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šŸ¤Æ The trap of mental accounting

Mental accounting can cause us to spend illogically and more extravagantly,Ā because it alters our perception of the value of the money we receive and spend.

Give your tax return a job this year!

Dear Money Mentalists,

Iā€™ve been going down a rabbit hole this year trying to discoverĀ ‘the why’ behind our financial decisions.

Why?

BecauseĀ itā€™s never quite as clear cut as it appears on the surface.

There areĀ so many mental traps and mindsets that catch us out on our money journey, so itā€™s only right to start identifying and tackling them as soon as possible.

Something I like to remind myself is that the perfect conditions for our financial decisions donā€™t exist. If we look closely there will always be a reason not to pay off debt, save extra money, or invest.

When if we realiseĀ there will never be a ‘perfect time’ to do something, it takes a lot of pressure off our shoulders to make sure we have everything lined up before we make and execute on aĀ  decision.

For example, many people will wait for the right time, the right amount of money and the right price before investing for the first time.

Today in particular, given many of us are starting to receive our tax refunds (or maybe youā€™re on top of things and already have), I want to discuss the idea ofĀ mental accounting.

Your tax refund is your money, so I want you to treat it with the same intention you would give to your normal 9 to 5 income.

What is mental accounting?

$1 always equals $1ā€¦ right? Not so fastā€¦

Thereā€™s a concept called mental accounting, which basically means thereā€™s a lot more to each $1 than meets the eye.

Depending onĀ whereĀ the $1 came from and where itā€™s going, it can sometimes feel like 50 cents or $1.50.

You might have experienced mental accounting without realising it.

For example, have you ever received a gift card and realised how much easier it is to spend the moneyĀ versus,Ā say,Ā if you were payingĀ upfront?

I personally find it difficult to spend money on a massage, but itā€™s a whole different experience if I receive a gift card, or give a voucher to my friends.

Weird how that worksā€¦

It turns out, assigning different values to the various parts of our financial life is a very human trait.

We give money rules and assign it a value in our brain based on:

šŸŽĀ Where we got the money fromĀ (e.g. 9-5 pay cheque, tax refund or gift.)

šŸš€Ā Where the money is goingĀ (e.g. health insurance, trip to QLD, or repairing a broken tap.)

šŸ˜ŒĀ How we feel about a situationĀ (a planned repair vs an unexpected one.)

šŸ’ŽĀ Our personal valuesĀ (what we value spending money o.n)

Since our brains are wired this way, itā€™s important to understand the way we frame a situation.

Mental accounting can cause us to spend illogically and more extravagantly,Ā because it alters our perception of the value of the money we receive and spend.

Imagine you just got a $1,000 tax refund…

Did the ATO just tell you $1,000 was heading your way? After you dutifully saved your receipts and submitted your tax return on time?

If you’re like some Aussies, when you hear the news of a tax return coming your way you might have started daydreaming about all the ways you could spend that moneyā€¦fancy sneakers, another NFT, concert ticketsā€¦

Many of the things you think of may be things you had no intention of buying 10 minutes ago. That’s mental accounting in action…

Breaking free of mental accounting

It all comes down to spending your money with intention.

If you check-in with your money goals when you receive an unexpected sum of money (e.g. a tax return), you can make sure itā€™s allocated in a way that makes current and future you proud.

Whether thatā€™s putting money into your super or spending it on a new holiday (maybe even both), donā€™t let the trap of mental accounting warp your perception of the money you receive (or spend!).

šŸ¤” What is the nextĀ best stepĀ you can take with your money?

Kateā€™s tip.Ā 

From me, make a plan for unexpected income you receive, like tax refunds, bonuses and gifts.

Donā€™t let the money fall into general revenue or get spent on something that doesnā€™t align with your goals and values.

Take a moment right now to create a note on your phone, and quickly jot down how youā€™re allocating your imaginary money. You never know, it might happen sooner than you think!

If this email takes your fancy, here are more resources you’ll love:

Cheers to our financial futures,

Kate Campbell

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