horizontal.png

money health weekly

SIGN UP AND NEVER MISS A POST:

Mental Accounting: What Would You Do with an Unexpected Bonus?


 

"A penny saved is a penny earned."


-Benjamin Franklin

 

I'm in my early 20s visiting a casino, even though I don't go to casinos often. I'm traveling and this new casino has free blackjack lessons. How convenient, I think, that a casino would teach me how to play a casino game for free. I'm pretty naive, but I'm having fun. I learn basic strategy and my new knowledge leads me learn a little about altering my bet based on how many big cards are still in the deck (this could be called a basic form of card counting).


I'm not a high-roller; I stick to starting with $20 and usually that lasts a while before I lose it. Some days it doesn't last long and get bored, usually forking over another 20 bones. But on one particular day I find myself playing blackjack in a high-stakes room. I started the day with my $20, but now I have $300! I think to myself, "Dude, you still have your $20, plus you $280 of their money. Why not see what this high-stakes stuff is all about."


I would never take $300 and walk into a high-stakes room at a casino, yet here I am. Why would I gamble with $300 on this night but never do on any other night?


mental accounting

The Mental Accounting Problem


The source of our money shouldn't have any influence over how we view that money. Nor should the use of our money. The unfortunate truth is that both the sources and uses of our money alter how we view it. The experts call this mental accounting, where we put money from different sources and for different uses into various buckets and treat each bucket differently. 


Do yourself a favor and ask yourself what you would do with an unexpected bonus. Be honest. If you are like most people, there would be a splurge. You would take a trip that you wouldn't have otherwise taken, or purchased a "toy" or other item that you otherwise wouldn't have purchased. Maybe you take your bonus and update your home that you wouldn't have updated for a few years.


It's not just sources and uses of our money, either. With investments, it's common for people to have different portfolios, or baskets of investments, set up for each of their goals. They may have a set of investment for their retirement accounts, maybe a different one for their fun money, and a third set of investments (these sets of investments are called