Why Budgets Don't Work

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Common wisdom dictates that making a budget can save you money. But, in fact, setting a spending limit when making purchases often results in higher spending.

That finding is part of research published in the April 2012 Journal of Marketing Research, which found that when making purchases, ranging from pens to televisions, consumers who set a spending cap on those purchases consistently spent more than shoppers who did not. 

To prove this point, researchers Jeffrey Larson, of Brigham Young University, and Ryan Hamilton, of Emory University, examined the spending choices of consumers.  In one study of consumers looking to purchase pens, nearly 60 percent of consumers who set a budget for pens spent more than 99 cents on a pen. On the other hand, just 38 percent of consumers who did not set a budget spent more than 99 cents. 

[A Quarter of Americans Won't Save a Dime in 2012]

The authors found that this is the result of the fact that when consumers set a budget, they tend to focus on a more narrow range of products. This in turn makes small differences seem larger to consumers, which the authors said can result in increased spending. The research also found that looking at products without a set budget allows consumers to examine the quality of the product and better judge what they are willing to spend for it.  This can result in consumers spending less. 

 The researchers found that consumers should look at a wider range of attributes rather than focusing on setting a budget. For example, the authors found that consumers who look to buy a 42-inch television should focus more on all 42-inch televisions instead of just those that fall in their price range. This consequently will give consumers a broader picture of those products and that can then lead to a lower price.

The research was a part of the article "When Budgeting Backfires: How Self-Imposed Price Restraints Can Increase Spending."

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