Question 19
Psychological sheltering — how people mentally categorize money — heavily influences whether a budget succeeds. Mental accounting is the behavioral finance concept that people treat money differently depending on its label (a tax refund feels different from paycheck income). Savvy budgeters use this tendency to their advantage by pre-labeling money for specific purposes: payroll splits that send rent money to one account, sinking funds for known annual costs, and a small “fun” fund so discretionary spending is guilt-free. Labels reduce the temptation to raid savings for small purchases and create clearer boundaries in a household where multiple people may have different spending priorities. On the other hand, overly rigid labels can cause inefficiency if money in one bucket is abundant while another is short. The skill lies in designing flexible mental labels that protect essentials while allowing reallocation when needed. This question tests recognition of a common behavioral-budgeting tactic that leverages mental accounting.
Which behavioral budgeting tactic uses mental labeling to reduce temptation and keep money reserved for specific purposes?
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By Wise Wallet
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