Budget depreciation: when budgeting early increases spending

A TFI research project by Yuna Choe and Christina Kan
Posted on November 26, 2020

"While budgeting in advance is seen as a good practice to control spending, this research shows that budgeting too early for a specific purchase may increase spending."

Yuna Choe and Christina Kan argue that as the temporal separation between budget setting and actual purchase increases, consumers become more willing to overspend because of what they term “budget depreciation.” Consumers adapt to the reference point set by the budget such that, over time, the budgeted level becomes the status-quo spending. Thus, the more time that passes, the lower the pain-of-payment from the budgeted amount, and the greater the willingness-to-spend.

Across a secondary dataset of real estate purchases, one field study, and two experiments, they find evidence that consumers who set a budget further in advance are more likely to overspend relative to their budgets.

Download the report or read the summary below to find out more.


Budgeting is often considered a useful tool to control spending. Many financial counselling institutions and financial literacy programs suggest that the first step to financial wellness is to set up a budget (Nagle 2019). Banks and other personal finance platforms provide services for effective budgeting (e.g. Lockert 2019), and in response, the number of consumers adopting budgeting and financial planning apps has more than tripled in the last five years (EY Global Fintech Adoption Index 2019).

When budgeting for a specific upcoming purchase - like buying a house - consumers typically do so in advance, and one might assume that budgeting even sooner helps them reduce their spending. This research explores when and why budgeting early might have the opposite effect, leading to higher spending instead.

We examine how the time between budget setting and purchase affects the amount of money that consumers actually spend relative to their budget. Contrary to the popular belief that setting a budget far ahead of a purchase is most helpful, our findings from secondary data, a field experiment, and a series of lab experiments reveal the opposite: when single item budgets are set aside far in advance, consumers are more likely to overspend their budgets by the time they make their purchase.

One reason why budgeting early can lead to increased spending is the 'pain' associated with the budgeted money, which lessens over time (Gourville & Soman, 1998; Prelec & Loewenstein, 1998). When spending money, consumers typically experience 'pain of payment' - a psychological burden of payment (Prelec & Loewenstein, 1998). We propose that when setting a budget of $100, for example, this amount becomes a reference point for spending decisions. As more time passes, consumers adapt to the idea of spending their budget, and when making a purchase, spending the $100 feels less painful. Consequently, they become more likely to spend, relative to their budget.

Experiment 1: buying a house

We chose to observe house buyers’ budgeting and spending behavior, as most consumers set a budget for a large purchase like real estate, and a house purchase has a significant impact on their financial well-being. Real estate transaction data was collected from the client management software and transaction journals of a real estate office in the U.S. for the period from January 2018 to September 2019.

We captured the temporal gap in budgeting by counting the number of days between the date on which buyers first set their housing budget with the real estate office, and the date of the actual house purchase. We captured overspending relative to the budget by taking the difference between the original budget range (minimum, mid, and maximum budget) set and the amount spent on the house purchase. We found that there is a positive relation between the length of the temporal gap and the spending amount relative to the budget. This shows that house buyers who set a budget further in advance ended up spending more, relative to their initial budget amount (see figure 1).

Experiment 2: buying a class ring

We then examined the causal link between temporal separation and spending among college students budgeting for, and purchasing, a class ring (a ring to commemorate one's graduation, which is considered a sizeable and relevant purchase for many students). To experimentally manipulate the temporal gap in budgeting, we randomly assigned 461 undergraduate participants to set a budget for their class ring, either ten or three weeks before the actual purchase. The ring order was placed on the same day for all buyers.

We recorded which budget each student set for their ring, and tracked how much they ended up spending, calculating the difference. We found that students with a longer temporal gap (ten rather than three weeks between budget setting and the actual purchase) were more willing to overspend their budgets. The amount participants budgeted was not affected by the temporal gap.

Consumer characteristics

In a lab experiment, we compared how the temporal gap affects consumers based on their individual spending characteristics. They vary in their chronic tendency to experience pain of payment (Rick, Cryder, & Loewenstein, 2008): 'tightwads' (as they are called in the TW-ST scale, see below) typically feel more pain when spending money, whereas 'spendthrifts' generally feel less pain.

We asked 169 participants to imagine that they set a $300 budget for a tablet PC either two months or one week ago, and that they're now about to make the actual purchase. We then asked them to indicate their willingness to purchase a premium version of the tablet PC, with additional storage space and longer battery life, at $330. Using the Tightwads-Spendthrifts scale (Rick et al., 2008), we then measured which consumers are considered 'tightwads' or 'spendthrifts'. People who scored the middle of the scale are categorized as 'unconflicted consumers'. When tightwads and unconflicted consumers set a budget in the distant past (compared to the near past), they are more likely to overspend.

Product characteristics

We examined how temporal gaps in budgeting have differential effects on spending decisions, based on individual differences in pain of payment. There are also product differences that can impact pain of payment. A hedonic product (designed for enjoyment and pleasure, like a game tablet) generally makes consumers feel greater pain of payment, whereas a utilitarian product (focused on functional and practical use, like a work laptop) elicits lower pain of payment.

Because hedonic products are more painful to spend money on, we find that budgeting early increases spending to a greater extent when budgeting for a hedonic product than when budgeting for a utilitarian product.

Revisiting the budget

What could help prevent overspending resulting from a greater temporal separation in budgeting? Budgeting early can still help control spending when consumers re-assess their budgets over time. Instead of treating the pre-set budget as a final decision set in stone, we find that re-evaluating the budget prevents consumers from adapting to the reference point over time.

In a lab study, we asked 226 participants to set a budget and buy short films and mini games to play using in-lab credits. We randomly assigned half of the group to set a budget and experience some temporal gap by simply waiting for the purchase to arrive. The other half was asked to reconsider their budget after setting it during the wait time. We find that people who reconsider their budget during the temporal separation in budgeting are less likely to overspend, suggesting that revising the budget from time to time can be helpful to control spending and achieve the budgeting goal.

Implications of our findings

Our findings provide actionable insights for those who offer services on consumers’ financial planning. When analyzing spending habits and providing recommendations for consumers’ financial soundness, financial advisors can consider how far in advance consumers typically budget, along with product characteristics and individual differences in personality. For example, when budgeting for hedonic expenses such as vacations, an advisor might encourage clients to repeatedly reassess their budget before making a final decision.

Finally, consumers themselves can also take advantage of these findings to manage their own spending. When planning a big purchase like a house or a car, it might be wise for them to reconsider their budgeted amount regularly to prevent overspending.


  • Gourville, J. T., & Soman, D. (1998). Payment depreciation: The behavioral effects of temporally separating payments from consumption. Journal of Consumer Research, 25(2), 160-174.
  • Lockert, M. (2019). “6 Tips for How to Budget Your Money,” www.creditkarma.com/advice/i/h.... Last accessed September 20, 2020.
  • Nagle, C. (2019). Practical Tips for People Who Have Trouble Saving Money,” https://www.nfcc.org/resources.... Last accessed September 20, 2020.
  • Prelec, D., & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.
  • Rick, S. I., Cryder, C. E., & Loewenstein, G. (2008). Tightwads and spendthrifts. Journal of Consumer Research, 34(6), 767-782.