Economics is known as "the dismal science", so you might not expect economists to have much of a sense of humor. But there is at least one joke economists tell that is actually very funny — and very educational.

A husband and wife spend a night in Las Vegas, and the man decides to try his luck at the casino. He loves roulette, but vows not to wager more than $5. So he puts his $5 down — on his lucky number, 17 — and wins. He keeps betting on number 17 and he keeps winning, so much so that towards the end of the night he is up more than $10 million. He decides to wager it all one last time on number 17. But this time he loses, and his $10 million gain is gone in an instant. When he returns to his hotel room, his wife asks him, “How did you do?” “Not bad,” he replies. “I only lost $5.”

The man could afford to be so relaxed about his multi-million dollar loss because of a phenomenon known as mental accounting, the tendency to value money differently based on where it comes from, where you keep it, how you spend it, and whether you expected more or less of it. As far as the gambler was concerned, the only money that was really ‘his’ was the initial $5. He didn’t have the $10 million before he started gambling and he didn’t have it when he finished, so for him the only real loss he suffered was the $5.

That is a common, if completely illogical, reaction to unexpected money. The truth is, the $10 million was just as much ‘his’ money as the initial $5. The only difference was that he never expected to have the $10 million, so he was more easily able to rationalize its unexpected loss.

If It's on Plastic, It Still Counts
The same kind of thing happens all the time in our day-to-day financial lives. Say you’re out shopping for essentials — groceries, for example — and you see some luxury item you would really love to have. You wouldn’t dream of paying for it in cash; that would blow an enormous hole in your budget. So you pay for it with a credit card. That feels better since the mental account in your head called ‘grocery budget’ remains intact, and the bill for the mental account in your head called ‘credit card’ won’t be due for at least another month.

But, of course, whether you pay in cash or you pay with credit, all of the money ultimately comes from the same account: yours! Purchases made on credit can feel less immediate because no cash actually leaves your wallet. But the reality is, credit card purchases will end up costing you more money — unless you pay off the amount in full every month, thereby avoiding interest charges.

Researchers conducted an experiment in which two groups of people were asked to bid on tickets to a basketball game. One group had to pay cash, while the other could pay by credit card. The average credit card bid was twice as high as the average cash bid. Why? Credit card bidders felt richer because they didn’t have to fork over any actual cash from their mental accounts.

Mental Accounting Every Day
Take a moment to think about some of your daily financial transactions, and you’re sure to spot examples of mental accounting at work. Say you have $1,000 stashed away for a rainy day under your mattress. You also have $1,000 in credit card debt, at 18% interest. You won’t touch the $1,000 in savings because it’s in a mental account called ‘emergency fund.’ But if you used it to pay off your credit card debt, you would save your self the 18% in interest charges, which amounts to $180. You could then use that $180 to start rebuilding your emergency fund, and you will have cleared some of your most expensive debt in the process.

Of course, mental accounting has its upsides, too. Keeping untouchable money in mental accounts like ‘home down payment’ or ‘college savings’ or ‘travel fund’ can be good for achieving your savings goals. Nonetheless, it is worth examining your mental accounts from time to time to make sure they all add up.

A Tax Refund Does Not Equal a Shopping Spree
The perfect opportunity to balance your mental accounts is tax time, especially if you are due a refund. As part of the government’s economic stimulus package, many households will receive tax rebates — of between $300 and $1,200 — in May. It’s tempting to put that money in a mental account called ‘Splurge!’ After all, like the Las Vegas gambler, you didn’t have that money before you filed your taxes, so you won’t miss it if you don’t have it after you filed your taxes, right?

Wrong.

That money is just as much ‘yours’ as the money in your paycheck. In fact, a tax rebate is nothing more than money taken from your paycheck that the government has decided to give back to you. So consider depositing any refund into mental accounts called ‘401(k)’ or ‘health care insurance’ or even ‘emergency fund.’ Tax rebates don’t have to be treated as ‘funny money.’ And maybe that’s why economics is called “the dismal science” because managing your finances is a serious business.

Note: Certain aspects of this article were produced by the Certified Financial Planner Board of Standards, the regulatory body for the CFP® and CERTIFIED FINANCIAL PLANNER™ marks.