Remember getting birthday money as a kid? You couldn’t wait to blow it on whatever you wanted. It’s a bit like getting a big fat tax return. Free money! Yours to burn on something completely unnecessary. So why does an unexpected windfall feel like a licence to spend, but we’re a bit more cautious with the money we get slugging it out at work?

Birthday money or money from a tax return is no different than the money we get from our job, so why does it feel different?

For most of us, ‘mental accounting’ is the culprit. It’s a term used by behavioural economists to describe the way we treat money differently depending on where it came from and what we intend to use it for, rather than just thinking about it in terms of our overall bottom line.


In other words, we have different ‘mental accounts’ for our money – spending money is different to money we save; money we win in a competition is different to money we earn, money for groceries is different to holiday money, etc etc. For example, we’re more likely to gamble $100 if it’s given to us than if we have to take it out of our savings account.  It’s one of the many built-in biases we all have that messes with our thinking.

This is obviously irrational thinking. After all, money is money no matter where it came from or what we use it for. But that’s how our brains are wired. Most of us aren’t comfortable treating all our money as one pool. So why not use this to our advantage?


You can take the concept of ‘mental accounting’ and turn it into actual, literal savings accounts. For example, if you’re keen to boost your ‘emergency fund’ and also save for a holiday, have two savings accounts and label them: “Emergency money” and “Ibiza 2021”. Just make sure you’re not paying two sets of fees for the accounts or getting duped into any other sneaky traps.


While mental accounting can be used to your advantage, it’s a good idea to check in with the bigger picture from time to time to make sure you’re doing the best for yourself.

For example, you might have given that Ibiza 2021 balance a serious boost lately – well done you – but you also have a credit card debt hovering over your head like a storm cloud. The credit card debt comes with high interest rates, so crunch the numbers to see if you’re better off paying it off before you start putting money aside for that European whirlwind you’re planning next year. ‘Mental accounting’ can mean that you don’t even think to use Ibiza 2021 to pay your credit card, even though it might make financial sense to do it.


If you get a bonus at work, win on a scratchie your uncle bought you for Christmas, have a generous grandmother or stumble across some unexpected cash in any way (don’t be dodgy), pause a few days before you spend it. Challenge your initial compulsion to blow it because it’s “free money”. It’s not. It’s just money.


Being human, you are going to make some less than perfect decisions, particularly when it comes to your finances. We all have psychological biases that get in the way of our own best interests, and self-control can be fickle – not something to rely on. But the more you understand your own behaviour and plan around biases, and the more steps you take to create healthy money habits, the faster you’ll be on the road to better off.