Are you suffering from Mental Accounting ?

POSTED BY Jagoinvestor ON April 19, 2011 COMMENTS (98)

Do you know that majority of the problems in your financial life are purely because of psychological reasons? We are all humans and are prone to think irrationally at times, due to which, a lot many wrong decisions are taken in our personal finance. Behavioural Finance is the area of finance that combines psychology and finance together and gives you an insight as to how a common man makes mistakes in his decisions. Today, I am going to talk about on its concept called ‘Mental Accounting’.

Mental Accounting

Lets imagine a scenario, which will give you a brief idea on mental accounting .

Scenario 1 : You and your wife visit an electronics showroom with the intention to buy a Laptop. After browsing various products you finalize a nice laptop with the price tag of Rs. 40,000. Just when you were to swipe your credit card, the couple behind you mentioned that another showroom about 3 blocks away (15 min drive max) is selling the same laptop for Rs. 39,800. Will you consider driving 15 mins to save Rs.200? Majority of us will not do so!

Scenario 2 : You and your wife visit the same electronics showroom to buy 4 GB Pendrive costing Rs.400. However, you come to know that this product is available for Rs.200 at another showroom which is 15 mins drive. So will you now choose to drive another 15 mins to buy this Pendrive? Most of us will happily choose to drive 15 mins to the second showroom.

If you look at both the scenarios, you will notice that both scenario 1 and scenario 2 are exactly the same, they both will save you Rs. 200 and both requires you to drive 15 min. Exactly same, no difference. But most of the people will choose the first showroom only in scenario 1 and will choose second showroom in scenario 2.

Why does this happen ?

Truly speaking, this happens because of Mental Accounting which makes Rs. 200 saved on laptop not a significant amount because its just 0.5% of the original price. Whereas, Rs. 200 saved on Pendrive looks attractive and substantial bargain because its 50% of the original cost.

What is Mental Accounting ?

Mental Accounting is very simple to understand. What makes is a crucial aspect to understand is the different ways we treat money depending on situation and its source. We often concentrate on the situation and the source of money in terms of the amount of hard work we put to get that money and all these points makes us human to fall prey to treat same amount of money in different ways. But coming back to the facts, Money is Money and it doesn’t matter where it comes from!

So, if you earn Rs. 100 from 3 different sources- Lottery, Salary or Tax Refund, all of them should mean the same as they all have the same purchasing power. Forget how you got it; all of that Rs.100 is valuable equally!

Personal Experience of Mental Accouting

Let me share on how I myself was a victim of Mental Accounting. Some 2 years back, when I did my first stock market trade in F&O. I made Rs. 2000 as profit on an investment of Rs. 6000 in the matter of 2 hours (options trading). This increase of Rs. 2000 actually increased my overall wealth, but to me it was ‘Cheap Money’. Naturally, I had made plans to spend this money and I had no 2nd thoughts on NOT spending. The decision to spend money was not at all rational, but it was fast money which came from stock market and it came without any hard work. Mental Accounting was doing its job in my mind!! Carefully evaluating the situation, all what happened here was that my networth went up by Rs. 2000 and I took out Rs. 2000 and SPENT it!


6 Examples of how our personal finance decisions are based on Mental Accouting

1. Treating some money as “Free-Money” or “Loose-money”

Most of us label money based on where it comes from, by doing so the value of that money appears to be less. E.g. if you get food coupons from your company, you will not consider it as cash! At the last company I worked at, it was amazing to see that people didn’t mind paying up to Rs.50 for Food Coupons for friends, but if the same person had to spend Rs. 10 hard cash, he will not be willing to do so. Food coupons have same purchasing power (at least in limited environment) as cash, so one should be treating it in the same way and not being bias just because it’s not in the form of currency. What I really want to know is that what will happen if companies start providing cash equivalent of these food coupons???

Another example can be with the money that we get from tax refunds, cash gifts on events etc…etc… We all in our heads label these as ‘Cash, but not as valuable’. Imagine that you got Rs. 2000 as your tax refund and you are more likely to be spending this money rather than the willingness you would have to spend from your salary. Also imagine that some friend gave you Rs. 1000 as gift voucher, will you even bother researching on what products can this voucher buy??? In the same way, if you earn yourself a bonus of Rs. 50,000; you will be more inclined to spend it on a holiday or for buying some item for the house. Would you do the same thing with the money from your salary??

So the message is clear, don’t label money as ‘salary money’, ‘tax refund money’, ‘bonus money’ or ‘Gift money’. It’s just MONEY!

2. Holding Stocks and Mutual funds with Loss

Mental Accounting is visible in buying and selling of equity products like stocks and mutual funds. Consider a person who bought shares at Rs. 100 each and the current price drops to Rs. 80. He does not consider this as loss until he books it, loss is not existent for him, and it’s just a possibility. But in real terms, that person is actually suffering loss already. The person in this case labels the loss as ‘potential’ and not ‘real’. On the other hand, if the same stock went up from Rs. 100 to Rs. 120, he will be happy and will be telling everybody that how he is in ‘profit’ even though he has not booked as yet. Profits have already happened according to this person’s thinking and this is exactly why many people fail in stock investments.

3. Size of the decision/money involved

A lot of times the size of the transaction also influences our thinking. Imagine that you went to buy a Plasma TV which costs Rs 20,000. You bargain with the vendor and successfully get a discount of Rs 500; it makes you happy and you feel as if you saved something. But do you put any big effort to find out how you can save much on groceries or vegetables? As the transaction size is bigger and bigger money is involved in case of Plasma TV, it clicks your mind that you should try to bargain the price and save as much as you can, but this thinking is not the same in case of small purchases. Even if we are able to save Rs 5 on small transactions, it would amount to Rs 1700 (approx) in saving in whole year and that would be bigger than Rs 500 saved in case of Plasma TV.

While there can be repetitive headache involved in saving that small amount, the whole idea is to communicate that we tend to think differently when there is a big decision and very different when in smaller ones.

4. Earn less interest and pay more interest

Many investors do the common mistake of earning less interest on their FD’s, PPF or Cash in their Savings account, but pay huge interest on their personal loan or credit card interests. For investors, money in FD’s and PPF is ‘safe’ and not to be touched, but in true sense you are earning less on a part of your portfolio and from that same portfolio you are paying huge interest for loans. If you see your whole portfolio as one and single element without labelling parts of it, your perspective will change. Ideally  one should clear a liability whose interest rates are higher than the part of portfolio earning lesser interest . But due to mental accounting , this idea does not look fine to many people .

5. Labeling money into safe money and risky money , loosing any money is just loosing

Ajay has Rs 1,00,000 in Bank FD, Rs 2,00,000 in his PPF account and 5 lacs in Balanced Mutual funds. All these investments are for his daughter’s education down the line and he has mentally labelled it as ‘safe’. However Ajay has also separated out Rs 50,000 to try out stock trading which is his passion and what he loves to do. He has mentally labelled this Rs 50,000 as ‘Risky’. You can see his total worth is 8.5 lacs.

Case A: Now imagine he is in loss of Rs 25,000 in his stock trading. This will not hurt him so much as he had accepted from start that it’s for stock trading and loss was a possibility. He is fine with this loss, as nothing has happened to his ‘safe’ investments.

Case B: Suppose market is down and he faces a loss of Rs 25,000 on his mutual funds. As the loss has happened in his mutual funds which was initially labelled as ‘safe’ and “for-his-daughter’s-education”, the level of disappointment and worry would be much bigger than Case A.

Even though the reaction of Ajay was different in both case A and case B, it’s purely because of mental accounting and the way he had unconsciously labelled both investments of his portfolio, but in both the cases the reality is that his total net worth went down from 8.5 lacs to 8.3 lacs, It’s as simple as that.

6. Paying for Financial advice

We recently encountered a very funny situation, one of the readers contacted us for our Financial Coaching service, he was very clear that he needs it (For readers who are not aware about financial coaching, it’s a paid program where we coach people in their financial life just like Garry Kirsten coaches Indian cricket team and transformed their performance). He was very much interested in being coached on his finances and what MONEY means to him, but was very uncomfortable paying the fee out of his wealth, as for him there were other important things in life; he said he would get back to us once he makes the decision. But he didn’t communicate for weeks, then just last week he told us that now he is ready for Financial Coaching. After we started his work, we asked him, what had happened in his life which motivated him to take our service. To our surprise, he had sold his old car and got price way beyond he expected, and he was fine to use that extra money to improve his financial life.

If you look at this incident closely, even the money which he got by selling his old car become the part of his overall wealth, the moment he sold it, in fact it was always part of his wealth even when he didn’t sold it. You must be thinking what was our first   coaching lesson for him? Yes, it was the way he looks at different aspects of his financial life and not fall prey to these kinds of behavioural patterns.

7. Treating unexpected money in a different way

There are lot of unexpected money at times coming in our life , It can be money in form of Bonus from your company , It can be money recieved from an old friend who took it from you ,didnt give back to you and you also forgot about it. It can be some money you find in old book which you had secretley kept long back . All these are examples of “unexpected” money and hence there is no mental accout for it , that money looks more of pocket money to you and you tend to spend it without thinking much .. However money is money , no matter from where it came . Its just different in your mind .

Please share your real life incidents where you fell prey to mental accounting . Do you think mental accounting is not applicable in real life and is more of a “time pass” concept or do you think its really something one has to understand and apply in their financial life ? Share your views


98 replies on this article “Are you suffering from Mental Accounting ?”

  1. Jagadish says:

    Hi Financial GURU!!!

    I envy you. You have great insight in financial matters and also a kind heart. (You replied me twice on the same day over an issue of surrendering ULIPs. I was unwilling to surrender the ULIPS which were anyway going on loss, but after your reply opened my eyes i did surrender them.) Thanks once again for your time and effort for helping me and also giving me an e-book which i am studying religiously (but slowly, as i am a slow learner).

    This article is really a well researched one and surely opens anybody’s dizzy half closed eyes regarding dangers in financial matters. I took printout of this article as i wanted to re-read it again and again, so that this wisdom seeps inside my little brain.

    Thanks for doing such a wonderful job. I already have accepted as my financial coach. Please continue this good work as there are many foolish, adamant, arrogant and illiterates in financial matters who require your sound wisdom advice. I know as i was one of the fool, and currently studying your other articles.

    Thanks ….no no profound thanks for your advice.

    Keep the good work. God Bless You!!!!


    1. Thanks Jagadish

      What moved you in your financial life is the action you took in the area of surrendering your ULIP’s, before that all what you were doing was analaysis which was taking you no where ,. you were stuck at one place, now you have shifted to another place . The only thing what matters is this movement and nothing else .. Keep it up 🙂


  2. Rajaram says:

    Manish, nice article. On shares if it dips I assess whether it was a wrong decision. If yes, I sell and stay in cash or switch.

    The other key thing I have observed is ppl spending on cheap and crappy things. They dont mind buying Rs1000 thing 10 times every year than buying a 7000rs product which would last maybe 12-15 yrs. The mindset is its 7 times costlier. Not only they end up spending more the do not njoy the quality associated with the pricey high end product.

    1. Rajaram

      Thats very rightly said , I have personally seen people who do not want to buy quality products which is 4x in price and 15x in durablity . In a way its cheaper if you see , the only thing is the payment is NOW .

  3. R says:

    Dude, looks like someone was “inspired” yet again by one of your posts… check out this article in ET!

    1. R

      yea .. seems like . I know the person who wrote it btw 🙂 . thanks for mentioning it

      1. R says:

        Well, like they say, if people copy your work, then that means you are definitely good at what you’re doing! 😀 Keep up the good work, Manish!

        BTW, IANAL, but IMHO, if you haven’t already put up a disclaimer for this site, it would be good if you do so now… stating that you shouldn’t be held responsible, if by some quirk of nature, a person/firm has a financial setback because of something they tried after reading posts on this blog… (Something similar to the “mutual funds are subject to market risks” statement!) What say?

        1. R

          Actually mental accounting is a well known thing , even i reproduced it in my way and original language .

          I do not say that some one copied it , but i would say they took the idea 🙂


  4. amol says:


    I really liked your writing sense with such articles… you rock..!
    I was reading this article and felt like many of such things have happened before.
    I think that by means of easy money(as in the mind of people) like bonus or lottery or some other (legal) source if people are spending money for something good that they didn’t do(because they didn’t wanted to spend hard earn money there) then that should be fine. Sometimes, we accomplish certain wish which would have then left uncompleted otherwise.

    I will love to read more such articles…

    1. Amol

      Thanks for apprecitation , we would write more such article soon 🙂


  5. buddiginvestor says:

    Hi Manish,

    This article made a wonderful read. Enjoyed discovering I am a victim too:). I would never imagine spending 1000 bucks over a coffee treat. But since I got ma salary I never gave a second thought to going ahead with it. Guess I look at my salary quiet differently from my parents money…
    I agree that I would travel another 15 min to save 200 bucks on the pend-rive and not the Laptop. But that would be more to oppose the extent of overcharging, rather than saving Rs. 200.


    1. Buddiginvestor

      Ok . I can see that happening with lots of people 🙂 . Keep reading !

  6. Arudra Kumar says:


    I was given Rs.1500 worth of sodexos (Food coupons) in my office (this was also part of my salary) and I didnt knew what to do with them. So, I use to either buy chocolates and distribute to my team members or I use to pay the restaurant bills when ever we friends went out to dine. All this was long back in year 2003-05. Probably, I wouldn’t have spent so much if the same amount were in cash. Now, that is, after my marriage in 2007, I am using the same sodexos for groceries, which are falling short way beyond the total bills (thanks to the ever raising prices). Absolutely no scope for wastage of sodexos, what so ever.
    Tip: So, to spend money wisely…..get married asap… 😉


    1. Arudra

      Thanks for sharing your experience, I think the same is the case with most of the salaries class in big MNC where you get food coupons or sodexo’s 🙂


  7. Deepak Kaushik says:

    Nice article Manish, infact i can recall my moment too. I bought some share @ 35 around 10k quantity and some days later it was trading @ 19 but i was happy as i haven’t booked it so its not my real loss.

    1. Deepak

      Yea . I can understand , happened with me too ! , so whats the status now ?


      1. Deepak Kaushik says:

        Its back to 37 so my patient paid off well!

        1. Deepak Kaushik says:

          BTW i used that time to accumulate more but all the TV shows and so called “Experts” were against it that time.

          1. Deepak

            Haha . good to know that , typical thing which happens with many !

  8. Sanjay Singhaniya says:

    I would suggest one simple idea of to address mental-accounting of source of income.
    We always have financial plan for monthly expenses — for example, save x% of salary, allocate y% to monthly household expenses, allcocate z% to Discretionary spending (aka shopping). Now with bonus-money you can divide the money to x% and z% (or 50%-50%) so that you would not be spending all of bonus money.

    You would be happy that you enjoyed life and at the same time, made some savings too.

    I am assuming that bonus was not a predetermined amount and so it was free-money. 🙂 Anything which is not part of regular cash-flow and has come as free-money should be enjoyed (at least part of it).

    1. Sanjay

      I will agree with you if you say that anything unexpected can be enjoyed fully or part irrespective of the source ! .


  9. Manish Awasthi says:


    Nice and informative article …..

    Examples of Mental Accounting from my Life……..
    I have lot of shopping Gift coupons which I don’t use use them I believe some of them had already expired (Bad Luck) Thanks for writing this article I was able to see this area of my life…

    One area where i don’t use Mental accounting …..
    Interest I got from different sources(Bank FD’s , PMS, Dividend, Saving accnt interst etc) . I make it a point to use the interest money in my monthly expenses so I’m able to save some money from my monthly expense account

    Manish Awasthi

    1. Manish

      Nice ,its a good idea to use that interest from FD’s in your expenses !


  10. lpm says:

    ” So the message is clear, don’t label money as ‘salary money’, ‘tax refund money’, ‘bonus money’ or ‘Gift money’. It’s just MONEY! ”

    For the sake of trivia. This characteristic of money that you refer to is called fungibility ( Money is fungible.

    1. lpm

      thanks for giving that word

  11. Dr Adesh says:

    Well crafted article..really its a food for thought with practical insights..I would like to make a point that though we should consider every type of money regardless of the source as hard earned money but what i get a feel from this is that of a scarcity..that we should save more spend less ..though this is not your point at all but this is the feel coming out..rather one can take some amount as loose money and spend on something one feel on spending, may be new pair of woodland shoes which one may not be needing,may be some jewellery which is just for flattering wife’s happiness or expensive clothing though one may not require these as point is sometimes doing things with money which are not needed as for just survival or living, do add to happiness. So one should be smart to spend one’s hard money but one shouldn’t fear much of loosing money and can take money in two ways in two different scenarios..all these are solely my views and i am taking nothing from your very fab. article.
    God bless you.

    1. Dr Adesh

      Thanks for acknowledging that . I can understand your point, I think your point is , one should spend on something with the money which looks loose or in small quantity, but you can not wait for it forever, if no loose money came, you will eventually buy it at the end some day, Right ?


      1. Dr Adesh says:

        ya that’s what i meant.. one may act in different way in two circumstances and this is a smart way if this adds to the lifestyle or betterment of you or family.Also one must not think of saving and saving every time such as saving every now and then on every transactions one may tend to develop a mentality of deficiency by this which is totally undesirable..My whole point is saving money is good and taking every type of money as wholesome is also wise but as u pointed don’t waste money on useless thing and just don’t be under debt..
        u r doing a great job..god bless u.

  12. dr kishan says:

    Thank God you made this post. My thought is exactly like yours in this matter. But everyone in my family is just opposite (especially the ladies). For them the unexpected money (which is also hard earned only) had to treated differently than the expected money. They would keep the tax refunds or arrears etc separately, only to be spent on things which would not have been brought if there were no refunds or arrears. i was always criticized or laughed upon for thinking the opposite. I always have the habit of mixing all my money of various sources and then make up the decision of spending or investing them accordingly. I always say to them that the decision of spending on an item should not depend on the source of money. If there is requirement of enjoying then enjoy, thats all. Don’t enjoy since u got a refund or arrears today. While reading the post i felt as if it were my thoughts being put to pen. But one thing i should confess is that i didn’t know that it has name called mental accounting. In my language its pure LOGIC, thats all.

    Dr Kishan

    1. Dr. Kishan

      I cant understand your situation , definately some people are very far away in personal finance and all these things which we talk about here might look unrealitic to them . We just have to make sure we are on right path 🙂

      It was great to know that the article seemed just like what you thought 🙂 .


  13. Jig says:

    Good One Manish,
    Its true and earlier i used to spend the gifted vouchers in that manner only. Some times the reason is that we have limited selection to spend those. But last few times i used my cc points/vouchers to get groceries in mall too. 🙂 others may not believe but yep its true.

    Now onward i am keeping monthly budget amount as budget money. i dont know its good or not but i am happy with that.

    1. Jig

      I agree that its not easy to tackly mental accounting , it happens with us overtime. the idea is to minimize it and have control on one self 🙂


  14. Raghu says:

    Hi Manish,

    Kudos, an insightful article articulated with simple but practical example.

    Here is what real life example in my case is.
    Had transferred my home loan from ICICI to SBI around 2 years back when the teaser loan from the SBI was launched.
    From calculation and the deal stand point I was “forced” to switch to SBI simply because it saved some Rs 60,000 over a loan of Rs 28 lakh with the big assumption that the rate of interest of SBI is ALWAYS lower that ICICI.
    Also note that at that point ICICI home loan (floating rate) was 13% compared to SBI’s 8% !
    Though I am not all repenting but wanted to show case the mental accouting scenario being applicable to both large and small value of money involved.

    What say ?


    1. Raghu

      I am not clear why you consider mental accounting to come into the picture in your case ?


  15. Krish says:

    Very nice article on behaviorol investing.

    Frankly credit availability is the biggest curse for the individuals. The loan over phone changed the scenario for urbanites. I could not resist taking loan from any institution who approached me. Never cared about interest rate but cared about howmuch quantum EMI. I was a victim of all the attractively packaged loans from the private banks viz. personal, auto, home, home renovation, creditcard, computer, furniture, shares, insurance, gold and what not. As if this is not enough, top-up loans came. One day I realized that interest payments were alone eating up my salary. That’s when item # 4 was realized and really had to work hard to clear the liabilities.

    I believe the founders of credit card were smart enough to realise the mental accounting advantage long back and introduced such cards. I thought creditcards would not make business sense for issuers. I am proved completely wrong and this mental accounting senario effecting every creditcard user.

    1. Krish

      🙂 . I can understand your point . You have really taken so many loans ? my god ! . Anyways if you can handle them wisely, i would say its fine , but unexpected things in life makes situation worse ! .

      You have rightly pointed out that credit card makers were smart enough to launch it


  16. T.S.ASHOK says:

    Manish, This article is very nice. Me & my spouse were spending money in huge as we were paying through credit card and our mind did not worry of spending as we did not see the hard cash..whereas after reading jagoinvestor.. i started paying by cash and now more than 20% of my money got saved. And now we think everytime that “Is it really required??”.. Now i came to know that it is due to mental accountings.

    1. T.S Ashok

      Thats amazing to hear , you have out-performed compared to others because you have taken action ! and thats not easy . Kudos !


  17. S S says:

    All the incidences/examples mentioned here are very true, it happens in real life and I have observed it with almost everyone. The money which you receive apart from your salary or fixed allowance is always considered a luxury, a blessing. When we used to come home for semester break, girls used to splurge on shopping, that day was marked as shopping day and money was asked from dad specially to “come home: ghar aane ke liye paise bhejiye” that’s what everyone used to tell their parents. That money was different from monthly expenses so no one was bothered about saving it.!

    1. SS

      Thanks for your comment , I can understand your example , but it does not exist in guys world with so intensity 🙂


  18. Smart Singh says:

    I agree with a lot of comments here. When I first started studying behavioral investing, there were plenty of ‘aha’ moments for me. It was fun to acknowledge and ridicule the behavioral aspects of the saver/investor.
    However, with time I realized that, let alone individuals, even institutions are not rational investors. This irrationality or behavioral biases make us who we are – humans. Behavioral finance was never meant to change the irrational nature of the investor. Rather it aims at making the planners aware of the human nature, to make them appreciate that in real world, there does not exist a rational investor.

    1. Smart Singh

      Nice comment, Mental accounting is more useful for people who want to sell to other and exploit the bahavioural pattern of customers .


  19. herge says:

    Mental accounting! Hmm another term to describe the need for frugality. The need to distinguish needs and wants.

    So the message is clear, don’t label money as ‘salary money’, ‘tax refund money’, ‘bonus money’ or ‘Gift money’.

    Why not? I save enough for all my life events. Have enough emergeny cash, life and medical insurance. I do label my money in different heads and I do
    spend money for things I enjoy and not necessarily need. This give me joy. I do this only when I save enough. So I see nothing wrong in it.

    When a person with a large appetiite starts dieting he should give himself a treat maybe once a month. Otherwise the longing will destroy the diet.
    Frugality is freedom and not some boring exercise which you will find repulsive.

    Between scenario 1 and 2. Whats the big deal its 200 bucks! Too much thought for such trivial amounts are not worth it. Of course this is only when your financial life is in order.

    I can see that your blog is slowly turning to advertisement mode:
    From plain JI to JI, come to Manish for help.
    This gives investors one more thing to be jago about: your services!

    1. Herge

      Thanks for putting your points and opinion

      I would like to clarify the samething which I did above to some one . As you said Rs 200 is not a big deal in the scenarios which I mentioned, but then it should not be big deal in both the cases or it should be a big deal in both the cases . But we can see in reality that in first case Rs 200 is not a big deal , where as in second case Rs 200 becomes a big deal , where as both the cases are exactly same from the point of “money saved” and “effort required” . So the mental accouting talks about different treatment and behaviour by a person in different situation, when at the deep level both are same .

      Also “mental accounting” is not another concept of “Frugality” , I would like to know what made you think so ?

      Mental accounting just say how we behave in a centain way depending on from where the money comes from . Let me know what you think about it .

      Regarding your comment on our services . I dont disagree with you . We have started our paid services and most of the people who feel that they require a deeper level contact us and we work with them . For people who dont need our personal help take what they learn from blog and apply it themselves . We are working with clients on paid basis from last 1-1.5 yrs , not now . and our services are well recieved by the community and much appreciated .

      I would also like to invite you personally to explore our services and recommend some one can truely benefit . If you dont see any value in it, blog is always there to learn.


      1. herge says:

        Also “mental accounting” is not another concept of “Frugality” , I would like to know what made you think so ?

        I understand what you are trying to say. If you look at reader experiences and your examples I would like to conclude that ‘mental accounting’ is ‘selective frugality’ or shall we say
        pound wise but penny foolish.

        So you are actually recommending ‘total frugality’ which is a fine concept.
        My point is pound wise but penny foolish is better than
        pound foolish and penny foolish.

        Regarding your services:
        I think you will agree that the blog has served as a platform to launch your services. In fact can one say you have a client base because you have a blog for 3+ years now?
        Absolutely nothing wrong with that. Way to go.

        Assuming you are doing this full time now and that your bread depends on it: there is one danger of the transition from a blogger who is a personal finance enthusiast to a blogger who is a personal finance professional.

        1. Every post builds up to an advertisement (harmless but the post is not as pure as before)
        2. One tends to hold back information (nothing wrong but a little more distasteful).

        I thing you are gently heading toward 1.
        There is absolutely no sign of 2. I am not accusing you of that.
        But there is that danger.
        Come to think of it actually you don’t need to conceal everything given the mental attitude of our populace: why research every decision ourselves lets go to Manish.

        That is the point:
        I have always been against tuition to supplement school or college as it it against true learning and self-discovery.

        To me: The old JI stood for true learning and self-discovery.
        I think the new JI takes a bit out of that concept. There is a possibility that bit could become bigger with time.

        I mean no offense. I am big fan of your work. I think you have always appreciated honesty and this is how I feel.
        The respect I have for you remains intact.

        1. Herge

          thanks for your honest opinion on this . I would like to share my thoughts on some points and not convince you .

          First thing is I am still not able to understand why you feel mental accounting is frugality , can you share example for that , it would be best if you can explain what is mental accounting as per your understanding and how its related to frugality ? Because I have not got any such thing while studying Mental accounting , even the person who started the term never linked it with frugality :

          Regarding the certification and services , I am not sure how many planners and CFP’s have you interacted with . No client asks for certification , everyone is interested in just one thing and thats
          getting quality solutions for their problems . certification is an important and desirable thing , but its not a “must have” thing . the bigger thing is trust with someone and our clients till date has never faced any issue . We even have clients who come after they have worked with some CFP’s who are well known . We have CFP’s and Financial Coach who have vast experience in this area .

          We over last 3-4 yr have understood what’ the expecations of people when it comes to financial advisory and we have come up with financial coaching which is well recieved with the clients .

          I am with you on the point where you say that should not go blind in what a person says and has to do their bit of research and findings and we encourage the same . And the main thing is more than data we believe in working on the person and how to bring a shift in his thinking about money .

          I really want to know which articles these days made you think that its not like old jagoinvestor ,because almost all the emails we get say says that its getting better day by day and they are loving it . It might be the case that from long I have not done a analytical post which deals with data , but overall I am trying my best to bring more ideas and posts which really help readers . And overall if me as a writer is getting deviated and compromising on the quality , I would really be very happy if readers like you and others please remind me and tell me thats a change is needed . If you can give me specific pointlers , it would be easy for me to understand your point on this aspect.

          Also i would like to hear views of other readers on this point and see how they feel.

          PS : I am now full time into this and have a team of total 4 people working on this

          Overall I would love to hear others comments on how they feel about it

          1. herge says:

            Dear Manish,

            Thank you for a detailed reply.

            1. I agree that I am wrong in equating mental accounting to frugality. Which is why I wrote ‘mental accounting’ is ‘selective frugality’ or shall we say pound wise but penny foolish.
            Selective frugality is used in a negative sense: frugal for big purchase and not for small ones. Just an extension of you plasma tv and veggies example.

            2. Issue of certification never came to my mind when I wrote the above.

            3. Aside from the feeling I get that
            you are “gently heading toward 1 (above)” there is nothing in JI today which gives me a wrong vibe. I am talking about a fear that is all.

            My fear stems from the following:
            True financial literacy cannot be a product which one pays for. It beats the purpose. Despite the fact you have a product called financial coaching. From an enter-pruners point of view its an awesome concept one which will make you rich.

            I am against a CFP (generally speaking) who claims he is a like a doctor. That is selling to make a living. That is not a literacy initiative.

            Yes people need help. The best form of help is self-help. Paying for it in my view beats the purpose.

            So my fear is now that you are full time into this your blog readers form a large part of your client base. So your bread-winning instincts may (change that to MIGHT) influence your writing.
            Its not a fear. Call it an apprehension.
            To this post there is no evidence of that in your blog.

            I am not saying seeking help and charging for it is wrong. It fine and many need it. But is not the ideal form of financial literacy.

            Don’t spend too much time thinking about this. Consider this a stray thought.

            1. Amit says:

              I want to put my view on Herge comments…..but defintely I am not a technical expert to comment (with such good vocab) ..:-)

              Personally…. one find day.. when i started thinking about my future, i started thinking about investment … i “google” it, had a talk with friends, office colleagues, Magazins……… …means what…i was looking for some MEANS or say some SOURCE to get to know about finance…..say insurance, FD, ULIP, MF’s, Debt fund, Autosweep..etc etc

              Most of the time i googled it and got my querries solved with help of some Blogs and good Websites. Later I started developing more interest in finance area… so i register for some newsletters and also some Blogs…..

              By this time I was educated enough to take my decision about where to invest and what to invest….But still I decided to get FP services…not because I was not confident but because i wanted to use the EXPERT Experience in this area
              say if there is very imp. delivery of one of the project in office (among existing 10 projects) ….what i will do…. i shall allot my best resource(Engineer), so that he can use all his exp and get this work done and satisfy my client, …… But to get this kind of Outcome….. definitely I have to first hire…Experience Engineer

              What I want to say is …though I am much familiar with Finance … I have preferred to hire professional to do that who will aware of existing Market…… and now it doesnt matter..even if i get some losses bcs i know I have selected (most) correct products for my money…….

              So now in this complete Journey
              1) Firstly…how i became familiar with finance …bcs of this kind of BLOGS… (Manish blog has higher contribution).. and they are absolutely free to read… 🙂
              2) Now I understood that, I know @ finance but I am not an expert…why not to hire FP and understand what he has done which may help in achieving my Financial Goals…And I am happy that I have not taken this decision blindly but after lot of research.

              AT the end, Coming to Manish Blog…. I am following his Blogs since many month… as everyone says he is doing great JOB by putting latest information (may be Best MF blog stays as it is of 2009…just kidding)…. making people aware How their Money can earn for them more efficiently

              Now as far paid services are concerned, nothing comes free in this world… perhaps i find nothing wrong in Charging for giving this expert advcices ….bcs he is taking much efforts in writing this BLOGS … why not to charge (not for Blogs but for coaching services)….
              definitely everything can come in free…but then you have to spent nights in understanding BIG FINANCE field….

              At the end keeping Big story small…
              i would always prefer to read this kind of Blogs and encourage Blogger…perhaps in this competitive worlds, its an challenge to Blogger how he can keep his Blog live and more interesting…
              At some point …u hv work on faith when you are taking paid services ….
              For Me…….
              Good Work JagoInvestor..


            2. Amit

              Thanks for the support 🙂

            3. Herge

              Thanks , I will try my best to live upto readers expecations and keep providing the value everyone expects


        2. Srinivas says:

          My ideas and thinking aligns with Herge. I like the concept of understanding things myself and do things on my own.

          Just to give a brief about me, though i was working for past 20 years, it is recently that i started understanding personal finance and financial planning. When i was learning new things(about finance), i was wonder why i didnot understand these simple things till now. I see friends and relatives in close circle doing things which one will not do if he knows and understands personal finance(ULIPS, endowment schemes etc). Interestingly this group includes many CA’s.


          Not all people are alike and very few(repeat only very few people) are interested in learning and understanding. Many use friends as financial advisors. Some more go to professionals. Thus there are diverse requirements and not a single need of getting full understanding.

          Another interesting offshoot of my learning(it is purely personal opinion) is that i view anyone offering some information, suspiciously as if he is trying to palm of things to me. Over a period i realised that this may not always be right and now i am getting to understand my feelings.

          As sages put it, true victory is victory on oneself, ie on one’s feelings and emotions. For achieving this one needs to get sensitised about various emotional triggers and reactions and ways to manage these.

          I feel this article helps in getting one sensitised to the triggers/effects of one’s feelings about money. As was mentioned in some comment, it is more useful to the seller. However, if one gets sensitised one can utilise this input to his/her advantage.

          Thanks Manish for interesting article and others for shring their views.

          1. S S says:

            I agree, nothing can beat self learning. We can not be experts in each and everything but drive to learn and understand develops commonsense. I used to be a novice in financial matters, but that was years back, now I take care of my own finances and my colleagues finances as well. By no means I am a mathematician but still good at making rational decisions. All this came from learning. I might have gone for a professional help and I don’t consider it wrong but you can trust a professional up to a certain level, you have to be knowedgeable enough to make your own judgement.

            1. Sanjay Singhaniya says:

              I second Srinivas.
              There are two things in do-it-yourself
              1. It gives happiness of do-it-yourself.
              2. I feel a lot more in control of my own finances.

              Though making financial decisions may not be an art and involves serious thought and some number-crunching but I would like to compare it with hobby of digital photography. You can pay money and buy best photos or learn digital photography, do-it-yourself and shoot great photos.

              That being paid, I think there is nothing wrong in paid advice but user should take it to learn tricks-of-the-trade and not just to outsource personal finances to some financial planner.

  20. Jagadees says:

    Hi Manish,
    Very nicely explained. Above situations are normal happenings around us and one should aware of those bias to improve financial well being. I would like to share my real life experience with my friend. He recently bought a endowment policy for his tax saving and paid 1st installment of 40k. I came to know about the investment after the free look-in period. I explained him about why endowment policy is worst investment which gives neither adequate insurance cover nor enough returns. I explained him in a excel sheet that how he can earn better returns and coverage with MF and term insurance combo even if he forgo the first installment paid for the policy. He was convinced that the combo will work good and he want to invest in them but he dont want to take the loss of 40k even though he has potential to earn more than 4 lac returns and 10x coverage. His reasoning is that each year he can encash earned leave and pay for the endowment policy!!!!!! In his mind he accounted those money as “free money from govt”. Having tough time convincing him about the bias. Now am going to forward this article to him 🙂


    1. Jagadees

      Exactly , He is labeling it as free money , If govt said that they will pay the encashed money each month in installment along with his salary , I dont think he would save all that money each month to pay for his endowment policy premium , because in that case , it appears as if its all coming from his salary .

      Good example you have shared , very relevent and too the point


  21. Jaipal says:

    Very nicely written. Thanks for making aware of this psychological labeling of money. I also do the same at times. But it is very difficult to keep myself away from mental accounting. I am so casual in my spending that I need a different account for savings. And that is what I am doing. Money in my salary account never carries for the next month. But the money that I label “saving” is never used as a part of any expenditure, may it be daily use, monthly needs or long term items.

    1. Jaipal

      The only solution I can see here is to mix your money . So if you get money from somewhere other than regular salary , also mix it with your salary in the same account and then it all appears to be one . Will that work in your case ?


      1. Jaipal says:

        Thanks for response. I am going to try this one. 🙂

  22. Manickkam says:

    There are many people suffering from this so called ‘Mental Accounting’ knowingly and unknowingly. Its a feel good factor once in a while and ‘chalega’ attitude that happens sometimes. I think, its very hard for someone to change this attitude in a very small time frame.

    1. Manickkam

      Yes , its tough and one can not change it in short run . The article aim is to make people aware and see how they can control their emotions while taking financial decisions


  23. Manish Chandra says:

    Scenario 2, everyone will look for another shop…. its true and it will always happen, % save is always important….. one more reason is that its applicable differently to people of different income groups…. and yes…. its result of planning and will not hop shops if savings amount is irrelevant irrespective of 5 saved.

    To be very frank was not able to understand the article completely. might be its irrelevant to me.

    1. Manish

      The article motive is to communicate on simple point ,and thats how we think about money in different situation , We mentally label is and then based on what we have labeled it we deal with it , but in reality money is money , what we do with Rs 100 coming out of our salary , tax refund or money we got on road , should all be same .

      See the video in the article which give you a good idea on what mental accounting is all about .


  24. Santosh Navlani says:

    i can absolutely relate to example 1 & 2, but my behavior is slightly different. Being an extravagant spender i’m in general, i treat free money in example 1 differently. If i save some money somewhere (better negotiation or unexpected discount), i first try to adjust that against some recent loss (over-payment on something or any direct monetary loss) i have incurred. if i’m not able to do so, i may just be happy about it. i normally don’t increase/decrease my spending based on my cash situation 🙂
    on 2, i am slightly different (and i guess there are many people like me) – a notional loss doesn’t hurt me till its booked but a notional profit does fire up my spirits.


    1. Santosh

      Point 2 talks about the same thing which you mentioned happened to you . In both cases the profit or loss is “notional” , but in one case we feel “its not real” and in other we feel “its real” , where as in both the cases its same, just that the direction is opposite .

      What do you say ?


  25. Sushil says:

    Excellent is the one word that comes to my mind when i read this article of you

    1. Sushil

      Thanks for your appreciation 🙂 . Can you share an incident from your personal life where you see mental accounting affecting your decisions ?


  26. Jayaprakash Kanreddy says:

    Really good manish, this will definitely make people think money as money.

    I can relate some of the examples in this article to myself a year back, but not now. Even though I used to look at the percentage when bargaining for things but I was never thought of hard cash is only money. At least now, even 100rs is money for me whether it is 300rs deal or 30000rs deal.

    That’s true, money is MONEY

    1. Jayaprakash

      Thats great to hear! 🙂 . This happens to everyone , even me 🙂 . Thanks for commenting


  27. Sanjay says:

    I don’t agree with point 1, 7.
    Usually people mark very small amount of money as loose-money or free-money. And it is perfectly fine if you spend it on your enjoyment because, heck, life is for enjoyment and not just for financial calculation. You were able to meet the ends even before getting loose-money so it is fine if you spend the loose-money when you got it. Also, free-money can not be, by definition, a regular cash flow so why to take it into account.

    I also don’t agree with point 5. In fact, the person has made a wise decision to make sure that he is not spending too much on his ‘hobby’.

    1. Sanjay

      Thanks for your comment and your open ness to discuss it further. I would like to take both the points and again and discuss points 1,5,7

      Point 1: . You said that “its perfectly fine to spend it on enjoyment” , I agree with it and the article does not talk about where the money should be spent and where it should not , It talks about how we behave in two situations . thats all . There is no connection of how you use it and where you use it . I hope you can see what I want to say ? If one wants to spend it on enjoyment , no one is stopping, but mental accounting comes into picture if one spends 1,000 from tax refund money easily , but has issues spending the same from his salary . So the main problem here is how a person acts differently in both situation where as internally its the same situation . it just appears differently .

      Point 5: Again , here you are talking about the management of expenses and how a person feels about it . I am with on the point , that by seperating the money into “safe” and “risky” , it becomes easy for him to manage and one should do it, infact we all do it and we have to do it .

      All i am saying is from behaviour point and how a person feels about it . In the example given in Point 5 . what do you think about both case 1 and case 2 . Do you think his happiness and sadness level should differ in both cases ? Can you explain why ?

      point 7: Can you elaborate why you dont agree with this point . Suppose you have your wealth in a box and you keep putting all the money you get from any source into it . Now if you put all your salary into it and your wealth into and then some unexpected money also into it and mix it well . then all your wealth is one and only one , any spending you do will come out of it . If you want to spend on something you eventually do it from this wealth only , not from other things , so no body is commenting on wheather you should spend or not , the only point is how one feels about spending from one source and from another source .

      I hope I understood where was the confusion and put my points. I would appreciate if you can take the discusssion to next level and briefly put your points ? Or some one else can also comment if they wish .


      1. Amit says:

        Hi Manish,

        About Point-1…..
        The statement “spending this unexpected money for enjoyment is prefered over Salary money “….is OK for Sanjay for you and for me as well….

        Hence, I would say the “Though process” of prefering this Unexpected money is pretty Normal / OK and is completely based on this particular “situation”…..

        So I dont agree with your statment “its the same situation”……perhaps its the different suitution …because even if you assume its the same situation as at the end of the day its part of your money (with same purchasing power)…..then what makes/encourage you to spend “this” money (only) at this point of time……..!!

        At the end, what I want to say is….I usally fully agree with all you Blogs
        — Endowment Vs term insurance + ppf + elss”…….
        — bank balance Vs Autosweep + STP
        — a big list….”hats off to you for writting this Blogs and making people aware…….”

        But in this case “Mental accounting”can affect somebody.. …and if its not affecting as per you response (above Point 1”)….why one should even think about it…..!!!


        1. Amit

          I am still not clear why you disagree with me on “its the same situation” . Considering the example I gave to Sanjay in my comment , In both the situation , you are spending Rs 1,000 and its coming out of your Wealth , When I say wealth , I consider salary as my wealth and even a Rs 1000 tax refund too as my wealth , infact it was earliar part of my salary only which I gave in tax (unfortunatly more tax , which resulted in refund) .

          So can you explain why its a different situation at base level ?


          1. Jig says:

            I am not against but just sharing my two cent here. I am also a regular reader of You manish and liked your all blogs.

            It looks like you are talking about mentally accounting but it is taken as Wise investment.
            What i understood , Its a different situation as the person never expect those money as wealth or he will get some money to add in his wealth till he will get in his hands. so whatever the financial planning or expense he set already. ( or may be running short of money for some expense). As soon as he recieved any loose money he tried to get that work done( for enjoyment, for purchasing or any other thing which he has not planned or not decided ).

            so wats wrong in that case?

            this is worth talking when the person has already planned his tax refund money and at the same time it will not become as loose money.

            just my thought.


            1. Jig

              Again , the problem is not using the money in some unplanned investment or joy. One can do it and should do , I am talking about the behaviour of a person in two cases where in one case the money comes from one source and in other case it comes from the other source. People behave differently in both cases and thats the only point here .

              I will clarify more on this , suppose a person needs to buy something worth Rs 1,000 which is not that important and does not add much value in his life , now a person will not spend normally on that thing from his hard earned money . But if he gets Rs 1,000 back from some friend whom he had loaned he money long back and forget , in this case the same Rs 1,000 which is part of his wealth always seems to be cheap and worth spending, so a person behaves in two different ways in two conditions which is purely psycological but the effect is same in both .

              There is no restriction on the enjoyment one has to do or where one has to spend . It can be anything .


            2. Amit says:

              Oooo oo o….
              Now i am with you… I think …i misunderstood you….
              now my thought process goes as follows (correct me if I am wrong)…

              It may be different situation…returned money from friend, tax refund…etc.. but at the end of the need to understood its same “your hard earned money”…only changed thing is it has came without any plan or by some other means……so defintely if one wants he can spent it for enjoyment…
              But the important thing is…”one should give same thought which he/she would have given while spending it as /from regular salary”…

              Am i right Manish…..


            3. Correct 🙂 . You got it , some people are thinking that we are against spending for enjoyment in life , we are not ! .

              the only thing is , dont think differently based on from where the money has comes , at the end , its MONEY !


            4. Sanjay Singhaniya says:

              I think my point is being missed. Suppose a salaried person ABC is financially literate and has planned his finances well. His monthly income is his salary. Now assume he gets a big amount in bonus – which he was not expecting it to be as big, it is not his regular income so he decides to buy, say, a plasma TV.
              The point I am making is if it is not accounted in your regular cash-flow then why not spend it? or part of it?

              I understand Manish’s point of rational decision making with the bonus money but wondering why should ABC save even a penny of it as he has already done a good financial planning.

            5. Sanjay

              ok , your point well taken , but you are again not looking at what mental accounting says , So if that money which was going to come from bonus , does not come from bonus and instead come from other source like after selling a plot of land (unexpected) , will the behaviour still be same , If its same , then I would say the decision of buy a plasma was driven by “requirement” which is fine . if you see at deep level the you are getting some money and your wealth is going up and you are taking a part of it to buy something . Now from where it has come, if you dont know .

              In the same example , suppose you got the bonus money , but you were not told that “Its bonus” , you were not told why you got it , it can be part of your salary or anything else , but you dont know , and still one buy’s that plasma , i would say that the person was then rational in his decision .


            6. Sanjay Singhaniya says:

              I am talking about some unexpected money (for example a big bonus) as opposed to labeling assured incomes like “encashment of leaves” as free-money.

  28. Marshal says:

    very good insight manish, thanks for sharing.
    another example is credit card / debit card / membership of shoppers stop, lifestyle etc points. Many of us don’t redeem those points considering its a waste of time.

    1. Marshal

      Hmm yea .. that also comes under Mental accounting 🙂 . good point


  29. raju says:

    Nice article Manish,
    Can be related everybody.


    1. Raju

      Thanks for the comment ,any incident from your personal life ?


      1. Ashwin says:

        Nice article Manish!

        What is your view on groupon sites like snapdeal, mydala, and many others?

        I think these sites are very instrumental in exploiting a certain aspect of behavioral finance. I have noticed people (myself included) end up buying stuff on these sites they wouldn’t have normally bought otherwise. By time limiting the deals (in addition to other tricks), I think these sites are trying to create a feeling of artificial scarcity and a sense of induced urgency to force people into spending.

        1. Ashwin

          Yea , nice point . I agree with you on this . I would say they are exploiting another aspect of Bahavioural finance called “Anchoring” , not exactly “Mental accounting” . We compare the new price with the new price and consider it cheaper and fall for it . Good point


  30. Amit says:


    I read almost every article you write. Many a times i guess whats comming up in next few lines. In short i get what you intend to say without reading every word of it.

    This is one article i read every word. I must say it is SUPERB.

    1. Amit

      Nice to hear that from you . Dont you read most of the articles till end ? There are many things in between the articles most of the times. So i would suggest going deep into it . What do you think ?

      Also does Mental Accounting apply in your personal life or not ? Any examples or experiences ?


  31. Ajay says:

    Good one Manish. I remember reading a similar article on rediff(?) earlier. Did you happen to write that as well ?
    I like the last example. Probably I would have reacted in a similar way like your client reacted. Hard cash is after all hard cash and no one wants to part away with it :). reminds me of the movie Lord of the Rings 🙂

    1. Ajay

      No , i didnt write any article on rediff . Also as you mentioned Hard cash is hard cash , but once you get money from somewhere which is unexpected , the same moment it also becomes hard cash , but still that hard cash is different than the old hard cash, which is where mental accounting comes into the scene 🙂

      Do you agree ?


  32. Sanchay says:


    Good Article, really makes sense, after all money is money.

    Want to make a point though, lets say I have a loan amounting 1,00,000/-. Paying EMI say 6,000/- @ 16%.

    Have savings of 1,00,000/-, as emergency fund. If I pre-pay the loan, and next day I have some emergency (medical!!!) , I don’t have any money.

    Hence, I think its better to keep emergency funds away from all these savings.

    Any comments?

    1. Sanchay

      yes , agree .. You dont have to use the emergency money in paying the loan , let it go . the only idea i wanted to give was how a person thinks differently in two situations . You should keep the emergency money as it is .


      1. Amit says:

        Hi Manish,
        I would like elaborate Sanchay’s question bit more,

        You say “he should keep the emergency money as it is”

        So in reality , He has to call this Emergny Fund as safe (though he is getting less out of it)… but as per your point 4…this situation should be termed as “overall earning less”…..

        Isn’t it a bit contradictory,
        (May be I am confusing somewhere)…….. 🙁
        Coud you please help


        1. Amit

          Actually this rule of seeing your total wealth as one should not be applied to emergency fund as it has it purpose is different , Its purpose is secondary to earn and primary for liquidity . So using that money to pay off a loan does not serves the purpose itself . Howev point 4 is mainly for investments which we do to earn return in long term , like FD’s , Debt funds or normal saving bank cash (not part of emergency fund) .

          I hope you understand my point now ?


          1. ganesh says:

            dear amit,

            i think there is no emergency fund for medical emergency fund, for medical emergency only thing is medical insuence !


  33. Raj says:

    Perfectly agree to mental accounting. But isn’t it joy to give it a shot once in a while ‘just for the pleasure of being rich’ 🙂

    1. “Give a shot” to what ? I didnt understand ?

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