Mental accounting

Mental accounting is a trap we can easily fall into. Experts define it as the tendency to manage money in separate mental accounts, sometimes based on different sources, each allocated for a specific type of spending: one for groceries, one for vacations, one for retirement, one for leisure, and one for investments.

We tend to associate different values to money depending on its origin (e.g., salary vs. inheritance), the payment method (cash vs. card), or the spending context (daily expenses vs. vacations). This leads to irrational behaviors, like spending freely on entertainment while being overly cautious with retirement savings.

It's important to remember that money is fungible: 50 euros have the same value whether saved or won in a lottery, and should be managed based on the same priorities.

Being aware of mental accounting is the first step to better money management. Learning to objectively evaluate every expense and saving decision - regardless of context or source - can make the difference between rational financial choices and impulsive ones.

Want more examples of mental accounting errors? Watch the video!