Why do I splurge in a good month and panic in a bad one?

You had a brilliant month. The invoice cleared, a new client signed, and for the first time in weeks your bank account looked genuinely healthy. So you upgraded your desk chair, booked the city-break you’d been putting off, and said yes to every social plan. It felt earned.

Then a quiet month arrived. The pipeline stalled, a client delayed payment, and the number in your account stopped feeling like a cushion. Suddenly you were anxious, cutting back on things that cost almost nothing, frozen in front of the supermarket wondering whether to buy the decent coffee or the cheap stuff.

Same person. Same financial situation, roughly. Completely different behaviour.

If you’ve lived that cycle, you’re not “bad with money”. Your brain is doing something very specific, and once you see it you cannot unsee it.

Your brain is not running one account. It’s running several.

Richard Thaler, the economist who won the Nobel Prize partly for this, called it mental accounting. The idea is that people do not treat money as a single fungible resource. They sort it into separate psychological buckets, each with its own rules about how it should be spent and what it signals.

When a good month arrives, the extra income often lands in what Thaler described as a “windfall” bucket rather than a “regular income” bucket. Windfalls, psychologically, feel like they carry looser spending rules. They feel less real, in a sense. So you spend them more freely than you would spend money you’d mentally tagged as “for bills”.

This is not a discipline failure. It is a predictable cognitive shortcut that Thaler documented in salaried employees, lottery winners, and tax-rebate recipients. You are in good company.

The affect heuristic, and why a good month feels like safety

Paul Slovic and colleagues mapped out what they called the affect heuristic: the way emotional state bleeds into practical judgement, often without us noticing.

When your income is up, the emotional signal is positive. You feel secure. That feeling of security does not stay neatly in the “how I feel today” compartment. It contaminates your risk assessment. It makes future uncertainty feel smaller. It makes spending feel lower-risk than it actually is, because the feeling of safety is doing the job you’d ideally want an actual cash buffer to do.

The problem is not that you feel good when money comes in. The problem is that the feeling of having money and the fact of having money are doing two different jobs in your brain, and you cannot tell them apart in the moment.

Then the quiet month comes. The affect runs in reverse. The emotional signal is threat. Your brain reads that threat signal and inflates the danger. Things that were objectively fine last month feel catastrophic this month. The decent coffee becomes a symbol of recklessness. You are not overreacting emotionally, you are under-correcting cognitively, because the bad feeling is doing the same contamination job the good feeling did.

Slovic, Finucane, Peters, and MacGregor published the foundational paper on this in 2002. It is not a quirk. It is a feature of how human risk perception works.

Why income volatility makes both of these worse

If you were salaried, the same salary hitting on the same date every month, the mental accounting effect still exists but its power is dampened. The windfall bucket rarely activates. The affect heuristic still runs but there are fewer dramatic swings to react to.

Self-employment removes both of those stabilisers.

Your income is genuinely variable. A month where you earn £4,000 and a month where you earn £1,200 are both real possibilities within the same business, in the same quarter, for entirely structural reasons that have nothing to do with your competence or effort. But your brain is not calibrated for that kind of legitimate variability. It evolved to read income drops as danger signals, because for most of human history, a sudden drop in resources was a danger signal.

Brad Klontz, the financial psychologist whose work on money scripts has been cited in dozens of clinical settings, has written about how financial stress responses are often disproportionate to actual financial risk, because the nervous system is responding to the emotional weight of money rather than the arithmetic of it. The panic in a bad month is often louder than the numbers justify.

This matters because the panic has consequences. Frozen decision-making. Avoidance of the bank app. Impulse-cutting of things that were actually fine. And then, when the next good month arrives, the relief is so physical, so visceral, that the splurge feels like a completely rational response to having survived.

It is a cycle. And it is exhausting.

What standard budgeting advice misses

Most budget templates assume a stable, predictable input. They ask you to fill in “monthly income” as if that is one number. For the self-employed, that assumption breaks the whole model before you have written a single figure.

The typical advice response to volatile income is “just pay yourself a salary from your business account.” Which is, in principle, correct. But it skips the step of explaining why the volatility is causing psychological chaos in the first place, and it assumes you already have a buffer large enough to smooth from. If you are in the early or mid-stage of self-employment, you probably do not have that buffer yet. The advice assumes the solution to the problem is the problem.

The behavioural reality is that you need a system that works with how your brain processes variable income, not one that assumes you can simply ignore the variability and behave as if it does not exist.

One specific thing to try this week

Lower the cost of looking at your actual numbers.

That sounds small. It is not.

One of the most consistent findings in behavioural finance is that people avoid financial information when they expect that information to be bad. Galai and Sade called this the ostrich effect in a 2006 paper. The avoidance is not laziness. It is an attempt to delay the negative affect that comes from seeing a number you do not want to see.

So you are more likely to check your bank in a good month, which reinforces the splurge behaviour. And less likely to check in a bad month, which means you make spending decisions without accurate information, which makes the panic worse when you finally do look.

The intervention is not “check your bank every day and feel disciplined.” That is a willpower instruction, and willpower is not the issue.

The intervention is to reduce the emotional charge of the number before you look at it. Concretely: before you open the app, write down what you expect to see. Not what you hope. What you actually think is there. Then open it.

This does two things. It activates your deliberate cognition before the affect hits. And it creates a small record of how accurate your money anxiety actually is, because most people find, over time, that they consistently expect worse numbers than they see. That record is data. Data is calming in a way that reassurance is not.

Do that once. See what happens. You are not trying to fix the whole pattern in a week. You are trying to lower the cost of one look.

A different kind of starting point

The splurge-panic cycle usually has a belief underneath it, something about what money means when it is there and what it means when it is not. Those beliefs are often not conscious, and they are often not accurate, but they are driving the behaviour more than the numbers are.

If you want to understand yours, the Money Beliefs Quiz takes about four minutes and gives you a mapped result based on the research frameworks I use with clients. It is a starting point, not a diagnosis. But it tends to surface the thing that is actually running the show.

Find it at the top of the page.

— Joel