Why do people not pay off high-interest credit card debt even if they have money in the bank? Why would they walk five blocks to save $25? Or not make the trip?
The answer lies in the phenomenon known as mental accounting, explains Gary Belsky, a behavioral finance expert who wrote the book Why Smart People Make Big Money Mistakes…and How to Fix Them. Mental accounting is the practice of placing a different value on some dollars than we do on other dollars, based on how a person gets that money or is spending that money. Mental accounting, says Belsky, affects how hard we work (or don’t work) to save money, and why we sometimes place outsize importance on money in the bank.