Side Accounts: What Are They, How to Use Them, and a Psychological Trick

By Jason Hull
Hull Financial Planning

“We all need money, but there are degrees of desperation.”
--Anthony Burgess

How many times have the holidays rolled around and seemingly snuck up on you, catching you unaware, and unprepared for the gift-giving season? Rather than disappoint the kids, you tap into the emergency fund, justifying this by saying that it’s only one time, and if the kids don’t get presents, then it will TRULY be an emergency. Or, worse yet, you tell yourself, correctly, that it’s not really an emergency, and you whip out the credit cards instead, promising to yourself to have them paid off by March, or June, or next holiday season.

It’s not just holidays that are the trigger for these reactions. It could be a vacation, the insurance payment that comes every six months, property taxes, replacing the worn out carpet, and on and on. All of these payments are ones that you know that you’re going to have to make eventually, but instead of preparing for them, you find yourself to find the money to pay for them.

What’s happening here? Why are we always surprised when things we know will happen each year roll around?

What is happening is that there is a battle going on inside your mind. In one corner, you have your rational, thinking self, powered by the prefrontal cortex. It’s the part of your brain which makes you engage in responsible adult behavior, like living within your means and setting aside money for a rainy day and for retirement investing. It also makes you choose broccoli over chocolate cake at dinner.

There’s another part of the brain called the limbic system, or, as I like to call it, Monkey Brain. Monkey Brain served us well back in the good old days when we were hunting mammoths and didn’t know how to farm, as it honed our survival instincts. It treated everything as if there were no tomorrow because, usually, chances weren’t fantastic that there would be a tomorrow.

However, Monkey Brain never adapted to today’s realities, so now, he continues to tell you to seize the day, for tomorrow we die, when that’s very unlikely to happen. He works in the subconscious, so Monkey Brain’s thoughts and desires often come out as psychological biases.

Rational, thinking you knows that there are other bills that have to be paid which don’t always show up in the monthly budget, such as the holiday season. Monkey Brain doesn’t want to set aside money for gifts because the holidays are such...a...long...time from now, and he’d rather you go out and buy the 183” flat screen TV right now so that you can start enjoying the man cave as soon as you can get that TV installed.

To convince you to spend now and not save for later, you get exposed to two psychological effects. The first is called hyperbolic discounting, which means that we tend to discount future pleasure in exchange for pleasure right now. If asked which they’d prefer, $100 now or $110 in a year, many people will say $100 now because, hey, it’s now! That’s hyperbolic discounting in action.

The second effect is called mental accounting. Mental accounting simply means that you, in your head, put different money into different buckets rather than visualizing all of your money as being one single chunk. To prevent you from filling up the “save for later” bucket, Monkey Brain will come up with as many “needs” (by convincing you that many of your “wants” are actually “needs”) as he can which have to be taken care of now.

Thus, even though you know that the holidays will roll around every year, Monkey Brain assaults you with different psychological attacks to convince you that you don’t need to save now for the holidays, which are several months down the road.

Stay tuned for part 2 of this article…

How do you convince Monkey Brain to save for the holidays?

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Jason Hull is a candidate for the CFP(R) Board's certification, is a Series 65 securities license holder, owns Hull Financial Planning, a CVE-certified service-disabled veteran-owned small business, and is an Army veteran. He is also a personal finance columnist for U.S. News & World Report.

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