Bestiary of Behavioral Economics/Mental Accounting

MENTAL ACCOUNTING

There are three types of accounts you should keep in your head: Consumption, Assets & Savings.

Consumption This account is associated with anything that is consumed by the person within the year. The account is basically what you live off of such as food, current bills, entertainment, etc. This account is mostly associated with people that are in their midlife. This is the group that spends more money than they actually have. Babies and elder people do not spend much of this account. Self-control is a major problem that leads to the midlife group spending so much of their income. This problem usually leads to utilizing funds from the other two accounts.

Assets This account is associated with any extra money. This account should mostly have deposits and not withdraws. It is usually passed down generations and builds up every year. Each holder contributes to it as it gets passed down. When emergencies do occur, some get their hands into this account. The elder people are the ones that mostly contribute to this account.

Savings This account can also be known as Future. It is the money you are investing to allow it to grow over the years. This account should be set up so there is one lump sump withdraw sometime during the future or early withdraws of the same amount. This money builds interest over time and the amount you initially invested grows. It is for special occasions such as college funds.

All three of the mental accounts are eminent in to keep a balance of your funds.

Reference: The Winner's Curse Paradoxes and Anomalies of Economic Life by Richard H. Thaler