J. Money recently posted a piece about how he treats money differently depending on the source. This is called mental accounting, apparently, and the piece got me thinking about how I treat my own funds. Does my mental accounting make me treat money as differently as J. Money does?
Paycheck: My paycheck is obviously not treated as anything but serious funds. It of course has to cover bills, plus my monthly living expenses and specific savings goals. The remainder gets split up among the mortgage, savings and retirement.
Rent money: I treat the rent from the guest house as mortgage money. That is, it goes straight toward the house payment with no further thought.
Tax return money: Historically this has all gone into savings. But it’s also usually been pretty small amounts. This year it looks like the return will be larger (again, more on that once I actually have the check in hand), so I’ll be following Liz Weston’s rule and taking 10% out as fun money. (Which is to say, it’s going in the iPhone fund.) The rest will be split between my mortgage and retirement.
Bonus money: I get a bonus each year (at least, thus far). I’ve always put it into savings until this past year. In 2018, I split the amount between my mortgage and retirement, and I plan to do the same in the future for as long as I get a bonus.
Cash back money: Mr. RebatesThis is money I get from and from my Citi Double Cash card. This money is considered savings on my spending, so it goes directly into the saved savings bank account. That money goes toward the mortgage.
Fun money: This isn’t a different source, per se, since it comes out of my paycheck. But it does get treated differently than the rest of my funds, so I thought it was worth mentioning.
I actually haven’t been taking out fun money recently, although you could argue that my new iPhone fund (at $50/month) is my current fun money account. At any rate, the fun money can go toward anything — as long as it’s a want and not a need. This means the funds are strictly prohibited from going to the mortgage or my retirement accounts.
Inheritance money: I recently learned that I’ll be getting $1,000 from a relative. I haven’t completely decided whether I’ll take 10% out. I think it’s probably more tempting to be able to throw the whole thing at either retirement or my mortgage. (Sensing a theme yet?)
Gift money: I don’t really get money as gifts these days, but I’d probably treat anything under $50 as fun money. I can’t imagine someone giving me more than that, but if they did I’m sure I’d throw it into the emergency fund or increase my retirement contribution/mortgage payment that month.
Investment money: Okay, this actually isn’t something I get, as my only investments right now are my retirement funds. But if I were to have investment accounts, any dividends or other yields would either get probably get reinvested. That or it’d go to — wait for it — my mortgage or retirement.
Looking over all this, it seems that I treat anything other than my paycheck — any “extra” money — almost exclusively as fodder for mortgage payments/retirement contributions. I suppose this speaks to my current obsession with paying down the mortgage and building up retirement.
According to J. Money, mental accounting is the exact opposite of how you should treat money. After all, money is money is money. And treating funds differently depending on the source leads to opportunity costs. That is, you’re more likely to fritter away money on fun stuff because the moolah is seen as a bonus to use for indulgences rather than funds that could further your long-term goals.
But given that nearly all my extra money is going toward healthy goals like my mortgage/retirement, I don’t see that it’s doing any real harm.
Do you treat money from different sources differently? Are there any types of money that I’ve forgotten?