concepts
What is mental accounting?
The tendency to treat money differently based on where it comes from or how it's intended to be used, rather than considering it all as the same.
Why might someone buy a $5 coffee every day but not spend $100 on a nice dinner?
Because they mentally treat small daily purchases differently from larger one-time expenses, even if the total cost is the same.
What is the sunk cost fallacy?
When people continue investing in something (like a bad movie or project) just because they've already spent money or time on it.
How do people treat windfall income vs. regular income?
Windfalls are often spent quickly, while regular income is budgeted more carefully.
How can combining mental accounts help your finances?
It helps you see all your money clearly and avoid wasteful or irrational decisions.
What is a "mental account"?
A mental “category” people create in their minds for money — like labeling funds for rent, fun, or vacation.
Why do people splurge with their tax refund?
Because they mentally label it as “extra” or “free” money, not part of their regular income.
Why is it risky to treat a bonus as "free money"?
It encourages overspending because the money isn’t mentally seen as part of the regular budget.
How does paying with credit vs. cash change behavior?
People usually spend more with credit because they don’t feel the “pain” of spending instantly.
What’s one way to stay in control of spending?
Set clear rules or limits for certain spending categories to prevent overspending.
Who coined the term "mental accounting"?
Richard Thaler, a behavioral economist and Nobel Prize winner.
Why do people save spare change in jars even if it earns no interest?
Because it feels like “bonus” money, mentally separated from their main finances.
What’s a danger of over-saving in one category, like vacation, while neglecting bills?
It leads to imbalance — urgent expenses might go unpaid while “fun” money piles up.
Why is a tax refund often spent differently than a paycheck?
Because it’s mentally categorized as a one-time gift instead of earned income.
How can automating savings fight mental accounting issues?
It treats savings like a non-negotiable bill, making it part of your “mental” routine.