Saw this in Kiplinger Mag and didnโt realize there was a term for it :) Iโve been a poster child for โmental accountingโ for the past 3 months! (more on that in a sec). Hereโs how Kip explains it:
โMental accounting leads us to hoard money in a savings account that earns 0.3% interest while keeping a high balance on a 15%-interest credit card. We like the psychological comfort we get from having money in the bank, even though transferring cash from savings to pay off a credit-card balance can essentially โearnโ us a quick 14.7%โ
Or, in my situation, keeping a $1500+ balance on your credit card when you can very well pay it off from your savings ;) For those whoโve been following my net worth updates you know exactly what Iโm talking about. Esp those who have been challenging me on it each and every month! Hahaโฆ
But there really is something to be said about that โpsychological comfortโ of it all. I am MUCH happier knowing I have more money saved up in the bank for whatever I want, even if I have a little debt on the side. I feel like it gives me more options ya know? Once you pay off that debt, the money just evaporates โ even if it does save you 4.78% over time. But when itโs sitting in your savings, your possibilities seem so endless!
Of course, Iโm not advocating never paying off your debt either (that would be plain stupid), but I just donโt think itโs the end of the world if you choose to mentally divide it up like that. Whoโs to say you wonโt change your mind next month anyways? We all work our own ways and canโt always expect to pick the most financially savvy paths all the time. Our emotions are there for a reason. โ they keep us balanced :)
Whatโs something youโre currently doing that might not make the most sense? (But you keep doing anyways because it keeps you sane?)
โโโโโ
PS: Iโll give you another quick example of something I do โ I tend to think my blog money is worth more than my other money, even though I know very well a dollar is a dollar is a dollar! It just feels so much more earned than, say, my 9-5 dollars ;) Oh, and also my xmas/bday money. I can never spend it on things that donโt feel special to me (like groceries, utilities, etc etc) โ always gotta find something worthy to use it onโฆ
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I can understand the desire and comfort of plain hard cash. Weโre doing the same thing with our mortgage prior to our plan of selling at a loss so we can buy a bigger place. Weโre racking up a lot of cash at a really low interest rate instead of paying toward the mortgage at a relatively large interest rate. Even with the mortgage interest deduction, itโs quite an interest rate differential. What we are trying to decide is if itโs wiser to have more cash on hand or if not, how much cash to get approved for the new loan next year. There is also the slim chance of system wide mortgage principle reduction so that makes it also a worry to pay toward the mortgage prior to needing to.
Weโre doing two things we should reconsider even though my husband has been unemployed for 13 months
We havenโt refinanced our 5.5% 30 year mortgage (24 years left and 13 months ahead) into a 7 year fixed mortgage at ~4.0%. We donโt want to spend the cash on the refi and add risk by going to a 7/1 mortgage even though we may have to consider moving away from the Philly area so we can both have a job.
We also have about $20k saved which was earmarked to remodel both full bathrooms. They are hideous and the one that is rarely used has a very slow water leak due to bad tile and grout. If we do end up moving, they will have to be redone. Again, we have a hard time actually spending the cash when he is unemployed, even though we are sitting on a hefty emergency fund and other money (money for a car when his finally dies, etc).
I dont like it, I understand your reasoning but at the same time your throwing money away. You are over thinking the matter and โpsychological comfortโ is different than actually money in the bank comfort. You still owe the money either way, It makes no sense not to pay it, you still plenty left for an emergency fund.
Automate your systems and think for the long term, that is how people develop large net worths. You have done it well in so many areas, I donโt understand why you canโt pull the trigger on it.
However, I also know that personal finance is only 20% math and 80% behavior/emotion. So, the small amount of money doesnโt really matter, but it just seems inconsistent with the rest of your plan. Maybe thatโs too much my inner dave ramsey but you owe the debt money either way and why mess with the CC companies?
I am with you. I think of different moneys in different ways even though every dollar is the same. My wife just got a royalty check for a book she wrote a couple years ago. It does not โfeel rightโ to spend this money on groceries or other necessities.
Personal finance is called personal finance because it is personal. Otherwise it would be called โrational finance.โ Only classical economists could follow it and then only in theory. I am sure that personal finances of classical economists is also very personal.
Oh J! You are soooo smart in soooo many ways, and yetโฆ.sometimes so darned silly! Iโm w/ ZFarls on this one. Net/net, money in one pocket and debt in the other is the same as less money period. And yes, you are throwing your money away. Not just on the interest differential, but on the inflated sense of wealth you feel from your little mind trick, which, I think youโll agree, sometimes leads to spending that wouldnโt have happened otherwise.
All that said, however, I do agree, life is a balancing act and at the end of the day the best you can hope for is to have most of your decisions be the wisest possible. Just seems to me this is one you could score A+ on pretty easily, and save the slip up for something harder :-)
Ok, so my confessionโฆ..I often keep way too much money in my checking account, even though I have a very easy linked high yield savings. Like you, I tell myself the diff is peanuts, but sometimes I look and realize itโs not peanuts. Thing is I have everything so automated, that I rarely look at my checking acctโฆ.so knowing there is more than I need there makes me feel safe. Ok, so we all have silly tendenciesโฆ.we do the best we can, no?
This has been a large habit for me over the last few years. I feel so much better knowing I have money in my savings account, even tho I may have 60k in student loans and 1k+ sitting on a credit card somewhere. I guess its the piece of mind that we give ourselves when we KNOW that we have some LIQUID cash sitting around gaining some miniscule interest.
I am the same way as you J$โฆ. I treat the money I make from refereeing like it is gold bullion. I just want to keep it in a safe shoebox so I know where it is at all times!
I used to transfer money from my savings and pay off my CC. However, I soon learned that I never saved anything because I used my savings like a checking acct. Now, my savings is in an ING acct which makes it less accessible, and I have a personal mental max amount that I have for my CC and go on โshopping detoxโ until I pay it down. But yea, I feel โsexyโ when I know I have a wad of cash saved up somewhere :)
I transfer money between multiple savings accounts. I should just have 1 general savings account, but for some reason, I just havenโt taken the time to do it yet.
@Geoff โ I hear that brotha! I struggle w/ paying down the mortgages too โ feel MUCH much safer w/ a nice stash of cash in the bank, esp if Iโm gonna try and go work for myself in the near future. Itโs def. a balancing act thatโs for sure. You can always throw money against the debt at any time!
@E.D. โ I donโt blame you! Iโd hold on tight to that money too if I were unemployed, thatโs scary :( Got enough problems to worry about in that case. Hope things get brighter soon!
@ZFarls โ It just makes us feel a lot better esp if Iโm going to work for myself soon ;) And also weโre only talking 6% here (USAA rocks w/ credit cards! along with my credit score on top of that) so itโs literally a matter of $15 or $20 or something a month. Stupid, yes, but worth the price. At least for nowโฆ eventually iโll get tired of seeing that debt there and then just wipe it out.
@ctreit โ Hahah, exactly!! Thatโs a perfect example of mental accounting :) No way in hell iโd spend my royalty money on groceries!! no way, not in a million years.
@Chris Haviaris โ Haha, amen to that ;) We all have our quirks but thatโs what makes us unique! If we did everything by the books weโd be boringโฆ as long as weโre doing 80% good weโre fine โ the rest is just icing on the cake.
@Doctor S โ You know it, sir :) That money we work our asses off for so we gotta spend it on something worthy! Just remind me to search for your box the next time/first time Iโm over at your place! Hahaโฆ
@Burnette โ Damn straight! Cash = Sexy.
@Briana @ GBR โ I used to do that a lot then got annoying, hahaโฆ but hey, if it works great!
I guess Iโm a mental accountant.
โWe like the psychological comfort we get from having money in the bank, even though transferring cash from savings to pay off a credit-card balance can essentially โearnโ us a quick 14.7%โ
I donโt know about the psychological comfort, but transferring solid, real savings to pay off a credit card is as stupid as using credit in the first place. When you transfer your savings, you wonโt have 100% of what you transfer, and you will definitely not be โearningโ anything. Of course, I am not one of much faith, and Iโd have no sense of security that the money I transferred to pay off a credit card would ever be replaced. We only know for a fact what we have in our pocket at the moment.
Instead of essentially earning 14.7% by spending away your savings, how about earning triple-digit percentages by not paying off the credit at all? LOL. The devil made me say that ;)
Other than not doing auto bill pay and paperless (I need to get on that), I think Iโm pretty good.
Think of it this wayโฆ
If you had no money in the bank, would you borrow the $1500 at 14% interest just so you could have โoptionsโ?
If you say NO, then you should realize thatโs just what you are doing now by keeping the CC balance.
I never realized there was a name for it either. I know it makes more sense to pay off credit cards but I am more comfortable with the cash in hand as well. I think its good to have an emergency savings regardless because that paid off loan isnโt going to do much good when youโre in a tight spot (a credit card might though).
โWhatโs something youโre currently doing that might not make the most sense? (But you keep doing anyways because it keeps you sane?)โ
Thatโs a tough one. I do a lot of things that donโt make sense.
I have zero CC debt, zero consumer debt (other than a bunch of mortgages but technically those fall under assets of an LLC)
My biggest mistake is probably not delegating. I am currently installing a wood floor, writing a book, coaching soccer, raising a family and about 1,000 other little things that go along with a job, family, entrepreneurship and life in general. I have been spending lots of time streamlining (i.e selling some assets, aggregating accounts into a single investment house โ Vanguard got my vote in case you were wondering ) but my simplification efforts, I feel, are not enough. I need to let go and hire some good help.
As a result, I have neglected the exercise and health stuff (My mental accounting tells me that installing the wood floor is somehow equivalent to jogging 5 miles). Not even close but I tend to let little pressures get in the way of what I know is best for me.
I have found that I need to have at least one or two real, physical projects going on. My job and my business life is built on pixels and ideas. Itโs hard to define a solid finish-line. Itโs nice to finish a tangible, lasting project. As an example, I recently built a fireplace mantle out of 150 year old barn wood. It was an absolute blast.
@J โ btw, the โentrepreneurshipโ money is better than โ9-5โ money and should be treated as such. Profits are better than wages. All money is simply a measure of value and that money in particular represents Values that you hold dear. Do something special with your blog profits. (I donated $200 this A.M. from some of my business profits. A colleague of mine is running a great charity campaign: Build a well, win an ipad http://www.mycharitywater.org/p/campaign?campaign_id=9627 )
-WR
I agree with the thought that there are certain windfalls that should be spent on non-essentials. I receive birthday and Christmas money from family and I feel that this money should be spent on fun things. I understand that if there are pressing bills that are important to be paid immediately, these funds should go to them first. However, I like to consider this guilt free money, meaning I can blow it on a massage or a new dress without guilting myself over the things that it could have been spent on.
At first I was thinking you should never give a penny to those evil credit card companies. Then I read your response saying it was a USAA credit card. LOL! As much as I envy your ability to use USAA, I think your love of the company is a bit to much.
My financial set up would make everyone but the retired cringe. No investments, just strictly cash. Just remember that there is someone crazier than you :) Even though I feel saneโฆhmmmโฆ
Having money in the bank is about having an emergency fund that you can tap without having to get more debt in the event something were to happen. This way you can avoid the endless cycle of almost paying off your credit card, and then racking it back up for some unexpected expense.
I wouldnโt say put money into a savings account and not pay off your debt, but try to do a little of both.
@Yana โ Lucky for me I only pay 6% or something w/ USAA ;) Should I be saving it? Of course. Will it make me happier though? Nope. So at that point it doensโt matter.
@Jenna โ Sometimes itโs good not to do auto-pay though, like with utility bills (cell phones esp!) and other variable things (credit cards). This way youโre always in controll and will consciously think about it before you go and pay off.
@Josh โ Itโs true, I wouldnโt pay to have the options, but Iโm not in that situation right now. My only two options are โPay the bill offโ or โdonโt pay it offโ (well, also โpay some offโ but you get the point). If it were at 14% for me it would have already been gone. But 6% isnโt enough to justify the lack of happiness.
@Kevin โ Yup! Canโt go back to your mortgage company or utility company and ask for your money back. But youโre right with credit cards.
@WR โ You are a busy bee!! Thatโs awesome though. Much better to have too much going on than too little at least for me. And youโre right โ I will be using my blog money for something special: QUITTING my 9-5!!! Hahaโฆ no, Iโm not joking.
@Cassandra Gardner โ Yup! I always think my family would be happier if I bought something for myself with their money than pay a bill. Unless I was in loads of debt and would be idiotic of me not to.
@StackingCash โ Iโve said it before, and Iโll say it again: Iโd marry USAA if it were a chick and I were single! I bet sheโs hot ;)
@Sarah โ That probably would be a nice balance, eh?
Whatโs something youโre currently doing that might not make the most sense? (But you keep doing anyways because it keeps you sane?)
Mineโs a little different.
I am a full time student, and I come from a well to-do family. I donโt need to pay for tuition, books, rent, living expenses, but I work 3 jobs and take a full load of classes. Why donโt I just not work (or at least just quit 2 of my jobs)?
Because I canโt stand the thought that people think I am born with a silver spoon in my mouth. I donโt want people to think I got anywhere in life just because of my parents. I work dang hard at school and at work because Iโve seen my parentsโ work ethic, not because they pay for my grades.
I would way rather have everyone think Iโm a poor starving college student than some rich beezy who has never worked a day in her life.
good for you, girl! a strong work ethic is no joke, appreciate you sharing with us :)
I never really thought of this as โa thingโ but youโre right โ we all do that. Or 99% of us do. Weโd rather keep some money in the bank than clear our debt. An urge and type of behaviour Iโm trying to push against within myself right now. Sure thereโs no money in the bank, but the credit card balance is a lot smaller!
yep! pros and cons to both sides really :)