A cognitive bias that causes people to categorize and treat money differently depending on its origin or intended use.
Mental accounting refers to the tendency of individuals to mentally allocate specific portions of their money to different categories (e.g., savings, entertainment, groceries) as if they were separate accounts. This can lead to irrational financial decisions, such as treating a windfall (like a tax refund) differently than regular income, resulting in excessive spending rather than investing or saving. Recognizing mental accounting can help in better budgeting, improved investment strategies, and ultimately achieving financial freedom by understanding the true value of money regardless of its source.
It's not about how much money you have; it's about how you think about it.
