Mental Accounting

The habit of treating money differently depending on its source or intended use, rather than as fungible.

Mental accounting describes how people mentally sort money into separate buckets, a bonus, rent money, vacation savings, and treat each bucket by different rules, even though money is fungible and one dollar spends exactly like any other. This can lead to irrational choices, like carrying high-interest debt while keeping a separate low-interest savings account untouched.

Mental accounting explained why she kept her tax refund in a separate 'fun money' account instead of paying down her credit card balance.