the surprising psychological effect of tracking your expenses

Have you ever felt stressed out over finances? You’re not alone. Nearly two-thirds of Americans report that money is a major source of stress. Studies show that insurmountable debt may be even more stressful than divorce or the death of a close friend.

Financial stress is liable to spill over into other areas of life, too, including family relationships and physical health. Dr. Megan Ford, a licensed therapist and director of the interdisciplinary ASPIRE Clinic, describes how financial issues can infiltrate every aspect of our lives:

“Some clients come in because they’re feeling depressed, anxious, or are struggling with their marriage, and we discover the root cause is money,” Ford says. “Or, vice versa, we discover that financial stress is leading to struggles with mental health and social relationships.”

But there is good news for anyone worried about money. You don’t have to wait until your income increases or your debts are gone to enjoy relief — the mere act of planning ahead can reap immediate benefits.

Why money can be so stressful

To understand why budgeting and tracking your spending can boost your mental well-being, it’s helpful to understand why money causes stress in the first place.

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We all need money to survive, but money is tied to our well-being in less obvious ways, too. First off, financial instability is mentally exhausting. When you’re not sure whether you’ll have enough money to pay down your debts or enjoy an evening out with friends, you simply must think more about how and when to spend your money and time.

Also, money is tied up in our identities. Financial stability influences one’s sense that they can provide for their family or be financially independent. On the darker side, it can often be conflated with one’s sense of overall value as a human, meaning that financial insecurity can lead to a sense of shame, helplessness, loss of control, and decreased motivation.

Budgeting can promote confidence and relaxation

At first, many people dislike the idea of budgeting. But according to Ford, it often becomes a crucial part of relieving financial stress for those who try it.

“Budgeting has a negative connotation,” Ford says. “Many see it as limiting or restrictive. But in practice it helps propel people towards their goals.”

Indeed, studies show that the simple act of creating a budget and tracking spending can reduce mental exhaustion and restore a sense of control.

Purposeful budgeting helps people create specific, measurable, achievable, relevant, and timed goals — that is, SMART goals. The process encourages people to identify what is uniquely important to them, and to commit to concrete steps to achieve their personal goals. Doing so increases the likelihood that you’ll actually achieve your money objectives; decades of research finds that having a clear plan increases motivation and achievement.

Similarly, tracking spending can help people see their progress, ease anxiety, and restore a sense of control. In addition to increasing self-awareness of when and how you tend to spend your money, simply seeing data itself can be empowering and encouraging.

Tracking helps ensure your spending boosts your happiness

We’ve all heard the cliche that money can’t buy happiness. But research has repeatedly challenged aspects of this idea. A 2011 study in the Journal of Consumer Psychology makes the case that money can buy happiness — if spent the right way

According to the study, we tend to feel happier when we spend our discretionary money on: social experiences (vacations, get-togethers with friends or family); buying time (hiring a cleaning service or paying someone to do another task to free up your time); and others (charity, gifts).

That said, no two people are alike, and so different kinds of spending are likely to affect people differently.

What kind of spending brings you happiness? The answer might not be immediately obvious. Tracking our spending can help reveal discrepancies between what we spend money on and what we truly value.

How to budget and track better

Given the immediate mental boost that it can provide, what is the best way to go about creating a budget and tracking your expenses?

Begin by assessing how you currently spend your money. People generally underestimate their spending, so it’s helpful to pull up any records or receipts you have. Credit card bills and checking account statements are usually easily available online.

Identify your major spending areas (such as housing, transportation, food, etc.), pull out your calculator, and estimate your average monthly spending in each category. There’s no need to be perfect or overly detailed; instead aim for a rough estimate.

Draft your budget. After you’ve identified how you tend to spend your money, create a realistic monthly budget for future spending and saving.

Dr. Kristy Archuleta, a professor of financial planning at the University of Georgia, suggests developing a realistic plan that’s tailored to your unique life situation.

“Science and finance often suggest there is a ‘right’ or ‘best’ decision that clients should make,” Archuleta says. “But in practice, each person has their own lifestyle and goals. It needs to work for them.”

It can be helpful to divide your spending into three categories: necessary spending (the items you must pay for each month), discretionary spending (the items you could reduce if necessary), and long-term goals (where you would like to put more money, like savings or paying off debts).

Million Stories will be launching its unique budgeting tool at the end of 2022. In the meantime, try out some of these helpful free budget calculators.

Tracking. Then start tracking. Systematically record how much you are spending, in which categories, and how it matches your budget goals. You can use formal electronic systems like Mint or Quicken, or paper-and-pencil systems to record and review your purchases daily or monthly.

Regularly tracking your spending can provide helpful information to improve your habits and increase your sense of confidence and control. Simply seeing your daily data is highly motivating for many — you can see your progress and get ideas for improvement.

Congratulate yourself for getting started

Finally, pat yourself on the back for taking steps to become financially secure. If you find yourself overwhelmed, take it slow. You don’t have to have to make a perfect budget plan, completely overhaul your spending habits, or save a thousand dollars right away.

“You have to start somewhere,” Archuleta says. “And small is better than nothing at all.”

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