What is mental accounting?

Mental accounting refers to the ability some of us have to differentiate money based on how it was obtained and how it will be spent. Explanations.
Conceptualized in 2017 by Richard Thaler, professor at the University of Chicago – who for his work received the Nobel Prize in economics – the notion of mental accounting refers to people who tend to separate their money in their minds based on a variety of subjective criteria, such as the source of the money and its use. Put, “individuals simplify financial decision making by creating separate boxes in their heads, focusing on the impact of each individual decision rather than the overall effect,” says Richard Thaler.
To understand, let’s take a concrete example. Isabelle and her companion, Arnaud, have been saving money for the past few months to pay for their vacation after taking out several consumer loans. The money they hold and the money they pay off their loans are not, in their minds, treated the same. Logically, the money they put aside to pay for their vacation should instead be used to pay off loans faster and thus allow them to pay less interest. How then to explain their behavior? According to Richard Thaler and his notion of mental accounting, the answer lies in people’s value of money. In the case of Arnaud and Isabelle, they think the money saved for their vacation is too much to give up. Therefore, and even if it could make them “earn” money (prepayment of credit = less interest to pay), this money considered “important” cannot be spent.
Can “use” mental accounting to better manage a budget?
We are all different, but most importantly, there are no magic formulas on how to manage your budget best. Nonetheless, understanding the psychological mechanisms that go into mental accounting will help rationalize your financial choices.
By better understanding why you consider such and such an expense as “important” and another as “secondary” and by asking yourself whether they are related to necessities (rents, bills, credits, etc.) or impulses, you better understand your relationship with money. In this way, you will be able to manage it better.
In any case, remember that to organize better and visualize your spending, you need to set financial goals for yourself. To help you do this, you can register your bank accounts in Neymo, the best way to have a clear view of your sources of income and your expenses.

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