What My Gym Membership Taught Me About Mental Accounting

Savings aren't savings unless they're actually saved.

Posted Aug 16, 2017

Humans have a peculiar relationship with money. Consider the following:

Why are people more likely to spend money found on the sidewalk on something frivolous?

This is a typical illustration of mental accounting, a concept coined by Richard Thaler. According to the theory, people treat money differently, depending on its origin and intended use, rather than thinking of it in terms of the “bottom line” as in formal accounting. An important term underlying the theory is fungibility, the fact that all money is interchangeable and has no labels. In mental accounting, people think of money as less fungible than it really is. A small windfall, for example, is more likely to be spent—and for a different purpose—than the same amount as part of regular income.

There are other seemingly irrational ways in which people think about money:

Why do some households hold high-cost debt even though they also have low-interest savings that could be used to pay off their debt?

Many consumers recognize their spending problems, leading them to co-hold savings and debt as a form of managing self-control problems. They not only worry that using savings to pay off debt will deplete funds that could be used in an emergency, but that paying off debt will free up capacity for creating more debt or recreating that debt.

Why do people keep money in a low or no-interest account (potentially losing money over time due to inflation) in the first place, if they could be making money by investing it?

When people keep money in savings, it may not only be due to a need for readily-available funds, but also out of habit, laziness or due to an aversion to the risk and uncertainty that comes with investing.

Why are consumers generally willing to spend more when they pay with a credit card than cash?

People feel a greater ‘pain of paying’ when they use hard cash than credit or debit cards, contributing to higher spending on cards. Payment is less tangible with cards, and in the case of credit cards, also deferred.

A recent experience made me reflect on how some of these ideas may apply to my own psychology. It happened when I joined a new gym and was presented with the following payment options, which reflect a typical payment structure for subscriptions and memberships:

A. Pay $75 monthly and a $50 joining fee (amounting to $900 for 12 months + $50 one-off fee)

B. Pay $825 for 11 months in advance, no joining fee and get a 12th month free

For the second option (B), I was told that they had a special offer at the time with an additional (13th) month added free of charge. Maybe uptake for the 12-month advance payment was not as good as they hoped, so they added an extra incentive.

There are only three reasons I can think of that would rationally warrant the choice of the first payment option (A):

  • You don’t have enough disposable money to pay upfront.
  • The gains you could make from converting the annual fee into savings or an investment (and withdrawing from it every month) are more advantageous than the savings you get in Option B.
  • Your membership is non-refundable under any circumstances and you have reason to believe that you won’t be able to use the membership for the full year (e.g. due to an impending relocation, health issues, etc.).

So why might some people not choose the cheaper option with the upfront payment even if none of those reasons apply to them? I think there's a number of psychological explanations:

  1. Habit: You go with what you always do. There’s a feeling of safety in familiarity and convention. But it’s mostly an excuse.
  2. Uncertainty: You are unsure whether or not you will be able to take advantage of a year’s worth of membership or worry that you may need the money later (see points above). This could be based on genuine risk or just another kind of excuse.
  3. Pain of paying: Parting with a large sum seems to hurt more than having the payment not only deferred, but also chunked into many seemingly more painless payments (and interspersed with other small transactions) from your account every month.
  4. Mental accounts: Points 1 and 3 are connected with the concept of mental accounts, especially if the (lump sum) annual membership fee is paid from savings. It somehow doesn’t feel right to pay a subscription or membership from your “big expense” account.
  5. Self-control: You fear that the large upfront payment essentially frees up disposable income every month (the $75 monthly payments) that you may be tempted to spend – leaving you no better (or even worse) off.

Most of these points went through my mind when I thought about my gym membership payment decision. Perhaps not surprisingly, I ended up going for the financially optimal choice and paid for a year in advance. It would have been premature, however, to declare a victory of formal over mental accounting: I almost forgot to set up regular monthly transfers from my checking account back into my savings account in lieu of monthly gym membership payments. This should be common sense. After all, the same payment will be due again in a year’s time. This is not only good financial planning, but also eliminates any self-control concern about "spending the savings" and having to re-experience pain of paying all over again next year. Savings aren’t savings unless they’re actually saved.


Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39(4), 341-350.

Prelec, D., & Simester, D. (2001). Always leave home without it: A further investigation of the credit-card effect on willingness to pay. Marketing Letters. 12(1), 5–12.

Spencer, N., & Bright, I. (2017). Banking on Behavioural Change. In A. Samson (Ed.), The Behavioral Economics Guide 2017 (with an introduction by Cass Sunstein) (pp. 53-62). Retrieved from http://www.behavioraleconomics.com.

Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12, 183-206.

Thaler, R. H. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199-214.

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