Mental Accounting: Can It Help Me?  

 As children, we are often taught that money is fleeting, tricky, and a scarcity.  Most of us spend a larger part of our lives being afraid of money. We often think we don’t have enough, or we live in fear of losing what we have.  There is a way to change this!  The concept of mental accounting allows you to organize your finances efficiently.    

What is Mental Accounting?

2017 Nobel Prize Winner in Economics, Richard Thaler from the University of Chicago, studies how psychology and economics intersect. He explains, “The idea behind mental accounting is that people don’t treat all of their money (or time or effort or other resources) as if they have one big pool of it. Instead, they have separate mental accounts, and when they spend money (or time or effort), they keep track of it based on the mental account it came from. These accounts are typically based on people’s financial goals and needs.” 

Whatever stage of life you find yourself in, practicing mental accounting will teach valuable spending and saving habits. 

How Does Mental Accounting work?

To effectively employ mental accounting, divide your finances into buckets. This way, your money is divided into short-term savings (TIFSA), retirement savings (RRSP), bill payment, and disposable income buckets, so you don’t have to think about each aspect of your financial wellbeing.

The object is to take the guesswork out of your monthly budget. Set up automatic payments for your TIFSA, RRSP, and bill payments. Some who practice mental accounting open different bank accounts employing the out of sight, out of mind philosophy.

Budget Audits

If you love being organized with your budget, go one step further, and conduct a budget audit quarterly. Review your bank statements to determine which spending habits can be cut or reduced, then re-direct those savings into an emergency, vacation, or education fund.  Creating separate buckets of savings allow you to ensure you are on track for your financial and retirement goals.

If you need help establishing mental accounting rules for yourself, the Gail Sylvester Mortgages team would be happy to review your current financial situation and determine how to manage your budget to achieve your goals. Book a coffee date with us – and let’s make your dreams happen!