Wednesday, December 13, 2017

The Art of the Good Life #1 : Mental Accounting and the "Tai Ko Kia" fund.

Let's move onto the next book. This is great book that has so many tools, it is best digested slowly.

Mental Accounting is supposed a bad thing to do in finance because it creates inconsistency in the way we handle money. This happens quite a bit for folks who have inherited money versus earned money.

For most of us normal human beings, inherited and earned money are placed in separate buckets. Earned money belongs to us because of the personal exertion we made to earn that money. Inherited money is a lot more complex, we might just want to preserve it because it is something given to us by a loved one. This is why, when a person develops a margin account, I bet he is more likely to invest his earned money into the margin account. Inherited money may be put into something safer, like a broad based ETF or bonds.

A similar argument can be make for a lot of crypto currency fans who read financial blogs. I acknowledge that cryptos has had a really good year, but it's best to use just your spare change to buy them.

( Ok Ok, I know that many of you are now sitting on a heck of a lot of spare change )

This book views mental accounting as a good thing. We evolved to create mental accounts to protect ourselves from psychological pain.

The author sets aside a sum of money to make donations to charitable organisations every year. When he gets a traffic fine, he will deduct from that account so he does not feel that its cutting into his hard earned money.

Singaporeans can benefit from this idea from instituting a "Tai Ko Kia" fund.

You might ant to consider setting aside perhaps $2000 every year to deal with bad luck like fines or, in my case, when my son decides to break some of my equipment at home. If there is some amount left in your Tai Ko Kia fund after the new year, you can have a Tee Kong Kia barbecue celebration or simply buy more toys for your kids.

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