Mental Accounting: Why We Treat Gift Money and Salary Money Differently

Have you ever found it easier to splurge birthday money than your salary? That’s mental accounting, a concept from behavioural finance. It means we treat money differently based on how we get it. Even though Rs. 1,000 is always Rs. 1,000, our mind doesn’t always see it that way.

• Table of contents

• How mental accounting affects our financial decisions
• Gift vs. salary: Why Rs. 1,000 feels different
• The role of behavioural finance in mental accounting
• Real-life examples of mental accounting
• How to overcome mental accounting bias

How mental accounting affects our financial decisions

Mental accounting can shape our personal finance decisions in surprising ways. For example:

• We might spend a tax refund on luxuries but use our salary only bills.
• We could keep savings in different jars or bank accounts labelled “vacation”, “emergency”, or “rent”.
• We treat winnings or cashbacks as “bonus money” and spend them faster

Gift vs. salary: Why Rs. 1,000 feels different

Let’s say you get Rs. 1,000 as a birthday gift. You might think of it as “extra money” and decide to splurge on a fancy dinner or shopping. But if that same Rs. 1,000 came from your salary, you may hesitate. This is because:

• Gift money feels like a windfall: It doesn't require effort, so we don’t attach rules to it.
• Salary feels earned: We worked hard for it, so we treat it more carefully.

Even though the value is the same, we feel differently and that affects how we use it.

Also Read : What are Behavioural biases in investing?

The role of behavioural finance in mental accounting

Behavioural finance explains why we don’t always make logical money choices. Mental accounting is one of the most common mental shortcuts (or biases) we use.

Instead of seeing money as one big pool, we divide it into mental buckets, each with its own rules. This can make us:

• Overspend in one area while being overly strict in another.
• Ignore better investment opportunities.
• Save less because we think some money is for “fun”.

Real-life examples of mental accounting

• You get Rs. 5,000 as a Diwali bonus and spend it on shopping, but your regular income goes to essentials only.
• You keep emergency funds in a separate account and refuse to touch it, even if you’re overusing a credit card for discretionary expenses.
• You feel fine buying something on impulse using digital wallet cash back, but may not do the same with cash from your salary.

How to overcome mental accounting bias

• Treat all money equally: Whether it’s salary, cashback, or gift, it's still your money.
• Look at your total financial picture: Avoid making decisions based only on where the money came from – see how that expense fits into your overall goals.
• Set clear goals: Have one savings plan for all income types.
• Use tools or apps: Budgeting apps can help you track all funds together.

Also Read: How does investor behaviour impact market conditions?

Conclusion

Mental accounting is a natural part of how we think, but being aware of it can help you make better personal finance decisions. Remember that money doesn’t care where it came from. So, being aware of this bias can help you make more consistent decisions across different sources of income. Gift money vs. salary may feel different, but both of them have the potential to grow over time if invested strategically and can help you reach goals. For personalised planning, consider consulting a financial advisor.

FAQs

What is mental accounting in personal finance?

Mental accounting is how we treat money differently based on its source, use, or purpose, even when its actual value is the same.

Why do people treat gift money differently than salary?

People often see gift money as “extra” or “free”, so they’re more likely to spend it freely.

How does mental accounting affect savings and investment decisions?

It can cause people to ignore good financial opportunities or overspend in some areas, making it harder to build wealth.

Is mental accounting a type of cognitive bias?

Yes, it is a cognitive bias in spending. It shows how emotions and mental shortcuts can lead to illogical financial decisions.

How can I avoid falling into the trap of mental accounting?

Start by treating all money the same, no matter the source. Focus on your overall budget and goals, not just where the money came from.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.