Do people keep track of their money?

by Shabnam Mousavi
Posted on January 30, 2020

Save more and spend less is what many parents teach their children and friends tell one another. Savings can help you out on a rainy day, and the money you do not spend, is saved. It sounds simple: Money is money and there are only two things one can do with it, save or spend it. Is that so? With spreadsheet accounting, the answer maybe yes, but not in the real world. When people win money in a lottery they spend it easily, quickly and on items from their wish list. You might well object that a lottery prize is not exactly money earned or expected. But people also treat earned and expected money differently when it comes in different chunks. For example, a bonus of say 6000 euros paid once a year is usually spent on one big luxury item such as a trip, whereas the same total amount paid in monthly payments of 500 euros contributes to savings. People also treat money received today differently than when they will receive in a year (plus interest). This phenomenon of treating money differently depending on where it comes from and how it is paid is called mental accounting.

“Mental accounting suggests that we compartmentalize our money into parts that are more or less spendable.”

When people invest their savings, they do not touch the capital, but easily spend the interest or dividend. Conscious of people’s preference for certain “forms” of money, financial firms devote a good deal of their resources to developing financial products that appeal to their target consumers. Decisions about the amount and changes in dividend payments are an excellent case in point. Spreadsheet accounting makes no distinction between reinvesting the yields in the same stock and announcing separate dividend payments. After all, one can always sell some stock shares in order to spend the money. Money is money, whether called dividend or stock. Not quite so. Investors become angry when a firm cuts dividends. In fact, they even pay a premium to buy shares that pay dividends, that is, they pay more for investing in a dividend-paying stock. This makes absolutely no sense in terms of spreadsheet accounting.

How do people manage their personal finances?

In a white paper prepared for the Chase Bank in 2013 in the aftermath of the last financial crises, one of the founders of behavioral finance, Hersh Shefrin reports that for Americans, the following holds:

  • 55% of Americans report spending amounts that exceed or equal their household income.
  • 60% of American households have no “rainy day” funds.
  • 25% of American households are engaged in high-cost, non-bank borrowing.

Being in debt for most of their adult life imposes stress and strain on a large portion of the population leading to lowering the quality of life in many aspects. However, Americans are generally viewed as big spenders, who have too easy a time accessing credit.

How do Europeans fare?

In 2017 the Max Planck Institute Harding Center for Risk Literacy conducted an online survey in six European countries, France, Germany, Poland, Spain, Sweden and the UK. The four thousand participants were randomly selected from households across socio-economic clusters, and included roughly half men and half women of 18 to 75 years old. Survey questions were collecting information to portray risk profiles of Europeans by eliciting their views, understanding, and knowledge on different aspects of risk, starting with naming what they considered the three highest risks in their lives. Thereafter, the participants were asked a set of questions aimed at revealing their awareness of risks in the environment, such as the number of people who died last year in plane crash, car accidents, or terrorist attacks. Additionally, they were also examined on performing risk calculations that required using probabilities, proportions, and graphs. And finally, provided information on their insurance purchases and other cautionary behaviors, such as the safety of food or health choices. This survey included two questions on financial habits, one on the proportion of income spent, and the other one about financial habit such as keeping an emergency fund and careful budgeting. The second question was the following:

In my household, we/I

(a) write down budget and spending, and have an emergency fund;

(b) write down budget and spending, but have no emergency fund;

(c) have an emergency fund, and spend as it feels right;

(d) spend as it feel right, and do not have an emergency fund.

The results from the answers to this question are plotted in the figures below, representing financial habits by country, gender and age group. Overall, four out of ten participating household do not have a rainy day fund, which is also the typical rate among these countries, apart from Germany (2/10). Moreover, feelings play a big role in spending decisions more than half the time.

Do men and women treat money differently?

Saving for a rainy day appears to be country related, not gender based. Germans rank on top with more than half of all men and women holding a rainy day fund, whereas only one out of five Spaniards do the same. The latter could well be attributed to lower average income. Across all six countries, those keeping track of their money show a higher tendency to have rainy day funds as well, independent of their gender.

Is age a significant factor in financial habits?

Apart from Germans, who hold a rainy day fund from the beginning, others seem to mature up to it: in France, Sweden, and the UK the regard for an emergency fund increases with age. Polish and Spaniards report an increase in this behavior from early adulthood to middle age, but a decline afterwards when entering their senior years.

People’s financial habits can be viewed from many angles. Interpretation of data must always be handled with care for policy making analysis. Notwithstanding, the mere exercise of paying attention to such data, and trying to think of factors that contribute to certain ways of treating money can be a good way of raising general awareness.

The next time you want to make a money decision, pause a moment and think of what you took away from this read. It is really up to you to find your personal financial style and habits that agree with your lifestyle and aspirations. Beyond personal taste and special circumstances though, financial health can be maintained across the spectrum by keeping a rainy day fund and treating money, independent of its source, simply as money. These simple rules have the power to curb financial habits for better.


  • Forbes, W., Igboekwu, A. O., and Mousavi, S. (2019). A Fast and Frugal Finance: Bridging Contemporary Behavioral Finance and Ecological Rationality. Elsevier.
  • Gigerenzer, G. (2014). Risk Savvy: How to Make Good Decisions. Viking.
  • Shefrin, H. M., and Thaler, R. H. (1977). An Economic Theory of Self-Control. NBER Working Paper No. 208.
  • Shefrin, H. M. (2013). Born to Spend? How Nature and Nurture Impact Spending and Borrowing Habits.
  • Shefrin, H. M. (2017) Behavioral Corporate Finance: Concepts and Cases for Teaching Behavioral Finance (2nd Ed.). McGrawHill.
  • Thaler, R. H. (1955). Mental Accounting Matters. Journal of Behavioral Decision Making 12: 183-206.