We're all really creative accountants

This time of year usually comes with money challenges and combined with inflationary fears and food price increases, it’s tempting to jump all-in on frugal/savings/no spending challenges.

I love a challenge and do small ones myself but I don’t jump all-in because I’ll backslide into old spending habits. But the point of financial challenges, I think, is to change a behaviour, not just to save money. To do that, it helps to understand how money affects us physically and mentally.

This article from The Decision Lab provides an explanation as to how we think about money. One common action is mental accounting, which was defined by economist Richard H. Thaler in 1999. The idea is that people classify funds differently, associating different values to money even though it doesn’t change. As a result, people make irrational decisions in their spending and investment behaviour.

(If you’re interested in reading more, his work is Mental Accounting Matters and it was published in the Journal of Behavioral Decision Making.)