Be Aware Of ‘Mental Accounting’ When You Save Money On A Purchase

Let’s say you found a deal on a new laptop you’ve been planning to buy and save $100. It’s human nature to tell yourself you now have an extra $100 to spend as you wish. It’s called mental accounting, and it can make you spend money you otherwise wouldn’t have spent.

Photo by geralt.

The Motley Fool explains:

The reason comes down to what behavioural finance researchers call “mental accounting.” Essentially, we tend to keep different accounts in our minds, even if all of our money is sitting in the same place. So, if you’ve just “saved” $100 on a new TV, your brain is likely to treat that as extra freebie money — even if you were searching for a good deal precisely because you didn’t have that money to spend. It’s the same reason we tend to spend our tax returns: The money isn’t technically free, but it feels free.

We’re probably all guilty of doing this at some point: you tell yourself you “saved” by spending less on something that was a splurge in the first place. As the Fool says: the money isn’t actually free, but it feels free. To combat it, they suggest not only to avoid shopping, but also to move that money to a savings account immediately so you’re not tempted to think of it as free money.

Check out the rest of their post at the link below.

Never Shop Hungry, and Other Secrets to Saving Money [The Motley Fool via Fidelity]