Despite how it is spent, a dollar is simply a dollar. Except it’s not. For most people, knowing where a dollar comes from or where it is kept can make the difference in how that particular dollar is spent.
In the 1960s, Michael Landsberger, an economist with the Bank of Israel found that Israelis who were given World War II reparations appeared to expand their savings rate as the amount they were given increased. Individuals who received the greatest amount saved an estimated 77% of their take. Those who received 7% or less of their income spent their entire payments, and more.
How can you tame your urge to spend? By creating a different habit. Trick yourself into a new routine or set aside a specific amount in a bank account designed for spending while you wait to decide what you will do with the money.
Implement Mental Accounting to Prepare for Retirement
The practice of labeling money depending on the source, where it is kept or how it is spent is called mental accounting. Consciously labeling your money can make all the difference in having enough money for retirement or not.
When people spend their inheritance, tax refunds, employee bonuses or monetary gifts, they lose out on the compounding that can occur as a result of holding onto these extra dollars. Alternatively, gripping these dollars too tightly and refraining from investing may eliminate opportunities of future purchasing power.
As a result, individuals can alter their mindset on money management and gain a unique appreciation for every dollar earned by looking at the source, where it is kept and how it is spent.
By James Cornehlsen CFA