Mental Accounting

Personal finance or literacy is the most neglected area of ​​our education system, Generally, people do not bother to learn, but the reality is that money always matters and personal finance is a very important affair for every person on this planet. Dollars and Sense is a well-written book about this subject  by Dan Arelli and Jeff Krasler.

This article topic is inspired by this book, while reading this book, I thought that it requires everyone to know, especially my family, friends and acquaintances. While many points can be discussed from this book, Mental Accounting is the most fascinating subject to discuss because it is the truth in my life and I have observed that  other people follow similar practices. After this knowledge, I have decided to eradicate these habits. Although The idea of Mental Accounting was first introduced by Dick Thaler.

While there are many psychology of pricing which business and markets always try on customer in the form of discounts, coupons, deals and deals. The truth is that the business never tolerates losses , Sometimes losses destroy business and business people. Subsequently, why do markets practice such ideas and customers also prefer such schemes? Such questions force us to think about such schemes and this book disclose such mysteries.

Most people do not believe in real-time accounting and they always calculate their expenses, plans and budgets mentally. They believe that Book keeping is time consuming and useless activities. Sometimes Families and societies environment prevent to record of expense. But in our cultures, wealth is known as artha (अर्थ) and has two meanings, the first being money (wealth) and the second being the importance of life. Both are required to hold accounting, review and investment according to previous knowledge and experiences and most important truth is that Money always matters, Otherwise the Golden Lanka is not mentioned in the Ramayana nor the palaces of Indraprastha in the Mahabharata.

For the Budget, expense plan and evaluation of true price or value any products, people always believe in their memory power, cognitive understanding, and rational thinking. While people formulate their own financial rules and practices in their personal life.  but flaw of such accounting is that humans are emotional creatures which always  drive by it. No matter how strong a man is, but he cannot always be cognitive and logical. 

Mental accounting does not work in periods of real-time complexity and pressures. The author gives many examples of how financial rules are broken in such accounting and fits their own logical interpretation and sometimes we cook up stories to fit the explanation. The truth is that our individual mental accounting rules are neither specific nor strictly enforced. They often exist as vaguely sophisticated ideas in our needs, so it is easy to find loopholes when we need or want to find them. Perhaps the most common way, we cheat on our mental accounting is the way we think and think wrong about time. In particular, the time interval between payment for an item and its consumption.

In essence, Mental Accounting works perfectly in some scenarios but not always. Money is most important affair in everyone's life, therefore it needs to proper record , evaluation, review and investment. At last I want to share Robert Kiyosaki's Quotes:

The word accounting comes from the word accountability. if you are going to be rich, you need to be accountable for your Money.