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.