We all do it. We divide our money into buckets, physically or mentally for special purposes. There are buckets that are specifically defined by a financial structure, such as a mortgage or a 529 college savings fund. And then there are the other buckets that we mentally create to help drive our own behaviors. Sometimes this is a good thing, and sometimes it’s bad. What do you do, and is it helping or hindering your saving efforts?
We might have a vacation fund, and an emergency fund for unexpected bills that life throws our way. Sometimes, if we didn’t segregate special pockets of money, we feel like it would never be saved. And when it starts accumulating, it gives us satisfaction and hope, encouraging us to put more in. This is a positive side of what we call mental accounting – separating our money into buckets.
Do Buckets Cost You Money?
Now here’s the other side of the coin. Are you tucking money aside in an account, and perhaps earning 1% on that money while you carry balances on your credit cards or a car loan? Credit card interest is one of the highest interest percentages an individual can face. So it is good practice to pay your credit cards off monthly, or as quickly as possible to avoid accumulating high interest. Otherwise, your mental accounting may be costing you money. Stay tuned for more on mental accounting.. because it's never this simple.
Carrie Rattle is a Principal at BehavioralCents.com, a web site for women focused on the mind and money behaviors. She has worked in the financial services industry for 20+ years and hopes to inspire women to better prepare themselves for financial independence. Thoughts always welcome: email@example.com.