GLOSSARY · BUDGETING, SPENDING & SAVING

Mental accounting

The tendency to sort money into separate mental accounts by its source or intended use, and to treat money differently depending on the account, even though money is interchangeable. It can lead to costly choices, such as keeping low-interest savings while carrying high-interest debt, but it can also be used deliberately, as in envelope budgeting and sinking funds.

Also called: mental budgeting, earmarking, money jars

COMPUTE IT WITH YOUR NUMBERS

Subscription cost audit →How much am I really paying for subscriptions per year?Debt payoff planner →If I put $X/month toward my debts, when am I debt-free and which order saves most?Pay off debt or invest →At my debt rate, does extra cash do more paying debt or investing?Paycheck budget →How should I split each paycheck between bills, savings and spending?

LEARN IT PROPERLY

CHAPTER · BUDGETING METHODS & FUNDAMENTALS · FOUNDATIONSWhy Budgets Fail and How to Build One That Lasts CHAPTER · BUDGETING METHODS & FUNDAMENTALS · FOUNDATIONSEnvelope Budgeting With Cash or Apps

SOURCES

Mental Accounting Matters. Richard H. Thaler, Journal of Behavioral Decision Making, 1999.
Earmarking and Partitioning: Increasing Saving by Low-Income Households. Soman & Cheema, Journal of Marketing Research, 2011.
Mental Accounting and Consumer Choice. Richard Thaler, Marketing Science, 1985.

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