How Budgeting Can Actually Make You Spend More (And What You Can Do About It)

One of the golden rules of smart money management is to set up a budget and stick to it, right? Well, flying in the face of that common wisdom is this new study that shows sometimes budgeting backfires.

Photo by Losevsky Pavel

In the experiments, conducted by Brigham Young University and Emory University marketing professors, consumers spent up to 50 per cent more when they went shopping with a price in mind compared to those who didn't have a budget for that item. Setting a target price for an item can actually prompt us to spend more than we intend when we get to the store, because once we "screen our choices based on price", the researchers say, "we essentially ignore price after that and focus on quality" when we get to the store. "And better quality products usually cost more."

For example, in one of the experiments, the researchers asked a group of consumers how much they would be willing to spend on a new TV. Those consumers were then given the option of choosing a TV $US18 above their target price and a lower-quality one $US18 below. About 55 per cent of them chose the higher-priced option that was above their target price range. But among a set of consumers who were given the same options WITHOUT being asked how much they would be willing to spend, only 31 per cent chose the higher-priced option. Those who set a maximum price first also rated the difference in quality between the choices as much greater than those who didn't.

Setting budgets for "aggregate" things — like groceries in general or all of your finances — is still wise, but for individual, specific purchases, the research suggest that you start first by thinking about quality and features before thinking about price to protect yourself from this effect. Also, force yourself to reconsider the price, now that you know about this effect.

Budgeting Backfires - shoppers unconsciously spend more when trying to limit costs [Brigham Young University via Time]


Comments

    I now budget to within an inch of my life after many years of disastrous money management.

    However I have definitely found that doing this means that I am more likely to spend more than I originally planned on something... because I can quickly plug that figure in, check the knock on effects, adjust something else and carry on as before.

    Unfortunately it usually ends up being the grocery budget that gets chopped first so the extra spending on treats leads to eating worse.

    Woops?

    Another thing I've noticed with budgetting is that you start to feel more secure and have more spare cash laying around.. it lulls you into a sense of having money you can splash around on things rather than saving it. Admittedly I tend to splurge/impule buy a lot less than I did before.. but having the spare cash sitting there.. not to mention having the bills all covered by putting money aside each pay, leaves me with a sense that I could spend the remainder without it seriously impacting on my immediate life...

    I've been using an app to track my money for just over a year now (income and expenses), and have really only been focusing on saving for about the last six months. Having a bit of history on your spending is a great way to start a budget, once you know what you're likely to spend on things you can set up a pretty accurate budget for them. It was then just a matter of transferring whatever money I wanted to save into my savings account where I can't touch it. Yes, of course it means that if I go in thinking I have x amount to spend here I may tend to go "what's a few extra bucks? I'll just spend a little less on that other thing", but for the most part it has balanced itself out. I highly recommend it, if you have the patience to track everything you spend.

    When I need or want an item (example - microwave oven)
    I make my spending targets like this:
    How long do I expect this item should last? (say 3 years)
    How much would I be willing to pay for this item if payment had to be made each and every day (say $0.20)
    Multiply that out 365.25 days a year for 3 years at $0.20 per day = $219.15
    Then I have a target of $219 for my microwave
    If it lasts longer than I expected then I feel I'm getting free use of the item.
    If I get to the shop and I want a more expensive item, I must justify it as a cost per day, EVERY DAY over the expected life of the item.

    I think of it as though I would get out of bed and have put coins in all the items or they will be taken away from me.

    Using this method stopped me from impulse buying a very nice $4000 bed. It would have been a $1.10 per day commitment over 10 years. Instead I shopped around and found a bed for $1650 which was of similar comfort and quality and allows me to sleep well at night knowing it only costs me $0.45 per day to have comfy bed in my life.

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