A Quick Lesson on How to Think Straight About Your Money so You Can Manage Your Finances Like a Champ

Treat Your “Mental” Money Like It’s “Real” Money

We treat the dollars in our wallets and the dollars in our heads differently.

We put “real” dollars into just one bucket but do the opposite with our “mental” dollars.

But it’s the reverse — there’s only one kind of “mental” dollar and three types of “real” dollars. Let’s get them straight.

“Real” dollars are affected by taxes, liquidity, and duration:

1. A pre-tax dollar is not the same as an after-tax dollar. It’s worth less — you just don’t know by how much yet.

2. A liquid dollar is worth more than an illiquid dollar. Illiquid assets take time to sell, at a negotiated price, and with high transaction costs.

3. A dollar in a depreciating asset like a car is a rapidly shrinking dollar.

“Real” dollars are not identical, but “mental” dollars are.

We THINK:

A dollar is more valuable if it’s earned than if it’s a windfall. A lottery dollar is treated differently than an inherited dollar. A dollar from grandma is not the same as from grandpa. A dollar of debt is “bad.” A dollar in the stock market is “scary.” A savings account buck is “safe.” A dollar borrowed from the bank is not like one borrowed from mom. A dollar saved is worth more than a dollar spent.

These “mental dollar” classifications are all lies we tell ourselves.

It’s ironic that “real” dollars are seen as one thing but aren’t, while “mental dollars” are identical, but we classify them differently, based on emotional baggage. If you want to manage your wealth well, learn how to tell the difference.