Can something that takes as little as five minutes a day change your financial life? Absolutely, say the proponents of that so-often-recommended piece of financial advice: track your spending. They believe it can be the key to a wealthier life, and research shows it may make you healthier as well.
There’s no doubt that tracking what you are spending can help you get a better handle on where you spend your money. The insights you gain — I spent how much on that? — may prompt you to curb your behavior in order to achieve your bigger financial goals.
Two years before they quit their jobs to take their dream trip around the world, Warren and Betsy Talbot started carefully keeping track of every penny they spent.
“Right after we started tracking our expenses we sat down for our monthly review together and discovered that our #1 expense after the mortgage was eating out,” says Warren. “We found we were spending $1,500 per month on all our dining out. Just by cutting this back to $500 month we were able to save over $24,000 in 2 years, which ended up being the same amount we spent in our first year traveling full time around the world.”
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But what if tracking your spending did more than just shed light on where your money is going? In his book, The Power of Habit, Charles Duhigg shares research by two Australian researchers, Ken Cheng and Megan Oaten, who designed a four-month experiment where participants were instructed to write down every purchase. It took some time to get into the habit of recording expenses, but once they did, there were some surprising results.
Not only did the participants’ financial lives improve, but they also smoked and drank less, ate less junk food and even found they were more productive at school and at home. Duhigg writes, “As people strengthened their willpower muscles in one part of their lives — in the gym, or a money management program — that strength spilled over into what they ate or how hard they worked. Once willpower became stronger, it touched everything.”
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Your Brain on Tracking
I recently interviewed money coach Mikelann Valterra, co-founder of MoneyMinder Online, on my radio show. She’s been tracking her spending for some 15 years and helps all of her clients do the same. She shared some of the research into why tracking can have a powerful effect on your spending, and not simply by creating awareness of where your money is going. She shared the following insights:
The big key is dopamine, a neurotransmitter. I suspect a lot of us have heard about dopamine, it’s a feel-good ‘drug,’ similar to serotonin. And what we now know, we’ve actually known this for the past ten years since we’ve been able to see a little bit inside the brain with an MRI machine, we now know that when people go to spend money, a really interesting couple of things happen in the brain.
Like me personally, I just love shoes. So if I am at Nordstrom and I am looking at a really cute pair of boots, what happens is the pleasure center in my brain lights up and it gives me a hit of dopamine, and that’s actually normal.
When I go to pay for the shoes, when I see the price, when I think about the money leaving, then what happens is the insula in my brain lights up and it’s pain. It’s that part of the brain that lights up when you think you’re going to slam your hand in the door: pain. So it’s this weird dance between pleasure-pain, pleasure-pain. Pleasure, I want it, it feels good. Pain of paying and losing the money to buy these boots or whatever they are.
So, what we know now is the act of tracking, that act of either tracking in the moment or the act of knowing I’m going to go home and I’m going to have to write down what these shoes cost … I’m going to have to write this down, what happens in the brain is it balances out the brain chemistry.
It’s not that tracking will keep me from buying the shoes. But if I don’t track, if I’m not going to track what what I actually spent, my brain literally oversaturates in pleasure. It oversaturates in dopamine. There’s nothing to to balance it out.
When you don’t track — or let’s say you put something on a credit card and you don’t think about it until you go to pay your bill next month — it actually anesthetizes you against the pain for having to pay for something.
Valterra says some clients record what they spent as soon as they get home, while others might make a routine of doing it in, say, the morning at breakfast. Either way can work. What doesn’t work, she insists, is simply reviewing your credit card or bank statements to see where you’ve spent your money in the past. “If people look at how they already spent their money it’s too late. It’s already gone and there is no chance for another decision,” she notes.
“We are talking about mindfulness; people being mindful and connected. If people are not mindful and not connected, they are disassociated with their money,” explains Karen McCall, co-founder in MoneyMinder Online and author of Financial Recovery: Developing a Healthy Relationship With Money. “Healthy thinkers connect the consequences with their behaviors in one thought process and make the appropriate decision. Unhealthy thinkers disconnect the consequences and rationalize why it’s OK to spend,” she says.
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There’s another benefit to tracking a purchase as soon as possible, Valterra insists: “Tracking slows you down and that’s a good thing.”
The Talbots, meanwhile, continue to track their spending carefully, and they even publish their monthly spending online. They’ve turned their trip around the world into a full-time life of travel, and published several books, including Dream Save Do. And it all started with the simple act of tracking where their money was going.