Mental Accounting
Money is sorted into mental buckets by source and purpose — 'bonus money', 'holiday budget', 'house money' — and spent by bucket rules rather than by total wealth.
An everyday example
Blowing a tax refund on a gadget while carrying credit-card debt at 24%.
What it can cost you
Sellers who label the bucket for you ('treat yourself', 'it's a business expense') and decisions that ignore the fungibility of cash.
Warning signs
- This feels like free money.
- I would not buy this from my salary.
One thing to do
Before a purchase, translate it into hours of work or the highest-interest debt it could retire; that is its real bucket.
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