Budget Depreciation: When Budgeting Early Increases Spending

Abstract

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. We argue that as the temporal separation between budget setting and actual purchase increases, consumers become more willing to overspend because of what we 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, as more time passes, pain of payment from the budgeted amount decreases, and the willingness-To-spend increases. Across a secondary dataset of real estate purchases, one field study, and three experiments, we find evidence that consumers who set a budget in the distant (vs. near) past are more likely to overspend relative to their budget. The effect emerges for single purchase occasions rather than a category of purchases over multiple occasions. It emerges because of the hypothesized pain-of-payment process (e.g., effect is stronger among tightwads, who feel greater pain from spending; effect is mitigated under budget reassessment, which prevents pain adaptation). Our work contributes to the mental budgeting literature by invoking a role for temporal separation and draws a novel connection to prior work on payment depreciation.