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Mental Accounting

Mental accounting is a psychological concept that describes how people categorize and treat money differently based on subjective criteria. For instance, someone might view a tax refund as “extra” money to spend freely, while being more cautious with their salary. This segmentation affects spending and saving behaviors, leading to decisions that may not align with overall financial well-being. Essentially, mental accounting influences how we perceive and manage our finances, impacting everything from budgeting to investing. It highlights our tendency to separate money into different "accounts" in our minds rather than viewing it as a single pool of resources.

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    Mental accounting is a concept in behavioral economics that describes how people categorize and assess their financial decisions. Instead of viewing all money as interchangeable, individuals tend to create separate "accounts" in their minds for different purposes—like spending, saving, or leisure. For example, a person might treat a tax refund as "extra" money to spend on a vacation, while being more frugal with their regular income. This can lead to irrational financial behaviors, as people may make decisions based on these mental categories rather than considering their overall financial situation.