Saw this in Kiplinger Mag and didn’t realize there was a term for it :) I’ve been a poster child for “mental accounting” for the past 3 months! (more on that in a sec). Here’s how Kip explains it:
“Mental accounting leads us to hoard money in a savings account that earns 0.3% interest while keeping a high balance on a 15%-interest credit card. We like the psychological comfort we get from having money in the bank, even though transferring cash from savings to pay off a credit-card balance can essentially “earn” us a quick 14.7%”
Or, in my situation, keeping a $1500+ balance on your credit card when you can very well pay it off from your savings ;) For those who’ve been following my net worth updates you know exactly what I’m talking about. Esp those who have been challenging me on it each and every month! Haha…
But there really is something to be said about that “psychological comfort” of it all. I am MUCH happier knowing I have more money saved up in the bank for whatever I want, even if I have a little debt on the side. I feel like it gives me more options ya know? Once you pay off that debt, the money just evaporates – even if it does save you 4.78% over time. But when it’s sitting in your savings, your possibilities seem so endless!
Of course, I’m not advocating never paying off your debt either (that would be plain stupid), but I just don’t think it’s the end of the world if you choose to mentally divide it up like that. Who’s to say you won’t change your mind next month anyways? We all work our own ways and can’t always expect to pick the most financially savvy paths all the time. Our emotions are there for a reason. – they keep us balanced :)
What’s something you’re currently doing that might not make the most sense? (But you keep doing anyways because it keeps you sane?)
PS: I’ll give you another quick example of something I do — I tend to think my blog money is worth more than my other money, even though I know very well a dollar is a dollar is a dollar! It just feels so much more earned than, say, my 9-5 dollars ;) Oh, and also my xmas/bday money. I can never spend it on things that don’t feel special to me (like groceries, utilities, etc etc) – always gotta find something worthy to use it on…