the high cost.
It turns out that Mental Accounting is a huge contributor to the low rates of savings in the US (in 1999 it was 4% in the US and over 15% in Japan).
When Do You Use Mental Accounting?How can you know if you are more likely to be affected by mental accounting? Here are some clues:
You don’t think you spend, but you have trouble saving You have savings in the bank, but your credit cards aren’t always paid off You spend more with credit cards than with cash You’re more likely to spend your tax refund than your savings on a new itouchThings You Should Know about Mental Accounting:
We have a tendency to value money differently depending on where it comes from. If you win $50 in the lottery – considered “found” money – you more likely to spend that on garbage than the $50 you earned on the job. If you get tax refund – you’ll run out and spend it instead of saving. We are victims of the concept of “relative cost”. You want to spend $10,500 dollars but the used car dealer says it’ll be $500 extra this time of year. Mental accounting tells you that $500 in compared to the cost of the car isn’t that bad. But you want to buy a washing machine for $500 – you show up and they say it’s now $1000. Do you buy it? No. Mental accounting tells me that’s crazy talk. Plastic equals fake money:It sounds like the oldest most overused money trick but it still holds true – people do spend more with credit cards. When the weight of your wallet doesn’t change, you are less likely to think you’ve really spent anything. How can you fix the problem of Mental Accounting? Do what the book says: “Imagine that all income is earned income.” You worked for granny’s xmas check, so don’t waste it. Pretend you don’t have the plastic. Although Belsky and Gilovich haven’t gone all Dave Ramsey on us and told us not to...