Anyone else into "illogical mental accounting tricks"? Pitfalls? Facepunches?

[ctuser1]

I'm big into "mental accounting tricks".

I do know - logically - that money is fungible and buckets really don't matter. Somehow, however, I feel totally lost unless I have neat buckets of money piled up for specific purposes. This used to conflict with my wife earlier, she prefers a very different approach to money ("a giant pile", "fungible"). However, she realized that drives me crazy, didn't push the fight too far, and largely left me alone to manage long term finances and investments for both of us.

I have a separate "investment" accounts earmarked for:
1. home maintenance
2. Buying a car
3. Kids college.

I feel a visceral reaction if these boundaries are ever tampered with. I remember an exchange 11 years ago with my wife:
W: Why the f*** did you pay $87 finance charges on CC this month?
Me: We didn't have money in checking account.
W: Well, take it from this account X.
Me: You WANT ME TO TAKE MONEY FROM KIDS COLLEGE FUND???!!! To pay for eating out???!!!
Note: We didn't have kids out of my wife's tummy yet. She was pregnant with our first one at this time.
....
...

I guess you can predict how the rest of the interaction went.
She largely compromised on this and lets me handle all of our "long term finances" after a few clashes for the first few years.

Q1:
What are the "real" costs, if any, with my approach? Any opportunity costs?
Note: I already know about the occasional "finance charges" I pay on CC. I've paid, maybe, $500 in those fees in the last 10 years.

Q2:
Anyone else with such illogical bucketing mindset. Any tips? tricks? cool stories? supporting words?

[kitty_boos]

I would go apeshit too about allowing an $87 finance charge to happen BUT I'm also very much like you in that our savings is bucketed...on paper.  I do our finances as husband has no interest.

Actual invested money doesn't get touched but our amount of what I call "base" savings that'll be used for things in the too short term to bother with investing it, is actually in a "giant pile" savings account.  On paper I have that giant pile separated and earmarked for several different things. 
If we drew up short for a credit card payment or whatever reason, I'd pull from one of the "piles" but have it noted and I pay it back.

[havregryn]

I have this problem. I am obsessed with planning and budgeting everything and I get super uneasy if something spills over in a way I did not anticipate. Like, if I end up budgeting1000€ for x and 1000€ for y and then end up spending 900 on each, that is great...but if we accidentally ended up spending 1200€ on x and 600€ on Y I would be super upset.    The same amount of money would go out but I would see the scenario B as some kind of terrible failure at life and I'd spend weeks questioning what happened on the x front without ever stopping to appreciate the y part.
So similar with savings, if I earmarked something for X, spending it on Y would make my head explode.
No advice as I obviously don't know how to break out of this, but you're not alone.

[BikeFanatic]

I am on your wifes side, to me it seems that you keep the budget really tight and maximize probably money toward investments, so occasionally you are short or have to worry about paying a bill. That is a fine philosophy and I am not saying you are wrong it is just the way you do things.

I do not have the most efficient way of managing money I over cash flow and will not invest unless I have ten K of cash at all times. so that I can always pay the bills and not pay fees or interest.  This too can be problematic especailly as my wife does the same. We differ on many things and fight about the spending at times however we dont budget much and we both like a cash cushion so we can auto pay as opppose to micro  manage the cash.

Is it a control issue for you? I know I am transitioning to letting my wife take over paying all the bills and doing the accounting ( she is better at it than I am in many ways) And it is dificult for me to let go. But I m trying to give her free reign with minimal supervision. We each manage our own investments at this time even though we have been together for 20 years!

[Metalcat]

I understand doing this, but I do not understand being irrational and fighting with your wife about it when she's being rational.

You could keep things just as compartmentalized by loaning different accounts money, so if you took from one pile for another, you account that the receiving pile owes a debt. Hell, you could charge yourself interest if you wanted to.

[PoutineLover]

I think you don't have enough of a buffer if you end up paying finance charges. I don't keep a lot in my chequing, but I do keep a few thousand in what I consider "short-term savings" or "emergency fund" which I dip into when something more expensive comes up, then I refill it when I get paid again. I would rather borrow from that than pay interest, in fact I've never paid interest on a credit card and things would have to be pretty dire for that to ever happen.
I do have different buckets for the money, there's a few different accounts with different purposes, and when I get paid every dollar has a place to go, but I'd rather owe myself extra money to another account than waste it by paying a finance charge. I'd suggest making yourself an "overflow bucket" in a savings account that gains some small interest with no withdrawal penalties, and use that as needed, which allows you to be in control but not lose anything.

[BlueHouse]

I think in a similar way, but I use one account (checking) as my run-through fund. 
Every payment and every transfer of funds MUST go through my checking account.  So if I'm moving funds from a high-interest savings to Vanguard brokerage, I first move it to checking, then transfer to VG.   That makes it so I only have to keep one account with enough margin and it makes it incredibly simple to track all my spending.  I use quicken and use that program to create categories, so no problem there. 

I have another "mental accounting trick" and it's that I flat-out refuse to pay any bank any fee for any reason.  Even if it's my own error, I get on the phone and request a refund.  I have spent hours on the phone over a $3 charge.  I know it's not logical to spend so much time for such a small payback, but it's the principle to me.  Once I allow bank charges, interest, etc, then the floodgates will open and I might fall back into the bad habit of allowing debt to accumulate. 

[eyesonthehorizon]

It sounds like a lot of work, but that itself gives me an idea.

Have you considered using a spreadsheet to bucket out the cash virtually? If you've got the personal control to not overspend, I can see appeal in making a pie or bar chart showing the amounts attributable to each cause; update the numbers once a month or once a pay period and you have a way of tracking that doesn't necessitate finding yourself with CC interest over what sounds like no more than a timing problem.

I lean toward money as fungible, but sometimes have to break out a specific amount mentally with a pre-commitment to get myself to comfortably spend on legitimate wants within my means.

[nereo]

Interesting discussion.
I’ve always been of the “money is fungible, it’s just one big pile” mindset.  However, recently my SO took a job which involves a LOT of driving for which we are reimbursed mileage.  We want to eventually replace our current car with a plug-in, so we’ve set up an alternative account for the mileage reimbursements.  I figure it’ll take ~18 months for it to grow a point where we can buy a used Volt with cash.

Spouse definitely likes segregating money into piles for specific purposes.  She also likes to budget whereas I like to ask of each purchase “is this something we need/want” and send accordingly.  As long as we keep the lines of communication open it seems to work out fine.

[Omy]

I like buckets, but life isn't that neat - and there's NO way I would acrue cc fees to keep my buckets from splashing into each other a bit. We use a spreadsheet to create virtual buckets...like eyesonthehorizon suggests.

[Cpa Cat]

I understand having a budget with categories and sticking to it, but paying a finance charge when being over budget in one category seems extreme. As you've mentioned, though, the finance charge is uncommon in your case.

But it is a particularly common pitfall of individuals who think like you. I've frequently seen clients fund 529 accounts while putting their back taxes on installment agreement. Going into debt in order to maintain certain rigidly defined buckets is a pretty common thing. The most rigid buckets are the ones that parents have defined for children.

I've seen parents prioritize kids' cars, kids' parking tickets, 529s, kids' sports, kids' private school over every aspect of financial life, resulting in credit card debt, tax debt, and under-funded retirement.

The problem with rigid buckets is one of priority. All buckets have the same level of priority, emotionally, and therefore no bucket can be compromised, even if it results in a better financial picture. The bucket system tends to reinforce financially unhealthy habits, like financing your children's luxuries before paying of debt. I've watched someone put $100/mo into a 529 plan while paying $100/mo in credit card interest. But in the bucket system it makes sense - you don't take from the college education bucket to put more money in the credit card debt repayment bucket.

[nereo]

Interesting perspective @Cpa Cat  - In a much milder way we’re somewhat guilty of this; we set up a 529 when our daughter was born and make automatic contributions come hell or high water. The amount are rather small ($100/mo) but we’re doing this even though we aren’t maxing out our 403(b) and paying a (minor) tax penalty because of it.  I know the logical thing to do is to ignore the 529 entirely until we can max out our 403(b), but there is just so much pressure to have and fund a ‘dedicated college account’ that we’ve made that concession.

Hopefully by 2020 it will be a moot point, as new income prospects might allow us to fill that tax-advantaged headspace for the first time ever.

[Mrs. D.]

This was a sticking point between DH and me at the beginning of our marriage. I've always been a buckets person, coming from a family of bucket savers. My parents have separate accounts for cars, college, house, vacation, etc. My husband prefers one big pile. I've slowly transitioned to one big pile of cash and I think it makes things simpler. Our EF is 20K so when we see $21,500 in the checking account it means we have $1500 to work with. It's taken a lot of practice to switch to this mindset but it's doable. It does require a certain discipline which didn't come naturally to me. I spend less mental energy doing accounting tricks, which is good because I don't have a lot of mental energy to spare these days.

[firestarter2018]

I really like YNAB for this reason -- it makes it easy to set up "virtual buckets" for all manner of savings goals, sinking funds, and day-to-day expenses, but in reality all the money is sitting in your one big checking account (obviously there are other ways to configure YNAB but this is the most common).  The mental accounting thing is important for me too -- if we run over in groceries for the month, I'm ok shifting some money from the Restaurants bucket, but definitely not from the "Annual healthcare deductible" savings bucket. I also occasionally hide some YNAB categories if they're filling up with cash month over month and I don't want to even see them lest I be tempted to pilfer a few bucks for some stupid reason. It's trivial to unhide them whenever you need to see the balance.

But yeah, at the end of the day...money's fungible, and an $87 finance charge is bananas.

[Laura33]

I think everyone has their ideas about how things are "supposed" to be, and the issue comes up when spouses' "supposed to"s conflict.  I used to use Quicken by setting up one fake account called "budget," and then just writing all of the income and expenses to that account.  Then I married an engineer, who thought that was, and I quote, "stupid."*  So he set everything up with all of our physical accounts being different accounts in Quicken, so I had to write in all of the expenses in the "right" account, and then do transfers between the accounts for things like paying CC bills, etc.  It was absolutely more accurate.  But it was also much more of a hassle, and I stopped doing it.  So there's one good way not to handle the mismatch. . . .

My own personal quirks:  I had to set up a budget with three levels of savings:  (1) I set my total budget at less than I actually earned; (2) I set up a specific category for "savings"; and (3) every month, I played a mental game with myself to come in under budget in all of the other categories.  This was fairly illogical -- I mean, I was happier if I was $25 under in all four categories than if I was $200 under in one -- but it motivated me, so it served its purpose.

My current truly illogical quirk:  I like having a giant pile o'cash in my checking account, so that I never have to worry about bouncing a check or having a big monthly bill clear us out.  I never did this when I ran Quicken my way, but once I stopped reliably inputting my expenses into DH's version, I started to fret about not knowing what we had and what was coming.  So we just let the checking account pile up as a secondary emergency fund.  I know that has cost us in terms of lost investment earnings, but it manages my illogical emotional needs, so whatever.

*Awww, our first fight.  How cute.

[ctuser1]

Thanks a lot for the responses. Please keep them coming.

I realize that I have some fairly big irrational habits. I am trying to get feedback from other people in any form possible (from "I do it too, it's no biggie", to "you are totally stupid, and completely beyond redemption, for doing that", to "I did it, and changed. Here's how you can do it too").

I'm trying my best to stay away from posting on this thread. I don't want to color and bias the discussion by participating.

I'd really appreciate your thoughts on this, however! I find unvarnished external opinion to be one of the most useful ways to break through my formidable mental barrier of unknown unknowns.

[englishteacheralex]

We have a list of literal separate bank accounts that are buckets for various categories of savings (I think the technical term is "sinking funds"). I do transfers from the checking account every month to and from the sinking fund accounts.

One of those accounts is the "slush fund" account. We plan our budget according to what we think is a reasonable monthly amount to set aside for the various things, and then the extra goes to "slush". When we go over in any particular budget category that month, it comes out of "slush".

I've been doing this since before I met my husband, and when we got married and I showed him my system, he thought it was a little fussy and wondered why the whole thing wasn't just "slush". But for me, I'm so stingy that if I didn't do my accounting this way I would never think it was ok to spend money on a haircut or clothes and I would try to build up "slush" into as giant a pile as possible. This way I kind of get that little kid allowance feeling that $20 is a reasonable monthly amount to set aside for a haircut or whatever and it frees me up mentally to enjoy those things when the sinking fund has enough in it for a splurge.

It also allows us to keep a watchful eye on the household spending and never stress when things like new tires or a new dishwasher come up. We know how much we can spend on stuff like that without jeopardizing other savings goals.

Over spending in a particular category for a month does not stress me out. It's basically a monthly occurrence that something goes over. We take it out of "slush" and it isn't a big deal, because "slush" has a wide enough margin that we exercise our frugality muscles long before we'd exhaust "slush".

[Laura33]

We have a list of literal separate bank accounts that are buckets for various categories of savings (I think the technical term is "sinking funds"). I do transfers from the checking account every month to and from the sinking fund accounts.

One of those accounts is the "slush fund" account. We plan our budget according to what we think is a reasonable monthly amount to set aside for the various things, and then the extra goes to "slush". When we go over in any particular budget category that month, it comes out of "slush".

We did a version of this, too, for larger periodic expenses.  We had one account that was an EF, and then another account that got the monthly contributions for vacations, insurance premiums, car savings, and all of that sort of stuff.  There was no real reason why it couldn't have all been in one place, but I was very averse to the idea of dipping into my emergency fund, so I pretty much had to keep it in a separate place so I'd feel it was ok to use it when those expenses came up.  (And then when they did, we tried to pay out of regular cash flow anyway -- but that's just me and my "must come in under budget" mentality acting up).

[Jennifury]

If you are really committed to your buckets approach maybe you should consider starting a new bucket labeled "unexpected overages" or something. You could contribute x every month and quarterly take any unused portion over a baseline y and redistribute it to the most attractive other bucket.

Personally I stopped really budgeting after I became confident with our families spending habits and financial strategy. We have different buckets that are auto invested every month but those are really just about tax optimization. Like I mentioned above, quarterly I skim the general account for what's not been spent and put it where ever is speaking to me at the moment, usually the taxable investment account or mortgage.

[Phenix]

I really like YNAB for this reason -- it makes it easy to set up "virtual buckets" for all manner of savings goals, sinking funds, and day-to-day expenses, but in reality all the money is sitting in your one big checking account (obviously there are other ways to configure YNAB but this is the most common).  The mental accounting thing is important for me too -- if we run over in groceries for the month, I'm ok shifting some money from the Restaurants bucket, but definitely not from the "Annual healthcare deductible" savings bucket. I also occasionally hide some YNAB categories if they're filling up with cash month over month and I don't want to even see them lest I be tempted to pilfer a few bucks for some stupid reason. It's trivial to unhide them whenever you need to see the balance.

But yeah, at the end of the day...money's fungible, and an $87 finance charge is bananas.

+1 for YNAB

Been using YNAB going on 3 years now and I love it.  I feel we have a much clearer picture of what our money is set aside for (annual insurance payments, property taxes, home maintenance, car maintenance, etc.), without having to have our money in seperate bank accounts.  I was using a spreadsheet in the past which worked, but wasn't as easy to keep up to date. 

[DadJokes]

For items that are sinking funds, we put that money in the same account as our emergency fund. It makes me less likely to spend the money, since I like seeing that larger balance in the savings account. Necessities, like home and vehicle maintenance, are still paid for, but wants get additional scrutiny.

[secondcor521]

In working my way up to FIRE, I had four large segregated items:

1.  My kids' college.
2.  My house/mortgage.
3.  Child support.
4.  My FIRE stash.

I calculated that I would FIRE when some of my kids were in college and others were still requiring me to pay child support.  If I paid on my mortgage according to schedule, I'd still also have a mortgage at that point.

Because those non-FIRE items were large chunks of my budget, I was very concerned that I would do the FIRE math incorrectly and leave my job based on a broken Excel spreadsheet, then discover that I didn't actually have enough.

So I did the following accounting / bucketing things:

1.  I set up a separate "College" spreadsheet that calculated how much I had in the kids' college funds, how many years away their college would be, how much I had budgeted to provide, how much the costs would grow in the meantime, how much the money would grow in the meantime, etc.  I then figured out how much underfunded I was.  I then put money into those accounts until they were fully funded.  So those accounts were for their college, and the other accounts were for other things.

2.  With my mortgage, I just put everything extra on it until it was paid off.  Then I could just look at my remaining expenses and work to fund 25x those forever, instead of 25x of those plus the mortgage balance.  This probably wasn't the most efficient way of getting to FIRE, as I had a low rate mortgage and reasonably high risk tolerance for investing.  Again, it simplified things to keep track of, because I didn't have to deal with escrow accounts, tax deductions, mortgage payments, etc.

3.  With my child support, what I ended up doing in my retirement spreadsheet was subtracting the NPV of my remaining payments from my FIRE stash amount.  I could have done it like my mortgage, but in the case of child support it doesn't work as well to try to prepay several years.  When I put my numbers into cFIREsim or Firecalc I put in my current expenses including child support, then put in an offset amount for the reduced spending for next year when it will end.

I did FIRE 3 years ago, and things have worked out well so far.  I did make one major error in my "college" spreadsheet, but that error resulted in over funding their accounts.  So I've decided to distribute the extra to them as they graduate from college.