Official 31 Task 3

Mental Accounting

Although they may not realize it, people do not always manage their money in responsible way. In their minds, people tend to divide the money into different categories as if they were putting it into separate mental bank accounts. This tendency is known as mental accounting. People mentally store some money in one account to be saved, while they imagine other money being stored in another account from which money can be taken and freely spent. Mental accounting can lead people to spend more money than they should, which can make it difficult for them to save enough money to achieve their long-term goals.

Narrator: Now listen to part of a lecture in a Psychology class.
Professor: So a good example of this is something that happened to me.
When I was younger,
I had an office job and I worked there every day during the week,
and I made a regular salary from that.
But also I worked as a waiter at a restaurant each weekend,
so I made some money from doing that.
Now, around this time, I decided I wanted to buy a house.
So every time I got my regular paycheck from my job at the office,
I'd save as much of the money from it as I could after I bought the basic stuff I needed.
But with the money I made as a waiter,
that was another story.
Somehow, I guessed that money seems separate from the money I earned at my regular job.
So I used the money I made at the restaurant to go out to dinner,
to buy videos or CDS, things I didn't really need.
But the thing is, it ended up taking me a really long time to save up all of the money I needed to buy the house.
And looking back now I realize I could have bought the house a lot sooner,
if only I'd save more of the money I made working at the restaurant.

Using the examples from the professor's lecture, explain the concept of mental accounting.