Visit our archive

Christmas is just around the corner and it has gotten me to think more and more about the way that we spend money. It seems that we spend so friviously as a society on gifts and decorations but in the spirit of giving. Since we all view money differently, each person spends different amounts of money depending on many factors but we all cross the same mental crossroads in spending and how we value it.

Money has different values to various people in that they view the value of a dollar differently than others but they also associate money with various activities or accounts. There are two main schools of thought that differentiate between how individuals view their spending. Mental accounting views money as an interchangeable item, that the value of $1 is the value of $1. The basis of behavioral accounting is that people have different valuations and purposes for specific sums of money; for instance the money in their checking account, in their 401K and the money in their wallet. When people track money through mental accounts they tend to guard certain monetary areas more closely. Thus, money in your wallet is there to be spent but money in your 401K is to be saved for retirement and you aren’t to spend it.

This more cognitive, behavioral accounting approach can be a challenge for marketers because people aren’t thinking of their money as a whole. Instead of viewing it as a lump matriculation of cash they are dividing it up for certain activities. This poses a problem for marketers because in the eyes of the consumer, they don’t have as much money to spend. One way to frame the decision making process is through changing the consumer’s viewpoint on the purchase. For instance if the consumer is looking to buy a nice timepiece, they may think of it as a discretionary purchase that would come out of spending money. However as a marketer you could promote the value of the watch as an investment, as many fine timepieces hold value over time. This could shift the consumer’s mental account to include money within their savings account.

It is important to stay vigilant as a consumer because you don’t want to dip into your savings account, which is used for emergencies, to purchase a watch on a whim. We create these mental accounts in an effort to lineate our money so we can leverage our available capital while maintaining reserves that we deem necessary. I feel that many people in our society now take a more cognitive approach to their money and subconsciously create these mental accounts. It is a positive thing because they are able to differentiate between money they can spend and money they should save. Though we spend money in different ways, whether it be hedonic, virtuous or utilitarian purchases, it’s important to track these purchases mentally. The way that we feel about money will impact the way that we spend it. We must avoid pitfalls in our cognitive accounting to ensure that we are being vigilant with our resources… whether that be money, time or energy.

  • Juliana Oct 26, 2012

    Indeed, Accounting principle could be very very diferfent over the world. If you are talking about basic book keeping and debit/credit, asset/liability etc, they may sound the same, but the principle involved is very diferfent. 3+ decades ago, the first generation of international accounting was born til recently that you may have heard about the IFRS, International Financial Reporting Standards coming to America and the world will be standardized in terms of how to do financial reporting with one standard. Long story short, diferfent countries have diferfent standards and certifications (designations). I personally know an experienced certified accountant from London but not recognized as accountant in Canada, due to the diferfent standards of academic and certificate.Keep in mind though, CA is more accepted worldwide than CPA as far as I know, but I could be wrong on this one, so check with the professional accountant association and get the official answer from them directly. Good Luck

  • Name (Required)

  • Email (Required, but not published)

  • Url (Optional)

  • Comment (Required)