we tend to underestimate our future expenses. here's one way to prevent that
Spending totals indicate mean expenses, and are rounded to the nearest Canadian dollar amount. Credit: Chart: The Conversation, CC-BY-ND Source: Howard et al., 2022

When asked to estimate how much money they would spend in the future, people underpredicted the total amount by more than C$400 per month. However, when prompted to think about unexpected spending in addition to typical expenses, people made much more accurate predictions.

These are the main findings of a series of studies and experiments that we conducted and which have just been published in the Journal of Marketing Research.

In our first study, we began by asking 187 members of a Canadian credit union to predict their weekly spending for the next five weeks. Then, at the end of each week, we asked them how much they actually spent.

For the first four weeks, people underpredicted their weekly spending by about $100 per week or $400 for the month.

In the study’s fifth and final week, we ran an experiment to see if we could improve people’s prediction accuracy.

Specifically, we randomly assigned participants to one of two groups. In group one, participants estimated their spending for the next week just as they had done in previous weeks. These folks once again significantly underpredicted their spending.

In group two, participants were asked to think of three reasons why their spending for the next week might be different than usual before making their estimate. This led them to make higher and much more accurate predictions—coming within just $7 of what they actually spent.

Importantly, participants in each group spent roughly the same amount of money that week, on average. The only difference between the two groups was whether they accurately predicted that amount.

Next, we conducted nine experiments to better understand why people underpredict their spending and whether being prompted to think of unusual expenses helps improve accuracy. In all, over 5,800 people participated in these experiments, including a representative sample of U.S. residents.

These experiments revealed two important insights.

First, people primarily base their spending predictions on typical expenses like groceries, gasoline and rent. They usually fail to account for irregular—though still common—expenses like car repairs, last-minute concert tickets or one-off health care bills. This is what leads to underprediction.

Second, prompting people to think of irregular expenses in addition to typical expenses helps them to make more accurate spending predictions. In our studies, people did not factor in atypical expenses unless we asked them to do so.

Why it matters

Helping people improve the accuracy of their spending predictions could help them improve their financial well-being.

Underpredicting expenses can be costly. For example, 12 million Americans borrow a total of more than $7 billion in payday loans each year because they can’t meet their monthly expenses. These loans typically have extremely high interest rates—more than 250% in some states.

Payday loans also come due in full so quickly that around three in four borrowers end up borrowing again to pay off the original loan.

If consumers could better anticipate how much money they will spend in the future, it might help motivate them to spend less and save more in the present.

In fact, one of our studies shows that our suggested prediction strategy not only boosted spending estimates, it also increased intentions to save.

What’s next

Members of our research team are currently investigating if, when and why underpredicting one’s expenses may be beneficial. For example, if a person sets an optimistically low budget and actively tracks their spending against it, does that help them reduce their spending?

We are also investigating whether people who work in the gig economy show a corresponding tendency to mispredict their future income. Journal information: Journal of Marketing Research

Provided by The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Citation: We tend to underestimate our future expenses. Here’s one way to prevent that (2022, September 29) retrieved 29 September 2022 from https://phys.org/news/2022-09-tend-underestimate-future-expenses.html This document is subject to copyright. Apart from any fair dealing for the purpose of private study or research, no part may be reproduced without the written permission. The content is provided for information purposes only.

TECH NEWS RELATED

Indian GCCs to add 3.64 million jobs over next 12 months

ETtechThe revenue from Global Captive Centres (GCCs) in India could generate revenues up to $60-85 billion revenue by 2026 from the current $35.9 billion, said a new report by NLB Services. The centres will add close to 3.64 lakh jobs in the next 12 months, it added.Despite global economic concerns, ...

View more: Indian GCCs to add 3.64 million jobs over next 12 months

Scoop: HUL, other FMCG majors in sale talks with nutrition firm Oziva

ETtechHindustan Unilever (HUL) has held talks to acquire plant-based supplement brand Oziva, multiple people in the know said, signalling the start of what could trigger a wave of consolidation in the direct-to-consumer (D2C) brand market.Oziva, which sells nutrition and fitness products across categories such as women’s health, skin, hair, men’s ...

View more: Scoop: HUL, other FMCG majors in sale talks with nutrition firm Oziva

Exclusive: Swiggy may fire 250 employees in December, more layoffs possible in coming months

ETtechFood and grocery delivery company Swiggy is laying off up to 250 employees this month, which is about 3-5% of its workforce, five people aware of the development told ET.Two of the sources said the layoffs could go beyond 250 in coming months while another said people across supply chain, ...

View more: Exclusive: Swiggy may fire 250 employees in December, more layoffs possible in coming months

Social platforms flag age-gating fears in MeitY’s IT rules meet

ETtechSome social media and internet platforms have expressed concerns to the ministry of electronics and IT on certain provisions of the draft Digital Personal Data Protection (DPDP) Bill which includes age-gating, sources said. The Bill has defined a child as a person who is below the age of 18 and ...

View more: Social platforms flag age-gating fears in MeitY’s IT rules meet

Spice Money to offer B2B transactions on ONDC next quarter

ETtechSpice Money (a bootstrapped subsidiary of DiGiSPICE Technologies), one of the five buyer applications on the government-backed e-commerce platform the Open Network for Digital Commerce (ONDC) is going to foray into B2B business on the network next quarter with the electronics category.So far, the transactions on the network have been ...

View more: Spice Money to offer B2B transactions on ONDC next quarter

iPhone 14’s Emergency SOS via satellite feature may launch in the UK next week

Apple has promised that its Emergency SOS via satellite feature, an exclusive safety feature for the iPhone 14 and iPhone 14 Pro, would launch in four more countries by the end of the year. It seems we may have a launch date for one of those countries. As reported ...

View more: iPhone 14’s Emergency SOS via satellite feature may launch in the UK next week

New kilonova has astronomers rethinking what we know about gamma-ray bursts

Long gamma-ray burst stems from neutron star merger, not usual supernova explosion.

View more: New kilonova has astronomers rethinking what we know about gamma-ray bursts

Tecno MegaBook S1 brings 15.6″ 120Hz display and 12th Gen Core i7

Today was a big day for Tecno as the company presented its very first flagship phones – Tecno Phantom X2 and Phantom X2 Pro. These devices come with compelling specs such as Dimensity 9000, 120 Hz OLED displays, and capable cameras. The Pro has the first retractable portrait camera on ...

View more: Tecno MegaBook S1 brings 15.6″ 120Hz display and 12th Gen Core i7

Mars is hiding exciting mysteries beneath its surface 

Dyson's noise-cancelling, air-purifying headphones are finally coming to Singapore

SpaceX announces Starshield, a new satellite service for governments

Microsoft Teams launches Communities feature to take on Discord

US state of Indiana sues TikTok, alleging Chinese access to user data

Redmi K60 with SD8 Gen 2, Pro with SD8+ Gen 1, seriously?

Cleaning Up Toxic “Protein Clumps” Could Prevent Dementia

Ex-Theranos exec Sunny Balwani sentenced to nearly 13 years in prison

New bot ChatGPT will force colleges to get creative to prevent cheating, experts say

OpenAI’s latest chatbot is sending Chinese users into a frenzy even though it is officially unavailable in the country

Oppo Find N2 and N2 Flip to come on December 15

Invisible skin mites called Demodex almost certainly live on your face – but what about your mascara?

OTHER TECH NEWS

Top Car News Car News