Here's why I think the mental accounting error around windfalls is one of the most expensive cognitive biases in personal finance.

Most people treat money differently based on where it came from — salary is 'planned money,' a tax refund is 'found money,' an inheritance is 'special money.' This leads to treating windfalls differently from regular income: spending them in ways we wouldn't spend earned income.

The example: a $4,000 tax refund. Many people spend it on something they'd never buy from their paycheck. But a $4,000 refund is simply your own money you overpaid to the government — it's no different from any other $4,000 of your income.

If you wouldn't spend a $4,000 paycheck on a vacation, the fact that it came as a refund doesn't change the math.

The fix: when a windfall arrives, apply the same allocation rule you use for regular income. If you invest 20% of your salary, invest 20% of the windfall. The special nature of the source doesn't change what it is — money.