I primarily work from home. Due to a “lack of commute,” I don’t get to listen to morning radio like I used to (not the biggest loss). This morning, however, allowed me the pleasure of beginning my day with a little disc jockey.
The local country radio station plays a game where they have a prize of money. A listener (one per hour) gets to guess how much money is in the pot. If the listener guesses the correct amount, they win the money. Very simple…
I imagine this game goes on for a few weeks and consists of one incorrect guess after another. This morning, I just-so-happened to witness the winner as she correctly guessed “2 thousand, eight hundred and fifty one dollars and 81 cents.” What a guess!
As soon as she realized that she not only won the contest, but she also won a quick windfall of $2,851.81, her excitement turned into curiosity. She began to wonder, “what should I use this money for?”
When the DJ asked her the same question, her response was:
“Well, I need to catch up on some bills and I think I’ll take a trip.”
She later revealed that she’d like to go to the beach.
She is Guilty of Mental Accounting and So Are You!
Based on the radio listeners response, the “catching up on bills” painted a picture of someone that isn’t in the best financial situation. Perhaps she is late on a few payments. Maybe she is on-time with her payments, but she has limited savings and wants to get out of debt. A lot of assumptions can be made, but the point remains the same:
Someone that wasn’t planning to take a vacation is now taking a vacation because of a sudden windfall.
Do you think…
- If she received extra income from her employer, would she take a vacation?
- If she received a small payout from the life insurance policy of a lost loved one, would this money go towards a beach trip?
- If she received a tax refund (her own money), would this money be used the same?
It’s impossible to know for sure, but this irrational behavior is true for most people:
Money that is unexpectedly won is treated differently from money that is expected.
Money that is earned is treated differently from money that is found.
This phenomena is known as mental accounting and we’re all guilty of it.
Why I’m Guilty of Mental Accounting
It’s no surprise that my blog, Funancials, makes money. Most of this money goes directly into my Paypal account and will eventually make its way to my bank account. The irrational behavior that I’ll confess to is that I treat the money differently depending on where it’s sitting. If the money is sitting in my Paypal account, I will spontaneously (with little thought) pay large amounts of money for very unimportant things. For example, I paid an astronomical amount of money for Mrs. Blinkin and I to attend Justin Timberlake’s concert later this summer. I can honestly say that, if this money came from my bank account – we would not be attending the concert.
How Can this Information Help You?
Ask yourself what you would do if you suddenly received a windfall. Then ask yourself what you would do if your paychecks were suddenly increased. If you would go to the beach with the windfall, but direct the increased paychecks to your savings – you’re guilty of mental accounting. Be honest with yourself about your irrational habits. It’ll be difficult to eliminate the irrationality completely, but even minimizing the behavior will help.
Want another quick article on Mental Accounting? Read The Legend of the Man in the Green Bath Robe.