Last week my husband and I hired a painter to put a fresh coat of paint on our hundred year old home. True to form, my husband negotiated a good deal and got the contractor down $600. When he told me he saved this amount of money, he immediately started to brainstorm about how we could spend this “free money.” In my mind, our expenses went down $600. In his mind, we won the lottery and had $600 to spend. We laughed as we talked about our different perspectives and how mental accounting and behavioral finance theory was in play here.

Mental accounting is a concept in behavioral finance that explains how people tend to put money in separate mental buckets related to certain areas of life. This technique is often encouraged by financial advisors as it allows clients to save for retirement or for a big purchase and consider the money off limits. However, money is really just money and it has equal value. Your retirement money, your savings account and your daily checking account really are all in one big bucket when you look at it from a pure monetary standpoint. However, mental accounting which most of us do, allows us to see these separate buckets of cash as different and therefore, the rules we apply to these accounts vary as well.

The $600 in my husband’s mind was “free money” that could be spent elsewhere. However, it really was just an expense we did not incur. Rational financial law dictates that this amount should just not be spent. But when mental accounting and behavioral finance theory is applied an irrational human being like my husband feels wealthier and ready to spend this “savings.”

How do you treat the money you save when you negotiate a deal? Do you consider it money found and get excited about how to spend it? While this makes life exciting, it does not always make rational financial sense.

Kathleen Burns Kingsbury is the author of “How To Give Financial Advice To Women: Attracting and Retaining High-Net-Worth Female Clients” published by McGraw-Hill, 2012. She is the founder of KBK Wealth Connection, and a wealth psychology expert and behavioral change specialist. She teaches financial services professionals how to connect, communicate, and collaborate more effectively with their clients to increase client retention and improve profitability. Her next book:  “How to Give Financial Advice to Couples” will be published in 2013.

Guest Post From Kathleen Fox

Lingering in the shower the other morning, thinking deep thoughts as a way of postponing the inevitable moment of shutting off the nice warm water and stepping out into the cold bathroom, I started pondering ways to make cuts in the budget.

Not my budget. Other peoples’ budgets. It’s so much easier to be frugal with somebody else’s money. Not quite as much fun as spending somebody else’s money, but close.

Anyway, it occurred to me that one of the reasons it’s so hard to reduce spending is the way we react emotionally to being told what we “should” or “must” do.

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Guest Post from Tom Simmons

With few exceptions, when the law forms a part of a fictional narrative, the dynamic tension turns on a very human element. In Law and Order TV episodes, the conflict is between justice and an unsympathetic defendant. In a John Grisham novel, we turn the pages to see if the right side wins.

But the rule of law in our country is supposed to be blind to emotional sympathies. The law is intended to apply to everyone equally, without regard to their social status, the color of their skin, or their faith. The law limiting drivers to 35 miles per hour on LaCrosse Street in Rapid City applies in the same fashion to a poor dark-skinned Muslim with marginal English skills as it does to Governor Dennis Daugaard. In theory at least, both would receive the same exact penalty for driving 42 in a 35-mile per hour zone.

The blindfolded lady holding the scales of justice is the visual image suggesting the impartiality of the law.

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