Posts Tagged ‘accounting’

What Is Your Behavioral Finance?

Wednesday, April 18th, 2018

One thing I have learned during the course of my eighteen years in the financial industry is that a person’s view on money is like a fingerprint; no two views are exactly the same. They may have similar values, they may invest using similar methods but everyone treats money slightly differently from the next person. The question to ask is “What is your Behavioral Finance?”

Here are some of the typical behavioral traits people exhibit when it comes to finances:

a] Mental Accounting

The majority of people prepare a monthly budget and allocate certain parts of their pay cheque to certain bills. This “preparation” is slightly different with mental accounting. Mental accounting is the tendency for people to designate particular money for a specific purpose, without consideration for the big picture in terms of practicality. For example, a person can split their money and treat each portion differently, depending on which “account” it’s in. So, money in a savings account is treated differently than money meant for debt repayment. That is, even if a savings account is paying 1% pa in interest and their car loan is costing 7.5% pa in interest, the money they allocate to each “pot” they deem as equal because each “pot” of money has been designated for a purpose.