Mental Accounting: When Your Money Mind Plays Tricks on You
We like to think we make rational decisions with our money. But time and again, we fall into predictable traps—especially when it comes to how we frame our finances.
One of the biggest culprits? Mental accounting. It’s a behavioural bias where we treat money differently depending on its source, use, or location—even though, on paper, a dollar is always worth a dollar.
Here are some of the most common (and costly) examples of mental accounting I’ve seen in financial planning conversations – and a few from my own life too.
“The carbon tax got cancelled—gas is cheaper!”
Sure, you might feel like you’re saving money at the pump now that the carbon tax is reduced or removed. But don’t forget—you’re also no longer receiving quarterly rebate payments (in Alberta, that’s $450 every three months for a family of four—$1,800 a year!).
That rebate was real cash. Now it’s just being offset at the gas station. If you only focus on what you’re “saving” when you fill up, you’re ignoring the full picture. That’s mental accounting.
“I owed thousands at tax time—what a rip-off!”
This is a common one. You get your tax return and discover a big balance owing. Maybe you didn’t have enough deducted at the source. It feels like you’re being punished, or that you paid more tax than usual.
But it’s not a penalty – it’s just a mismatch in timing. Whether you paid gradually through payroll deductions or in one lump sum in April, the result is the same. But emotionally? That lump-sum payment hurts.
“I use my RRIF withdrawal to top up my TFSA.”
This one sounds strategic: you take your required RRIF withdrawal and move it into your TFSA. The implication is that you’re being efficient—using retirement income to fund tax-free savings.
But here’s the truth: you could’ve used any money for the TFSA. From regular cash flow. From your savings account. There’s no need to withdraw your RRIF in January just so you can contribute to your TFSA right away.
It’s all one big bucket in retirement – what matters is total income, taxes, and where it makes the most sense to pull from at the time.
“We live off one spouse’s income—my RRSP is just sitting there.”
Here’s a great example where mental accounting leads to missed tax opportunities. One spouse is early retired, while the other is still working full-time. You’ve got a shared household budget, but you’re only spending from one paycheque.
Meanwhile, the early retiree has their own RRSP sitting idle—even though with no other income, they could withdraw at a very low tax rate.
It doesn’t matter which spouse’s money is being spent. What matters is using all your available tools to minimize lifetime tax—and in this case, drawing down the RRSP early is often a smart move.
“I’m buying the dip—stocks are on sale!”
This one gets a lot of attention on Reddit and Twitter. Stocks drop 10–20%, and investors get excited: “Time to buy the dip!”
But let’s say you have a $500,000 portfolio. A 10% drop means you just lost $50,000 on paper—and you’re now trying to “buy the dip” with an extra $5,000 or $10,000. That’s only 1–2% of your portfolio.
Yes, buying at lower prices is a good long-term habit. But let’s not pretend you’re going to turn the tide with a tiny top-up. It feels like a win, but it’s more of an emotional comfort than a portfolio-changing move.
“We live off one income and invest the other.”
This sounds like a smart budgeting tactic—and it is! But let’s not forget, money is fungible. Whether you earmark one spouse’s income for spending and the other’s for investing, or simply pool both and track your savings rate, the financial outcome is the same.
Don’t let these mental labels trick you into thinking you’re doing something extra special—focus on your total savings and investment contributions instead.
Bonus Examples:
- Tax refund = free money?
People often treat tax refunds as a windfall—a reason to splurge. But it’s just your money being returned after an interest-free loan to the government. If you wouldn’t blow $3,000 from your savings, why do it just because it came from your tax return? - Treating inheritance or bonuses differently than regular income
A $20,000 work bonus feels different than $20,000 from your salary—even though they’re taxed the same. Same with an inheritance. Mental accounting makes us more likely to spend money we see as “found” rather than earned. But again—it’s all part of the same financial picture.
Final Thoughts:
Mental accounting is sneaky. It helps us organize our finances, but it can also trick us into suboptimal decisions. The antidote? Think in terms of total resources, total taxes, and long-term goals—not just labels.
In retirement especially, it helps to blur the lines between accounts and buckets. Your TFSA, RRIF, non-registered accounts—they’re all tools, and the trick is using the right one at the right time for the best tax and income outcome.
Thanks Robb. Wisdom and teachings of the first order as always.
We live off one spouse’s income—my RRSP is just sitting there.”
Here’s a great example where mental accounting leads to missed tax opportunities. One spouse is early retired, while the other is still working full-time. You’ve got a shared household budget, but you’re only spending from one paycheque.
Meanwhile, the early retiree has their own RRSP sitting idle—even though with no other income, they could withdraw at a very low tax rate.
It doesn’t matter which spouse’s money is being spent. What matters is using all your available tools to minimize lifetime tax—and in this case, drawing down the RRSP early is often a smart move.
Hi Rob,
I am exactly in this situation. My partner is 65 and retired with no income (not currently taking CPP or OAS) and an RRSP account just sitting idle. I am younger and a couple years away from retirement. It makes sense to convert to a RRIF now and withdraw monies at a very low or no tax rate, but if you don’t need the money to pay the bills what do you suggest you do with the monies you withdraw?
Pay off high interest accounts like credit cards first, then other high interest accounts. My own opinion is buy Canadian shares in a TFSA if you have the knowledge. There are blue chip Canadian shares that pay a good return and you sign up for DRIPS that increases your TFSA portfolio automatically.
Hi Ron, the idea would be to withdraw from a RRIF – at least up to the basic personal amount (the first $15-$16k of income is tax free), and likely into the next bracket – depending on what her future tax rates will be once you’re fully retired and splitting income.
What to do with the funds? TFSA contributions, non-registered savings, household spending, one-time expenses like vehicle replacement, home renos/repairs, gifts to kids, bucket list travel. Debt repayment, if any.
Hey Robb, whatever they had invested the money in their RIF should be purchased outside the RIF. Whether it is in a TFSA or another investment vehicle is used. That is, if they had shares in Telus, they should rebuy these…. Even better would be an in kind transfer…
Of course, one could take this opportunity to look at the current allocation to adjust the overall portfolio (assuming one has a target allocation)…
Argh! Carbon tax! I replaced my gas water heater with an electric one to complement my solar power system and save on the carbon tax for natural gas, which I anticipated going up on 1 April.
I was motivated to go solar and electric because of the carbon tax. It was part of my accounting for the ROI.
So much for that savings. Threw my whole plan out the window. Grr.
I’m one of those people in Alberta who thinks the carbon tax is a good thing.
I tend to agree Ted Luyckx we have to get off the carbon wagon or lose this world.
“We live off one income and invest the other.”
Counter point would be the attribution rules where it can be advantageous to do this in discrepant spousal income situations.
There are a couple of these that I would argue with. First, I’m trying to promote the “stocks are on sale, buy!” mindset with my kids, even if they only have a couple thousand available. Long term that attitude will serve them well – certainly much better than the “stocks are down, sell!” alternative. Secondly, once we have sufficient income from other sources- i.e. after we start taking CPP and OAS in a few years – I have already put in place a chunk of holdings within our RIF accounts which it makes sense to transfer in-kind to our TFSAs (mostly ZGQ – BMO MSCI All Cntry Wrld High Qlt which is grow-oriented and pays very little in foreign dividends). My overall plan is to draw down our RIFs and pad our TFSAs in a way that maximizes tax efficiency across our lifespan and beyond (including gifts/inheritances for our kids). Too many people hang onto their RIF accounts (delay as long as possible! minimum withdrawals only!) and end up both missing out on enjoyment and paying a huge chunk to the taxman.
Hi Marian, not today that buying stocks on sale is a bad thing but I’d rather promote the idea of staying fully invested at all times rather than worrying about timing the market.
As for the RRIF meltdown and TFSA fill-up – we are in full agreement there. That’s part of the strategy to defer CPP and OAS – to help deplete the RRIF at favourable tax rates.
TFSA should typically be touched last, but my point is that it’s still a very flexible tool for lump sum withdrawals. Tax free, does not impact OAS, and you get the contribution room back the following January.
Hi Robb,
I use Mental accounting instead of counting Sheep when I can’t fall asleep at night, that way I can dream about about how I would invest a future lottery win and not mess up my finances!
Would I use VDY for its track record or CDZ for the Dividend Aristocrats, how much would a 1million win produce monthly and run things like that till I fall asleep and I don’t know the answer as I fell asleep. LOL
Hi Robb, I love this post. Especially the one pertaining to stocks and buying low. When viewed from the perspective of the total portion of your portfolio it changes the thinking. Thank-you for your insights!