What is Mental Accounting?

 

We often assign a different value to

different things but that can sometimes

lead to a negative

consequences.

 

Mental accounting refers to the way

different people tend to perceive

the value of money this is usually

due to individuals subjective criteria

which greatly varies from one person to

another due to many factors for an instance you

might value dollar differently when it's earned

through work compared to when it's

given to you these differences in the

way we classify funds tend to make us spend more and

make irrational decisions about the money a good example

of this is when the person saves up for a vacation

and uses his savings john while having a

considerable credit card debt

at the same time he would probably

categorize his savings money

differently from the money he uses to

pay his debt

and so be left with piling interest

while having some money

sitting in his jar in the end he could

have just

used the money to pay off his debt than

to pay a lot more

interest just to have his vocation fund

separately right the solution may seem

straightforward but people still don't

follow it

another example when a person makes a

rational decision is after receiving

his bonus in his mind this money is just

additional cash so he can waste it

without feeling

guilty about it as a result mental

accounting often leads to poor financial decisions

that will only make your financial situation

worse so be sure that you treat all your

money equally and if you have extra money then

you should use it wisely