The Why #7: “Why do people pay $7 for toast at a cafe?”

Question submitted by Lydia, Claremont

Mental Accounting

  1. Where it comes from. Unexpected ‘windfall’ money — be it a one off bonus, a tax return, a government grant or a gift from Aunty June — is spent more liberally than money we earn through our regular jobs.
  2. What it’s for. We tend to put money into separate mental folders; $70 for the holiday fund, $130 for groceries, $200 for a rainy day. Strangely, we do this even if the money we set aside for ‘saving’ ends up costing us, because of the interest we’re racking up on a credit card that we’ve chosen to not pay down.
  3. Category limits. Subconsciously, we place arbitrary thresholds on what we’ll spend on certain things. $240 bed sheets with free shipping? Let’s do it. $190 bed sheets plus $50 postage? You’ve got to be kidding!

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