Your money problems may be all in your head

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Are you struggling with debt? Are your friends or family finding it hard to make ends meet?

Many people with money problems have a simple explanation – they don’t earn enough.

However, for some people, the problem is caused not by earning too little but by spending too much.

This can be harder to understand, because it has more to do with psychology than dollars and cents.

Mental accounting’ is one reason some people may consistently spend more than they earn, according to Andrew Grant, who is a senior lecturer at the University of Sydney and an expert in behavioural finance.


In theory, a dollar is always worth a dollar. In practice, though, we might attach different values to this dollar depending on how and when it’s earned and spent. This is mental accounting at work.

Mental accounting might lead us to believe:

  • A tax refund is free money – so spending it doesn’t count
  • A credit card purchase only needs to be paid for in ‘the future’ – so we can spend more than if we were using cash
  • Taking out a personal loan to fund a holiday will allow valuable family bonding – so it’s more responsible than a ‘regular’ personal loan
  • Buying a TV in four $250 instalments is much cheaper than paying $1,000 up front – so we can justify upgrading even though our current set is just fine

Dr Grant says the stories people tell themselves about their income and expenses can influence whether or not they live beyond their means.

“A big part of that might be because they can justify it [overspending] to themselves without looking at the rational explanation for it,” he says.

“Or they might see in their own minds that one sort of expense is different from another sort of expense. So housing expenses might be different from consumption expenses or entertainment expenses, and that could lead them to make different decisions in their own mind.”


Dr Grant says our money habits are also influenced by ‘hyperbolic discounting’, which involves attaching less and less value to something the further and further into the future it will occur.

So pocketing 90 cents today might feel more valuable than getting $1.10 tomorrow.

Hyperbolic discounting can affect people’s attitudes to, say, managing a mortgage or planning for retirement, according to Dr Grant.

For example, it might feel pointless to give up this year’s holiday just so you can put some extra money into your home loan – after all, you’ve got 30 years to pay it off. Similarly, why bother salary-sacrificing into your super when retirement is so far into the future?

“People tend to attach a fairly large discount rate to future earnings or future costs compared to present values of earnings and costs – relative to, say, what the market price of these would be.”


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