Fun Money

This post was written by Associate Wealth Advisor, Arman Hundal.

Many investors have what they call a "fun money" account.

It's where they pick individual stocks, trade options, try to time the market, or chase the next big AI company. Nothing wrong with having a little fun, right?

The thinking is usually that it's only a small portion of their overall investments, so what's the harm?

This is an example of something called mental accounting. It's a behavioural bias where we treat money differently depending on which bucket we've placed it in.

We might be disciplined with our retirement savings but willing to gamble with our fun money. The problem is that the money doesn't know which bucket its in.

Let's say you have $100,000 in fun money. Over 20 years, earning 7% annually would grow that to approximately $387,000. At 3%, you'd have about $181,000.

That's a difference of over $200,000. Not exactly pocket change.

I'm not suggesting everyone needs to give up their fun money. But it's worth understanding what that fun might actually cost.

At the end of the day, it's all your money, and it all contributes to the same financial plan.