Time to read : 5 Minutes
Have you ever treated a tax refund, birthday gift, or bonus differently than your regular paycheck… even though you know it’s all technically the same money?
That’s mental accounting at work.
It was coined by Nobel Prize-winning economist Richard Thaler and further explored by psychologists and behavioural economists Daniel Kahneman and Amos Tversky.
In simple terms, mental accounting refers to the value we put on money by placing it into different ‘buckets’, based on:
where it came from, or
how we got it, or
how we plan to spend it.
It’s not rational, but it’s extremely human, so if you’re doing this, you’re not alone!
Let me show you how this hidden bias could be quietly costing you thousands… or making you more money, but first let’s take a deeper dive into what exactly mental accounting is.
What is mental accounting?
Money is supposed to be fungible. That is a fancy word that just means one dollar should be treated the same as any other, regardless of its source. But that’s not how our brains work.
We can’t help but create invisible categories or ‘mental buckets’ for different types of money. Which is why:
We might splurge on dinner with a tax refund… but hesitate to use our regular pay for the same meal.
We’ll spend a $100 gift card more freely than $100 in cash.
We’re more likely to buy add-ons when buying a car, because we mentally roll those costs into the overall purchase.
Each of these decisions feels small. But over time, they compound and often at the expense of our long-term money goals.
A funny billionaire story
There’s a quirky story that’s floated around financial circles for years:
When Mike Bloomberg (one of the US’s most wealthy men) was running for mayor of New York City, an aide claimed he carried a stack of physical envelopes in his jacket, each labeled with a spending category like lunches or transport. Once an envelope was empty, he didn’t top it up until the next pay cycle.
True or not, the lesson sticks. It’s about adding friction to your spending so you can stay disciplined and not completely remove your freedom to spend.
The reality is that it’s really hard to rely on willpower alone, so this folk-tale highlights how putting systems (or structures) in place can help you make smart decisions more easily.
This is mental accounting turned into a superpower… and it can become your superpower.
How to use mental accounting as a superpower
With a bit of practice, mental accounting can be a powerful driver of good outcomes for your finances.
Think of it as a psychological trick that helps you stay disciplined and focused. Instead of fighting our natural tendency to create buckets, we can lean into it with structure and intention.
This is what people like Mike Bloomberg and Warren Buffett have done, using internal “rules” to separate money into categories with clear purposes.
Warren Buffett, who is widely regarded as one of the greatest investors of all time, separates his money into mental buckets. He reserves certain funds only for investments he has deeply researched and truly believes in – not just whatever seems hot at the moment.
Being disciplined like this has helped him avoid impulsive decisions and to stay focused on long-term returns.
When you assign ‘jobs’ to your money and set rules around how each bucket works, you ease the mental load from constant choices. It also reduces making mistakes from impulse decisions.
Structure makes good decisions easier to stick to, and it protects you from drifting astray, even when life gets chaotic.
When mental accounting works to your disadvantage
Mental accounting makes us feel like we’re making thoughtful decisions, but if it’s not used with intent, it often causes us to:
Treat unexpected money such as bonuses or birthday cash as ‘extra money’, so we tend to spend it instead of saving.
Ignore the big picture by only looking at what’s in each mental bucket.
Fall for sales tricks and marketing offers like bundling, upgrades, or ‘free’ extras.
Even the way money is framed can trip us up.
In a famous study by Kahneman and Tversky (often referred to as the ‘grandfathers of behavioural economics’), people were more likely to drive across town to save $5 on a $15 calculator than to save $5 on a $125 jacket, even though the savings were identical.
It’s a perfect example of how mental framing clouds our decisions. $5 is $5, but our brains don’t treat it that way. These hidden biases shape how we spend, often without us realising. So being aware of these is the first step to spending money more consciously.
Bottom line
I’m not suggesting that you should stop mental accounting, instead think of it as something you can use to your benefit.
And you don’t need to be rich like Bloomberg or Buffett to build strong habits. To tap into your superpower all you need is clarity, structure, and a system that protects you from your own impulses.
Whether that’s having separate bank accounts, rules on how to spend money, or placing weekly limits, the key is to create boundaries so it’s easy to make good decisions.
If you’re ready to flex your mental accounting superpower, here are some thought starters:
What mental buckets do you currently use?
What’s one new rule you could apply today?
Remember, just by being aware of mental accounting can help you rethink how you value money from different sources. And that awareness can empower you to change your habits one at a time.
Go deeper:
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
