How budgeting ahead may increase spending

by Yuna Choe & Christina Kan
Posted on July 06, 2020

You’ve probably heard that setting a budget is an important step in achieving financial wellness. People talk a lot about how and why to set a budget, but have you considered when to do so? In our research, we explore how budgeting longer in advance may, paradoxically, lead to higher spending.

Consider the following scenario. You’re looking to buy a home and you budget $200,000 for this purchase. At first, this feels like a lot of money, and it pains you to think about spending it all. However, as time passes, you start to get used to the idea. After a month of browsing, you’re even contemplating spending an extra $5,000 to get that place with the nicer view. A couple of months later, you’re adding another $10,000 to upgrade to a slightly better location. By month six in your search, you’ve finally made a decision and your $200,000 budget is now a $220,000 purchase.

From correlational to causal evidence

Sound familiar? If your answer is yes, you’re not alone. We collected data for over 100 real estate transactions that occurred in 2018 and 2019. The data include the date a budget was set and the date a purchase was made, along with the amount of money that was originally budgeted and the amount of money that was actually spent. Our analyses suggest that when buyers budget longer in advance, they tend to spend more than they'd predicted.

But this kind of data offers only correlational evidence, and correlation isn’t causation. Maybe people who are really excited about buying a home take longer to make a decision - and are also more likely to overspend.

To explore causality, we ran a field experiment with college students budgeting for "class ring" purchases (rings to commemorate one's graduation). We randomly assigned over 1000 participants to budget either three weeks or three months prior to buying their class rings. Students who budgeted three months ahead tended to spend more relative to this budget than students who budgeted just three weeks ahead.

One reason why budgeting early can lead to higher spending is because the pain associated with spending money lessens over time (Gourville and Soman 1998; Prelec and Loewenstein 1998). When people budget far in advance, they gradually get used to the idea of spending money, and by the time they actually make their purchase, it doesn’t feel quite as painful anymore - so they don’t mind spending a little extra.

“It can be helpful to revisit your budget from time to time and re-evaluate how much you should be spending”

Revisiting one's budget over time

Despite our findings, budgeting early has its benefits, and we would certainly not suggest that you simply stop budgeting in advance. Rather, we recommend reassessing your budget over time.

In a lab study, we asked participants to set a budget to purchase short films using in-lab credits (to be used only during the experiment). The films would be available to watch later in the lab session. We randomly assigned some participants to budget longer in advance than others. Prior to making their purchase decision, half of the participants were asked to reconsider their budget, while the other half were not.

We find that for participants who did not reconsider their budget, budgeting longer in advance resulted in higher overspending. This tendency to overspend was reduced for those who reassessed their budgets prior to making a purchase decision. This suggests that it can be helpful to revisit your budget from time to time and re-evaluate how much you should be spending.

Budgeting during uncertain times

Due to the global pandemic, many people are finding their travel plans upended. To entice future travel, airlines and hotels are promoting cheaper rates, with the option to book now and travel later. Budgeting now for a trip sometime in the distant future can be a great way to save on travel expenses, but our research suggests that people should be careful about overspending when the date of travel actually arrives. Revisiting your budget prior to travelling can make it easier to stick to your budget.

How does this effect play out in purchases that occur over time, such as subscription services that are paid on a monthly basis? That's an interesting extension of our research. We predict that people who have been budgeting and paying for a subscription for a longer period of time are more likely to upgrade their services.

Yuna Choe is a Ph.D. student in Marketing at the Mays Business School, Texas A&M University

Christina Kan is Assistant Professor of Marketing at the Mays Business School, Texas A&M University


  • Gourville, John T., and Dilip Soman (1998), “Payment Depreciation: The Behavioral Effects of Temporally Separating Payments from Consumption,” Journal of Consumer Research, 25(2), 160-74.
  • Prelec, Drazen, and George Loewenstein (1998), “The Red and the Black: Mental Accounting of Savings and Debt,” Marketing Science, 17(1), 4-28.