Mental Accounting: A Critic Into Your Preferences
Sometimes we fail to acknowledge the fungibility of money and this is often caused by the fact that sometimes we often place money made to take care of a specific need more important than another piece of money set aside for another need.
Take for example, someone might have an amount of money, while this amount of money can specifically pay for their rent, or give then an elaborate Christmas experience, there are people who would absolutely go for the choice of using this money to have an eventful Christmas, placing a much bigger value to the money for Christmas expenditures because paying rent might seem less exciting and of course, the opportunity cost of losing that Christmas experience is something they might never forgive themselves for.
This is what is called Mental accounting. Mental accounting is placing value over the Importance of one expenditure to another, thereby failing to see the universal sameness to money due to emotional or psychological reasons.
In the world currently, scarcity is a big issue, almost everyone reliant on a stream of Income has compounding needs to solve with static salary and the Influence of inflation on a currency. This is why mental accounting is a thing. When it comes to saving for example, a lot of people who are saving for a particular prospect would never touch their savings no matter the real life they're facing that only money can solve.
I've known people who have a lot of money locked away in current accounts, but immediately they have hospital emergencies they'll never touch their savings to actually treat or take care of their medical bills for them to stay alive.
This is mostly because the money in their bank may go for opening a new business, buying a new car or building a new house. In a state of mental accounting, these purpose for this money might overwhelm the need to pay for a medical bill even if in a rational senses, they need to stay alive at the moment for the future to be a possibility.
The diverse ways which we place importance to money is mental accounting, it is placing value to money diversely in respite to the different expenses that they're expected to take care of.
For example while we might place more value to the money we worked hard for, we might not do the same for another person's money in the same way we have done to ours. For example, let's say a person got a $100 bill as their wages, and they're gifted that same amount of money by their boss for actually being diligent, the way they'll spend the money they were gifted by their boss and the one they actually worked for would be totally different
This is because according to mental accounting, one was worked for, and the other was freely gotten, the one that's freely gotten might be spent without plans and this is how often make choices.
It's often difficult to understand the fungibility of money and this is because sometimes we go ahead to consider some emotional factors when spending. However, does this totally mean mental accounting is all shades of "bad"? The answer would be no.
It is subconsciously creating a scale of importance to one's need and allocating resources to them, while it can be devastating in investing, it's quite milder when it comes to investing. You know how you already spend your salary in your mind towards the ending of the month even before receiving the money into your account? That is also an aspect of mental accounting. Originally we need to plan.
Money is the means, but our choices gives it essence. For example, while it's possible for us to say mental accounting makes us make emotional decisions, for what it's worth, applying logic when apportioning importance to what matters more or less makes us lose the grander scheme to our money lesson.
This is to say that we learn and become dynamic by actually experiencing the beauty that comes with being rational, this is why the human emotion is not all that putrid when it comes to allocating resources to where we might deem fit.
Mental accounting reminds us of our human we are, inasmuch as it's utterly imperfect not to see the fungibility of money, in some milder scenarios are attained financial consciousness by actually having or creating a crisp sense of mental accounting. Having a scale of preference is setting a form of mental accounting. Sometimes what is on top of our scale of preference might not be the Most important, but what would actually appeal to us in a special and bizarre kind of way.
Mental accounting might be more detrimental in investing, but it's definitely not the same when it comes to investing. In critical thinking, the human factor is needed, irrespective of how imperfect we deem it to be.
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Mental accounting, in this case heavily relient on an individuals wiring and will always differ from one person to the other, how the money was made and the plan. I like the example on health and how one would not be shaken to spend dispite being in the sight of death, regardless what hits them the initial goal must be attained
This is truly true. But not secluded to money but also knowledge. I have had instances where I wanted to learn from my mentors but they I to pay just because they believe that if I spend to acquire the knowledge, I won’t value it. Well they were right though.
Another instance was when I was little, my uncle wanted to gift me his old phone free but my mum stopped him saying that I must work for it if not I won’t value it.
Well as you said, we are humans chasing comfort. Thanks for this.
This is exactly true, we attach more value to the Money we have worked for, anything that's non-monetarily beneficial. Mental accounting can make us wasteful to some extent. It takes personal discipline to value what we didn't work for
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Yes boss.
I guess I will have to train myself on that because I'm a victim 😂😂😂
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This just reminded me of some "mental accounting" I did a few days back. I had some money locked up and already made necessary expenses for the month of December which means I don't have to touch money till January/February. So I decided, "hey, i'mma save this small $". This showed me I might now be better at managing and handling money. But along the line, spending too much time on my phone and laptop began to have it's effect. My eyes. So I saw this advertisment for Anti-bluray or something glasses and remembered Belemo using the same thing for eye protection. He advised I do same. Now my life is basically Hive so I weighed my options of spending my last cash (roughly $10) on a "pair of glasses". My mind seemed to scream "unforseen circumstances will spring up" but the ache I seemed to get in my eye said "get it." Then I remembered an article of yours that spoke about putting health first. So I just went ahead to order it and deep down, i know I made the right decision even though I'm bleeding right now ...😩😂💔
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I'm glad you take it into cognisance. Hahah sincerely health first. The reality is that when we're healthy that's when we can actually make money. It's important to understand that we're first when we're doing our mental accounting, although sometimes being too emotional can actually make us make the wrong decision. Nevertheless, in the aspect of your comment, health is actually first whatsoever. Thank you for dropping by. How have you been?
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I have been realy good. Well maybe it's cause I've been active and doing something i like. Doing a lot for brain activity 😃. How are you? Anything new?
I like your "good" it makes me feel good. Well, nothing new, I need work, find me work plus I need money too. Hahaha.
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Lol. Sorry for the late reply. I do have something. Lol. I'm tryna work it out for me then Write about it ... 😃
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Thanks a lot
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Mental accounting is definitely a detriment. One way I try to avoid it is to write down things that I might want but not necessarily need down somewhere. If I still want it after a few days later, then I do get it but most of the time it gets taken down from the list.
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This is a actually a great way to mitigate this. Making a list and writing things down is definitely good, this helps you spend more logically.
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This one I can't understand. My mother will always say na person wey get life, na that person dey see money to spend.
To me, mental accounting has it's good and bad sides.
Yeah I can understand it's confusing to you hahah but it's real time queer money situations that I've seen in life. Money to some people is certainty, their health wouldn't even make them spend it.
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Your post reminds me of people who use the frase "we all have the same 24h in a day" and the folks who rightly fight against it's usage.
It's a fallacy. Each person has different backgrounds and difficulties that influence on how much they can with those 24h.
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You're totally right hahah. Each people have different backgrounds and this often influences not just the time of the day but other non-monetary resources.
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