Mental Accounting: The Psychology Behind Smarter Money Choices

Ever wondered why you splurge a tax refund on dinner out but scrimp on groceries, even though it’s all just money? This quirk isn’t just a personal oddity—it’s a textbook example of mental accounting, a concept from behavioural economics that’s reshaping how Australians think about their finances in 2025. Understanding mental accounting can be the difference between sticking to your budget and wondering where your pay cheque went.

What Is Mental Accounting?

Mental accounting is the psychological process where we categorise, compartmentalise, and treat money differently based on its source or intended use. Nobel Prize-winning economist Richard Thaler coined the term, and the principle has since been embraced by financial planners, banks, and even the ATO in policy design.

Instead of viewing all money as interchangeable, we create invisible ‘buckets’: one for bills, another for splurges, a third for savings. While this can help us keep track, it also leads to irrational decisions—like blowing a windfall while pinching pennies elsewhere.

• Tax refunds often feel like ‘bonus money’, leading to riskier spending.

• People might treat a work bonus differently from their regular salary, even when both add to their net wealth.

• Using a credit card for a holiday fund but paying cash for groceries can influence how much we spend on each.

Mental Accounting in the Australian Context

In 2025, mental accounting is shaping the way Australians manage rising costs of living, adapt to policy changes, and set financial goals. Recent government reforms—like tweaks to superannuation access, the Stage 3 tax cuts, and energy rebate programs—have introduced new categories for how Aussies mentally ‘bucket’ their money.

For example, with the 2025 Stage 3 tax cuts, many households will see extra cash in their pay packets. But rather than rolling this into general savings, some are earmarking it for specific goals: home deposits, travel, or home energy upgrades, encouraged by targeted state and federal incentives. This segmentation can help with goal achievement but also risks underutilising money if ‘buckets’ become too rigid.

Consider the impact of the 2025 energy rebate. Some families treat this rebate as ‘free money’ to spend on extras, while others add it to their household utility fund, reducing financial stress. The difference? Mental accounting at work.

Harnessing Mental Accounting for Better Financial Outcomes

Mental accounting isn’t inherently good or bad—it’s a tool. Here’s how to use it to your advantage in 2025:

• Create purposeful buckets: Automate transfers to separate accounts for bills, emergency funds, and savings goals. Make sure these buckets reflect your real priorities—not just mental shortcuts.

• Challenge your categories: When you get a windfall (tax refund, bonus), ask: is this really ‘fun money’, or could it fast-track my mortgage or super?

• Leverage policy changes: If you benefit from the new Stage 3 tax cuts or rebates, set up a plan before the cash lands. A little pre-commitment can trump impulse spending.

• Use mental accounting to curb temptation: If you tend to overspend on tap-and-go, set a strict ‘fun’ budget in a separate debit account. When it’s empty, you’re done for the week.

Case in point: A Sydney couple redirected their 2025 tax cut into a high-interest savings account labelled ‘Future Home.’ By mentally walling off this cash, they avoided frittering it away and hit their deposit target six months early.

Common Mental Accounting Pitfalls—and How to Avoid Them

Mental accounting can trip us up when:

• We hoard gift cards or loyalty points, waiting for a ‘special’ purchase, while ignoring everyday needs.

• We underfund essentials because we’ve labelled money as ‘untouchable’ (think: holiday savings growing while bills go unpaid).

• We justify splurges from a windfall but cut corners on important expenses.

The fix? Regularly review your categories, combine buckets when it makes sense, and remember: all money has the same value, no matter its source.

The Takeaway: Use Your Mind’s Money Tricks for Good

In a world where financial choices are multiplying, understanding your own mental accounting habits can transform the way you budget, save, and spend. With a little awareness and a few smart strategies, you can turn this psychological quirk into a powerful tool for financial wellbeing.