TPO31 task4
Mental Accounting

Although they may not realize it, people do not always manage their money in responsible way. In their minds, people tend to divide their money into different categories as if they were putting it into separate mental bank accounts. This tendency is known as mental accounting.People mentally store some money in one account to be saved, while they imagine other money being stored in another account from which money can be taken and freely spent. Mental accounting can lead people to spend more money than they should, which can make it difficult for them to save enough money to achieve their long-term financial goals.


Using the examples from the professor’s lecture, explain the concept of mental accounting.



Mental accounting is a tendency that people divide their money into different categories in their mind and therefore spend more money than they should have. The professor takes his personal experience. He used to have two jobs. He had an office job on the weekdays and got regular paycheck from it; also he worked part-time in a restaurant at weekends, which earned him some extra money. He decided to buy a house, so with the regular salary he earned from his office job, he only bought daily necessities and then put aside as much as possible. But with the money earned from the restaurant he wasn't so careful, spending it on dinner and buying unnecessary stuffs like CDs, because through mental accounting, the part-time money was separate from his regular paycheck. As a result, it took him longer time to get enough money for a house than he should have if he didn't spend the restaurant money. (158 words)


In this set of materials, the passage introduces a term, mental accounting, which means that people divide their money into different mental bank accounts. This would lead people to spend more money than they should. In the lecture, the professor uses his own example to illustrate the term. The professor had two jobs, a regular job in the office and a part time job in a restaurant. At that time, he wanted to buy a house. So he would save as much money from his regular job after buying basic things he needed and spend the money on things he didn't need from the restaurant job. However, it took him a long time to have the enough money to buy the house. If he saved some money from the restaurant job, he could have bought the house a lot sooner.
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