One hundred dollars is one hundred dollars, right? Well, if you found a $100 bill on the sidewalk, would you use it the same way as $100 you earned?

This idea is known as “mental accounting,” a term coined by behavioural economist Richard Thaler in 1985. According to the mental accounting principle, we may value a sum of money differently depending on how it’s received or its intended goal.

A topical example is the upcoming tax refund many Canadians will receive. Some people view their refund as free money, like that $100 bill on the sidewalk. Though a refund may seem like a windfall, it’s your own hard-earned money that you overpaid in taxes throughout the year. So the financially sound decision is to invest the money in mutual funds or pay off debts.

Though mental accounting can tempt us to spend frivolously, it can also benefit us. For example, we can view money in an emergency fund as untouchable – until a genuine emergency arises.