Day 8: Step 2
Don’t Be a Victim of Mental Accounting
There’s a common money habit to which we all fall prey: mental accounting. Many of us keep running tallies in our heads of how much money we are saving for various things. For instance, say your short-term savings goals are to:
- Flesh out your emergency cushion to a full six months’ worth of living expenses.
- Pull together $1,200 for your upcoming trip to Belize.
- And buy a digital SLR camera so you can take gorgeous photos of your vacation.
If you’re automatically having $200 transferred out of checking and into savings every single time you get paid, brava! That’s a great first step. But mental accounting may lead you to believe that every month, $200 is going to the emergency fund, another $200 toward Belize and another $200 toward the camera. But in reality, $200 per paycheck is only going to one of these goals.
The way to prevent mental accounting from making a mess of your finances is to create separate line items for each goal in your budget and to also set up separate accounts for each goal. As you begin to use your rules of thumb to improve your spending, you’ll start to see even more room available in your budget for your goals. Even now, if you have already committed to spending $100 less a month on, say, dining out, and you’ve figured out a plan for doing so, you can go into Priority Goals and allocate $100 toward one of your goals.
You should also create new savings accounts for each goal if you didn’t do so the other day. If your bank requires a high minimum deposit for each savings account, look for a bank that allows you to create several accounts with a low minimum.
HAVE YOU EVER PUT YOURSELF IN A BIND WITH MENTAL ACCOUNTING?