Before you begin, make sure you read the first installment of Are You A Mental Accountant. In case you missed it, let me summarize. Mental accounting is tendency most people have to treat money differently depending on where it comes from. If you haven’t found yourself guilty as of yet, I will continue my quest to get you.
Let’s say you go to a store to buy a t-shirt for $40. You find out that a store 3 minutes away is selling the exact same t-shirt for $30. Would you go to the other store?
I’m assuming the common answer here is yes.
Now let’s say you go to a store to buy a sofa for $900. You find out a store 3 minutes away has the same exact couch for $890. Would you go to the other store?
I’m assuming the common answer here is no (if you’re being honest with yourself).
Why is there a difference in decision when the decision to be made is the same in both scenarios?
I understand the percentage of savings in the 1st scenario is higher (25% vs ~2%) but the decision is ultimately the same: should I travel 3 minutes to save $10? It doesn’t really matter to me whether you choose yes or no, what matters is that your choices are the same. If they don’t match, you’re guilty of mental accounting.
Before you fall victim to this common disease, think logically. Don’t let the percentages fool you. What you should be asking instead is “how valuable is my time?”
When I said I didn’t care which you chose, I was lying. If you make less than $400,000 annually, you should make the 3 minute trip (according to logic).
The Breakdown
You can save $10 in 3 minutes of effort.
That equates to $200 in an hour.
If you were offered a job making $10 every 3 minutes, would you take it?
Of course you would!
So stop working so hard (earning) and take what is given to you (savings).
Are you beginning to realize that everyone is guilty, including you?
