“Mental Accounting”

I am currently taking a course on “Behavioral Economics” and one of the topics we covered last week really left its mark on me.  I know the older generation (Generation X and prior) are a little more familiar with “Mental Accounting” than Generation Y and/or the Millennials.  

  

The topic left me wondering how everyone else out there is coping in today’s world insofar as making payments is concerned.  I would hazard a guess and say the Millennials are paperless and the Baby boomers still need the ritual of sitting down and writing out checks by hand and balancing their checkbooks while at it.  Generation X, however, we are all over the place for some of us have gone paperless and others are holding on to paper as if their very life depends on it.  They often say “if it worked for my parents it will surely continue to work for me”.  What is the driving force behind your choices – are you simply “old school” and refuse to change just on principle?

Do you belong to the school of thought that divides all your money into “jars”?  Each jar has a specific use and once the jar was empty so too is your ability to make any purchases for that assigned need.  This group does the mental accounting and will be more risk averse by default.

If we do not physically have to part with our money, by not counting what we need to pay out we tend to spend more easily – with less caution.  Counting money out makes one mentally aware of what you are parting with – swiping your credit/debit card does not have the same effect.  If the money in your purse or wallet runs out then you simply stop buying but very few people either keep tabs on the credit limit or acknowledge that they are actually borrowing money with each transaction.

Debit cards on the other hand offer you the ease of swipe without the borrowing but there is a price for the convenience.  Does anyone keep track of these costs?   In the end it all does adds up!

What camp are you in and why?