Many terms we use in Western society today have Latin origins. A case in point is “mushroom”, which was originally known as “fungus that had a fleshy body”. The Italian word for mushroom is “fungi”. Even though economists use this word to describe all money as being interchangeable (as in “fungibility”), I don’t believe they would eat all fungi, as some are known to be poisonous!
Likewise, many economists don’t understand that not all humans are the same, and don’t follow the economic rules. For instance, some people keep clean banknotes separate from dirty notes, saving the clean notes and spending the dirty ones. This is despite the fact there is no inherent difference between notes that are clean and notes that are dirty!
The opposite of fungibility with money is mental accounting. This is when we mentally allocate money to different things. When I was young, my mother had empty coffee jars high up on the shelf, and every week when my dad got paid, she would put the money into different jars for different things, such as clothing, repairs, electricity bills, and so on. The idea was to ensure she always had money for the things that were due when they were due.
With internet banking, opening a bank account has become relatively easy. We don’t have to leave our house to create an online account, and some people replicate the old coffee jars with different bank accounts for various things. Economists advise against this, saying we should keep all our money in one account so we can earn the best interest. This is fine, in theory. But it ignores the fact that people need to budget, and the best way to budget is to put money where we can clearly see what it’s designated for. This practice is at the core of any practical money management system. It is also one of the dangers of using an offset account to maximise interest savings on a mortgage by using all available cash. For many, an offset account can seem like a giant credit card, allowing them to take money out any time they feel like it.
Even if we work in a job with a salary, we still get money from other sources, e.g. gifts, tax refunds, inheritances, lottery or gambling winnings, to name a few. If we have only one bank account for these monies to go into, Parkinson’s law comes into operation: “Expenditure expands to meet the money available.”
It can make sense to put all money in one central account, provided we immediately transfer the appropriate amounts to clearly labelled separate accounts. This is similar to what Scott Pape refers to in his book, The Barefoot Investor, as “buckets” for savings and various expenses.
Designing your own financial economy will pay off and help you ride out any situation in the future, ensuring you have the money you need when you need it.
If you need guidance with creating your financial economy, email me at firstname.lastname@example.org.