Mental accounting is a psychological framework that can be used to manage money. Mental accounting can be used physically by keeping seperate bank accounts, money jars, or mentally by thinking about the separate accounts. For example you may have one bank account but in your mind you plan to save 10% and the rest on incidental costs and bills.
Mental accounting also involves the opening of an account and closure and can help with money management as it is a form of self-control. You put money in and receive mental closure but spending it. You know how much is to go in a particular account and what for. It can also help you be aware of your finances as the money is contained in certain accounts.
Furthermore there are different schools of thought on how many accounts to hold your money. They range from three to six and include one for bills, one for holidays, one for an emergency, another for investment and another for giving to others such as charity. People use this practice to teach children about money management and for adults to improve self-control and manage debt. Mental accounting can also be used for investors or financial planners to compartmentalise money during diversification for an investment strategy such as placing money into Australian and international shares, property, cash and fixed interest, bonds and managed funds. It can also be used when investing in shares to assist with diversification further by splitting money into categories of a variety of companies such as utility, REITS, mining and healthcare.
Give mental accounting a go to help with money management and self-control.
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