Mental accounting is an economic concept that has gained recognition over the past thirty years. Popularized by economist Richard Thaler, mental accounting describes how we often mentally segment money for different purposes despite the fact that our money is fungible. In other words, the money coming into our lives — income, bonus, gifts, inheritance — is neutral, but we assign it a certain value or purpose instead of thinking about it as a lump sum. 

For example: In your mind, your tax refund will specifically pay for a tropical get-away. Or you’ve decided to pay for a new wardrobe with your end-of-the-year bonus. Even though this money doesn’t come with an assigned purpose, you create one anyway. You’ve probably done mental accounting at least once today without even knowing it. It’s almost unavoidable. Why? Because humans don’t operate objectively when it comes to money; we base monetary decisions on what’s in front of us, rather than our bigger picture. And our goals are shaped by our wants, needs, biases, and emotions — all of which can be pretty irrational when it comes to spending.  

Mental Accounting + Money Anxiety

Much of what is written about mental accounting focuses on the traps we fall into when we blindly follow our impulses. Mental accounting is seen as a negative bias because it can limit our thinking and choice-making. But if we can put some thought and intention behind mental accounting, we can harness it as a valuable tool that helps manage our anxiety about money. How do we do that? I’m so glad you asked. 

The Buckets of Money Strategy  

Money bucketing, or setting up different pots of money for different purposes, can be an effective way to optimize our natural tendency to do mental accounting. In my opinion, mental accounting happens because it’s too tiring to think about money as a total amount. Imagine that all the money you have is in one account, and you have to figure out how to spend, save, and allocate it to all the needs and wants in your life. That’s overwhelming. My clients often talk about how they’re uncertain about how much they’re saving for the long term. Or how they feel like they have no money after they’ve taken a trip. Most often, these fears stem from a failure to separate their resources — all their money is lumped together and there’s no clarity! 

Additionally, I think this also contributes to low-level anxiety for many people regarding ALL the financial choices they have to make. But if we employ money bucketing, we can ease those worries. 

How to Bucket Money

Bucketing money is meant to help with the big things in our lives. Imagine a scenario where you set up a few buckets for yourself: one contains all of your safety or emergency cash savings; one covers all the travel you take in a year; another funds a long term goal like buying a house; and the rest pays for your daily living expenses. If all the buckets are funded and your needs are met each month, suddenly the anxiety you feel may start to dissipate because you’ll know exactly where you stand in regards to your money. 

Let’s take it a step further: your money buckets are set up and functioning the way you want. You’ve decided never to touch your emergency money unless it’s a true emergency. But you look at your travel bucket and see that some money has built up — maybe instead of taking two trips this year, you decide to take an educational course or re-decorate your living room. Whatever your choice, it’s a good one because you’ve made it thoughtfully. Money bucketing helps us think about trade-offs and choice in a rational, guilt-free manner without endangering our financial resiliency or longer term planning. With this clarity comes the confidence that we’re using our money with purpose. 

It takes some acclimating, but using the buckets of money strategy can help you feel more grounded in your financial life and reduce that anxiety you have around spending. Will this completely rid us of the not-so-helpful side of mental accounting? Of course not! But will it be an effective tool for putting our minds at ease? Yes! With a healthier perspective, we can make financial decisions with less anxiety — no matter what the amount.

Need help working on your financial life? Reach out to learn more about financial planning services and how we could work together!