Monday, May 21, 2018

Mental Accounting, Equality, and Motivation

When I first found Mr. Money Mustache's blog, we leaned in to frugality. Hard. Take a look at some of the early posts from the blog's first year. Why we rented out a room in our house, even after we were married and had paid off the mortgage. Why we rode a scooter around town to save on gas. Why, for a very short time, we took fucking navy showers (like, getting wet, turning off the faucet, then soaping up, then rinsing off) just to save a little money on water.

Then we relaxed. We realized we were happier when we weren't viewing every single activity as something to optimize: when we realized our life wasn't just a series of cost-saving targets.

Still, we keep things reasonably frugal around here. While we don't stress over costs these days, we still have a family budget meeting at the end of the month. We see how we did the past four weeks, then plan out the upcoming month: the things we want to do, or buy, and we make sure we put some money towards those things.

We were going over our April expenses a few weeks ago, and Mrs. Done by Forty made a comment about some new bras for breastfeeding.

"I'm sorry they're so much."

"They're not that much, and we need them, right?"

"I just feel bad spending so much on myself, when you're the one earning the money."

This threw me for a bit of a loop since, on some level, I like to think the money we earned was always 'our money' rather than 'my money' and 'her money'. Both approaches are totally valid and this isn't an attempt to argue for one over the other.

But as Mrs. Done by Forty is working on her PhD, our incomes are really different, which comes with its own sets of challenges.

Then I mentioned that Mrs. Done by Forty's income still covered half our expenses. If we look over the entire time she's been in school, her income has covered way more than half our spending: there's enough of a surplus that her income has made significant contributions to her retirement accounts and saving for rental properties.

But why do we get caught up in tracking where money from certain sources is applied, anyway? Money is fungible, of course. When we assign certain buckets of money to specific goals, we're engaging in mental accounting: a cognitive bias wherein we compartmentalize money, often to our detriment.

Does it really matter if we earmark Mrs. Done by Forty's income towards our expenses rather than, say, our retirement accounts or our taxes? No, probably not.

But for whatever reason, this framing seems to work for us. It allows for a different conversation about money in our household. In a literal sense, everything is 'ours' in terms of our income. But at the same time, Mrs. Done by Forty is also working, earning, and covering half of expenses: there isn't a single line in the budget that she doesn't have an equal say on.

Of course, this isn't the best or only way for mental accounting to help our relationship with money.

Back when we were aggressively paying off our first home, while still trying to save for an early retirement, Mrs. Done by Forty and I had very different motivations when working towards those two goals. I was lukewarm on homeownership altogether, while Mrs. Done by Forty, fresh off the worst investing mistake of our lifetime, was worried about putting more money into stocks. But some mental accounting helped us move forward with both goals: Mrs. Done by Forty happily plowed all her income into paying down the mortgage, while I concentrated on contributions to my 401k and our IRAs.

A single person might do something similar, perhaps with multiple income streams. I've seen some clever approaches with side hustles: individuals taking moonshots with their side income, while their main gig covers their basic expenses and typical investments like retirement accounts.

Regardless of the framing, these days I'm a fan of strategic mental accounting, which gets a bad rap in personal finance circles.

Sure, money is fungible. And yeah, where money comes from shouldn't have any impact on where it is allocated.

But this cool, rational argument doesn't account for the pesky fact that we are living, breathing humans, not calculating automatons. Our behavior can change, often for the better, when we frame financial decisions to align with the things our hearts desire. When we want the right things, motivation can have an incredible and positive impact on the bottom line.

We paid off our first home in under four years precisely because Mrs. Done by Forty wanted to pay down debt and own a home outright, even though I wasn't so sure. And at the same time, I plowed every dollar of my income that I could into retirement accounts, because I had this whack ass idea of retiring before forty.

While I can't prove it, I believe this mental accounting of separating "my income" and "her income", and directing each towards separate goals that were inherently motivating to each of us, had way better results than if we had seen the funds as they "truly" were: one big pile of money that we could direct any way we wanted.

Which all goes to say that mental accounting can be a very good thing for nerdy, personal finance aficionados, whose competing goals might be owning property outright and investing for retirement.

When you're money nerds, like us, you probably don't need to sweat this cognitive bias.

*Photo is from orphanstephen at Flickr Creative Commons.


  1. Very interesting post. I think we absolutely have a different sort of emotional attachment to money from different sources, and if you can use that to your advantage, why not?

    I do sorta want to shake your wife for that comment about the nursing bras. IMHO that expense isn't at all for her, it's for the baby, and um... the baby expenses are just as much yours as hers.

    That being said, I know a lot of women who have struggled with those sorts of issues, especially if they're not working because they're raising kids etc. I know one couple where he works and she doesn't - they don't have kids, but he's disabled so she deals with all of the household repairs, shopping, cooking, and virtually everything else - including some stuff they'd normally have to pay an in home nurse for. I think she occasionally struggles with feelings like she's somehow sponging off of him. I have to remind her that if they had to pay someone to do all of the things she does, it would probably be in the six figures. I think one of the ways they deal with it is that she's the financial manager of the couple. So he hands his checks directly over to her, and she deals with paying all of the bills and keeping track of the finances. So even though he earns the money, he's the one that has to go to her to OK the expenses.

    You know, back in the olden times, it was common for a man to pay his wife a monthly or weekly allowance for her personal expenses. Many people look on that as a sexist relic of sorts, but I'm not so sure. In my mind it's a good way of acknowledging the value of work that doesn't have an income attached to it.

    1. Hey there, ECL.

      I hear you on the baby expense (and indeed, all the expenses) really being 'ours' not 'hers". But the whole idea of the post is that our emotions, and the weird way we humans think and feel about money, has a material impact on our finances. Illogical as it may be to see a bra as 'her' expense, to the degree that she sees it that way, it's true on some level.

      I often will hear arguments for logic as a retort: we should combat the illogical and harmful biases we often fall victim to.

      But I also wonder if we're tilting at windmills. That, rather than trying to overcome our cognitive biases (the 'big win' but much harder to pull off) if we're better off manipulating them, or using them to our advantage.

      As you noted with your example with that couple, it's kind of hard for the lower earning spouse to really avoid feeling, at least occasionally, like they're not pulling their weight. Systems and approaches that acknowledge those feelings are probably going to be there, maybe forever (rather than trying to overcome them) might have quicker (if not better) results.

  2. For us it seems like it's been kindof the opposite... the closer we get to the RE part of the FIRE journey, it seems like we are doing more of this mental accounting. "2 more months of working an easy desk job or a few weeks of miserable labor on top of a roof" "what about putting money into this 'fun money' cash account to allow for guilt free treats the first couple years of retirement before we settle down?" We pretty much never did this stuff when we started out!

  3. We're engaging in the mental accounting stuff plenty, too. I think it can be healthy to think about things in the way you're framing them, Mrs. Pop: we can spend money, or time at our current work, or time in DIY work. I kind of wish more of us ran through the alternatives like that!

  4. I can't banish my mental accounting so I lean into it, hard :)

    1. I think that's a good way to be, Revanche! At least for people who are really into personal finance and are debating between two very beneficial choices.

  5. I think we're in similar situations these days. I remember harping on my wife for wanting to drive three blocks to the grocery store, back when I first dug into the MMM crazy train.
    Interesting theory about our cognitive biases as money nerds. We probably sweat the details more than we should, quite honestly. Wack ass. I need to use that adjective in my posts. :-)

    1. Yes! We used to be hard core frugal, too: eventually, we turned the corner from focusing just on efficiency, to also focusing on effectiveness. Sure, biking the three blocks to the store is more efficient. But is that sort of tactic effective at all?

      Lots of the uber frugal shit does not move the needle in any material way.

      And yes, we need to all use whack ass more. :)

  6. This is so smart. Money is the number one cause of divorce, at least that's what they always say. Regardless, it's definitely a source of conflict as it presents a power differential. Whoever decides or wins on how money is spent is happy, and the other is not. Makes perfect sense to identify each individual's motivation and then align their surplus there so that their hard work is more fulfilling, and efforts can be sustained, like navy showers. I appreciate that you provided the singles perspective, too. I just bought a house solo - resulting in $700 in new expenses each month, plus improvements to operate a larger business out of the home. So, to stay motivated, I have a target of producing enough new income from the expanded business to cover all of the renovations in the first year and the additional ongoing overhead on a monthly basis after that. It's a measurable number to target and helps my prioritize the extra work, even after a long day of my existing business.

    1. Hey Emily! So glad to see your comment. Hope all's well. And congrats on buying a new home!

      We, too, are dealing with roughly the same amount in new expenses from our new home. It's an adjustment for sure, but I wish I'd thought of what you did, and came up with the idea for a new income stream to cover the delta.

      Maybe we'll nudge our future kiddo into modeling/acting.

  7. You guys really find a way to make it work. I admire y'all.

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