Why a Budget Could Cause You to Spend More

It’s a golden rule of personal finance that budgeting helps you saving money. But a new study suggests that budgeting may actually be causing consumers to spend more.

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When shopping from individual items ranging from pens to televisions, consumers spent more on particular items if they set a budget than if they hadn’t, finds “When Budgeting Backfires: How Self-Imposed Price Restraints Can Increase Spending”. That’s because when shopping with a budget, consumers tend to focus on items around the top end of their limit, paying less attention to ones that offer a better value below their budget.

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“If you go out with a particular price in mind, it changes your decision process,” says Jeff Larson, assistant professor of marketing at Brigham Young University and co-author of the study, which is set to appear in the Journal of Marketing Research this month. “Typically without a budget, consumers are good at trading off price for quality. They usually zero in on an optimal balance.”

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Six lab experiments led Mr. Larson and co-author Ryan Hamilton, assistant professor of marketing at Emory University, to these conclusions. In one, subjects were asked to imagine that their car had broken down and needed a replacement tire. One group was shown six tires of varying quality and price. The second group was asked to first set a budget for a replacement tire, and then shown the set of six tires. The latter chose more expensive tires overall.

People with a budget stuck with higher quality, higher priced items, they found. Those without one more often wound up with cheaper items that lacked certain features that weren’t important to the consumer.

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Next up? Mr. Larson wants to see if this logic applies to home buying—an activity many do with a set budget in mind. “Most likely, people are being pushed [by the budgeting process] to buy more house than they need,” he says.