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Mental Accounting - Is it really a bad thing?
Old 11-09-2008, 09:27 AM   #1
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Mental Accounting - Is it really a bad thing?

According to a book I've seen mentioned on here several times (Why Smart People Make Big Money Mistakes...or something like that), mental accounting accounts for a lot of the mistakes people make financially. They make it out to be a very bad thing....and in some cases I see their point. They uses examples like finding money...most people are more likely to spend that money quicker and with less thought than the same amount of $$ they earned. The book got me thinking nonetheless....and I started digging.

My name is Jason, and I am addicted to mental accounting.

I have so many accounts and mental 'tags' on $$ that I often get confused. I used to be a 'one-account-guy' because in reality, it makes no difference where you store it...if you spend more than you have you've got trouble. Save more than you spend and you're in the positive. But lately I've developed all kinds of schemes to save money.

I have a regular checking that I deposit all $$ into. From there, it's swept away weekly into a high yield checking. Once that acct hits $5k, I pull the CASH out and hide it under my bed....seriously. That money has NEVER been spent ever. Some of the other money is swept into a new vehicle ING checking which I do not touch under any circumstance. some more money is swept weekly into my roth ira, traditional vanguard acct, and simple ira. If I get paid cash on a job I throw that into another box in the house that I dip into for fun stuff....like an upcoming vegas trip, or the stripclub, or a night out with the wife.....or a night at the stripclub with the wife. Then I manually sweep a couple bucks every so often into another checking for yearly self employment taxes. If I ever get paid from a large job, I often allocate a portion of that money to yet ANOTHER account which serves various purposes. The $4k in there now is tagged for my next property tax payment, the next 2 months of business advertising, finishing my bathroom i'm installing, and a new roof for my shed. Then , my tenants' rent payments goto another account whcih isn't really tagged for anything. Sometimes I use it for taxes, other times for the slow winter months....but it's a last resort account and doesnt get touched til I'm desparate. And of course, I use the rest of the $$ in my checking to pay bills


All of this seems really crazy when I look at it now, but it has served me well. when my main account dips under $3k I hit panic mode because I know soooo many things get pulled from there automatically. so then my day-to-day spending habits are throttled back until it's back where I feel comfortable. Of course, this only works because I turn a blind eye to the other umpteen accounts I have.


Anyone else feel this type of mental accounting can be/has been beneficial?
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Old 11-09-2008, 09:38 AM   #2
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...in reality, it makes no difference where you store it.
When dealing with money, I find it's good to stick with reality.
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Old 11-09-2008, 09:45 AM   #3
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reality has always been a stretch for me ... i find that multiple accounts work for me, even though, objectively, they make no sense.
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Old 11-09-2008, 09:49 AM   #4
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I think a lot of folks do this sort of thing effectively. For example, I have everything on autopilot in terms of expenses and investments. I know that when my checking account dips below $3,000 at any time in the month, I start to be concerned about cashflow. Otherwise I'm good. I just have to keep track of big one time expenses like property tax, insurance and vacations as they have to be paid out of the checking account. It is simple and doesn't preoccupy much time thinking about it.

You have an extra layer of complication - you are mixing business income/assets with personal income/assets and personal spending. What you do sounds really complicated for what benefit you are getting. But hey, if it works and isn't a big time burden, do what works.
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Old 11-09-2008, 10:09 AM   #5
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I keep an "accounting" of various things within the checking account, and try to run on just what I consider the household portion of the account. Various accounts would be more work than I want. But, whatever works for you - you know if you are meeting your goals or not.
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Old 11-09-2008, 11:14 AM   #6
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I use Microsoft Money to do my guess "mental" accounting. This is what my "cash flow" looks like. I back-dated one to show the result of moving money into the Checking Account.

My brain is just too inefficient to do this by itself... and there is some doubt that using MS Money is sufficient to balance the scales.

(BTW, although it isn't obvious, both credit cards are paid off monthly.)
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File Type: jpg Cash Flow 2.jpg (64.0 KB, 11 views)
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Old 11-09-2008, 11:28 AM   #7
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I think "mental accounting" is fine *IF* you recognize it for what it is. It should be set up to help you, not hide reality from you.

In many things, we over-simplify something, just to help us understand the "big picture", which may be too complex to grasp all in one view. But, once we've don't that, we should step back to see how it fits in the "big picture".

Like so many things - I won't call "mental accounting" "good, or "bad". It is a tool, and tools can be used or misused.

IMO, cash literally hidden under the bed is probably approaching "misuse"

-ERD50
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Old 11-09-2008, 11:33 AM   #8
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They uses examples like finding money...most people are more likely to spend that money quicker and with less thought than the same amount of $$ they earned.
When it comes to "found money", such as the unclaimed property money that I got from the state a few months ago, I usually spend a little (maybe 5-10%) on something that I would not have otherwise purchased. Still, the rest is moved into my nestegg in the manner described below.

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But lately I've developed all kinds of schemes to save money.
I have a similar though much less elaborate scheme by which I save money. I have mentally established both "high" and "low" limits for my checking account and also for my savings account.

When the checking account balance exceeds the high limit for that account, I skim it off to the low limit and put that excess into savings. Then I regard that low limit for my checking account as though it was zero, and put off spending until my next paycheck is deposited. There really is money there but I don't spend it until there is more.

The same for savings - - when it exceeds the high limit that I have established for that account, I skim it off to its low limit and send the excess to Vanguard.

Nothing leaves Vanguard until I retire. Vanguard is untouchable, for now. Money can go back and forth from checking to savings and back, depending on the amount needed to keep each account within its bracketed limits, but once it is in Vanguard it is verboten.

The high and low limits for my checking and savings accounts are adjusted from time to time, to prepare for specific major purchases/expenses as these come up.

Of course reality is bound to intrude at some point. When it does, and there is some unexpected or emergency use for funds (such as hurricane evacuation, for example), all bets are off. I have never had to touch Vanguard, though (knock on wood). I just don't upload to it for a while.
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Old 11-09-2008, 11:35 AM   #9
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Want2Retire, I like your idea of "untouchable" accounts.
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Old 11-09-2008, 11:39 AM   #10
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Originally Posted by TromboneAl View Post
When dealing with money, I find it's good to stick with reality.
Reality like sanity is way overrated. I ah always used max auto deduct for my tax deferred in the accumulation phase. On and off broker account for mad money - and a long stretch of DRIP plan's I paid into every month - in my mind I was paying monthly 'bills' instead of dollar cost averaging.

As for the rest - ahem, ahem we lived thirty years in New Orleans - need more be said.



heh heh heh - in the stretch the max auto deduct (401k) index fund overtook everything else and became the horse I rode in on, tortoise and hare wise.
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Old 11-09-2008, 11:47 AM   #11
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I use mental accounting as well.

It works pretty well as long as your are able to establish, and stick to, some "unbreakable rules."

I don't decide any particular savings rate, budget, or decide how much I am going to spend any particular time, and usually end up saving 70-80% of my take-home, I just set the rule:

"I will spend as little as possible and save as much as possible"

There are also some other rules that accompany it,

"The larger the purchase, the longer I will think about it"

"Is paying more for better quality better in this case?" (rare, but it does happen, for instance, I hate the cheaper kinds of orange juice, anyways, the difference must be very significant)

"Find a way to get what you want at a lower price, if possible"

"Don't pay for something you can get for free, but, do not exchange saving money for a disproportionate amount of time"

"time is worth more than money, but it requires a certain amount of money to buy time" (which is why I am never really satisfied with my pay right now in the earlier accumulation stages, I could be making $1M/year and I wouldn't really be completly satisfied until I had the minimum amount to buy time, a.k.a. early retirement) (at $1M/year I would be retired in 2 years...)


By using a small set of unchanging rules, you don't need to set a budget, track how much you are spending, or any of that, I think it is actually the easiest and most effective approach, since it kicks in before you have splurged, not afterward. It does take a pretty high amount of will get started using though, such as having some sort of very large, very important, goal.
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Old 11-09-2008, 11:49 AM   #12
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As for the rest - ahem, ahem we lived thirty years in New Orleans - need more be said.
Hey, it's cheap to live here! Don't tell the tourists, though. We want them to keep dropping as much money as they can into the local economy.
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Old 11-09-2008, 12:14 PM   #13
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I think over-accounting is worse than a little fantasy; anyway it's not my style. I'm able to keep track of my checking accounts but have never really paid attention to the brokerage accounts, buy and hold. So a couple of years ago, there was CuppaJoe walking down Main Street, sees the stock ticker, jaw drops, didn't know the DOW had climbed up from 10,000 and was then over 12,000. I rationalize it's what they call, "having a life." That's my fantasy, always assume you have less, in the accumulation phase, anyway.
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Old 11-09-2008, 12:33 PM   #14
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All of this seems really crazy when I look at it now
What's that old saying? If it walks like a duck...

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But lately I've developed all kinds of schemes to save money.
...
Of course, this only works because I turn a blind eye to the other umpteen accounts I have.
If you're not paying attention, do you know that these schemes really are saving you money?

If it seems crazy, and you're worried about it, and you're not even sure it's saving you money... why not simplify?
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Old 11-09-2008, 12:35 PM   #15
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My approach resembles W2R's. (We think alike a lot of the time ).

However, I have the added complication of a professional corporation within which most of my saving occurs. While I consider my long term savings accounts "untouchable", lately I have changed my ongoing corporate contributions to provide increased liquidity.

As for my next car, the cash is already sitting in a high interest personal savings account and I'm plannning to wait till the bottom falls out of my old one before touching it.
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Old 11-09-2008, 12:41 PM   #16
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Investopedia.com's definition of: Mental Accounting

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Anyone else feel this type of mental accounting can be/has been beneficial?
Good grief-- as you describe your system, how can anyone be persuaded that it's beneficial? And what if you have a house fire or a break-in or even end up out of action in the hospital for a few weeks?

You're also paying at least 3% annual inflation to keep that "extra-safe" money under the mattress, although this year the govt swears it's nearly 6%.

By contrast, I can see why so many on this board are attracted to buckets.

Would it be easier to keep a few thousand in a bank's safety-deposit box (which makes you less of a target and gives you a chance to rethink the spending imperative), a few thousand in a checking account, and your "mental accounting" funds in one or more money-market accounts? Heck, if I have to spend money "right now" then I either use a credit card or a check on our home-equity line of credit. For Craigslist everything else I stop by an ATM on the way to the transaction.

The only time we keep cash around the house is when the hurricane is 48 hours away.

My Depression-born mother-in-law deals in cash. Every week she's in line at the bank to withdraw hundreds for spending (because they don't trust ATMs). She's a walking target for anyone hanging around the bank doors. She keeps cash hidden around the house for "emergencies". So far the only emergencies have been self-imposed when she forgets where she hid it or if there's a plumbing leak. It's been far more hassle than benefit. And like so many other Boomers, I dread the day that we have to go clean out their house...
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Old 11-09-2008, 01:35 PM   #17
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Dont deal with cash myself. Unless Im going to someplace where I want to avoid any transaction charges. For example getting cash at Casinos. Simple is better for us minimal accounts to deal with.
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Old 11-09-2008, 02:51 PM   #18
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IMO, cash literally hidden under the bed is probably approaching "misuse"

-ERD50
That cash under the matress has outperformed my other investments by 30% this year. Worked out pretty well imho! i actually did snag a little of it to buy some more equities as DOW hit the 8's
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Old 11-09-2008, 02:59 PM   #19
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What's that old saying? If it walks like a duck...



If you're not paying attention, do you know that these schemes really are saving you money?

If it seems crazy, and you're worried about it, and you're not even sure it's saving you money... why not simplify?
I'm actually not worried a bit. Just curious what everyone's take is on the 'mental accounting' situation. I'm actually quite pleased with the way it works for me...the whole process developed on its own and I have been saving quite a bit for some time.

I know that I am saving $$...that's a fact. But where the mental 'deception' comes in is when the only account I have that is not on autopilot reaches the low 'trigger'. Then I find myself being more frugal to be sure all my auto-pilot stuff keeps rolling. At the end of each year I take a glance at all my assets as a whole and am AMAZED at what can be saved by being on auto-pilot. I KNOW ahead of time what will be saved, but I would never have done it if not for the auto-deductions. Hope that makes sense
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Old 11-09-2008, 03:02 PM   #20
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for the record, I have also never balanced a checkbook . I look online, but don't record purchases as they're made. Perhaps that quality is somehow tied into my mental accounting defect! Because I do know at any time what my balance is within a hundred or so...and I keep track mentally....thus 'mental accounting'
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