On Spending More Than You Thought You Would

How much money will you need?

Source: Photo by Sharon McCutcheon on Unsplash

We all have had the experience of entering a big box store, putting just a few too many items (all useful! all on sale!) in the shopping cart, and then being unpleasantly surprised at the checkout. Shopping trips, vacations, and home renovations all often run more expensive than estimated beforehand. Predictions of future spending are an important part of budgeting and planning our financial life. However, predicting future expenses is difficult, and most people make a specific type of mistake: they underestimate how much they will spend.

Dr. Buehler and I showed that when tracking people’s spending over several weeks, participants predicted that they would spend less in the next week than they had in the last week. They actually spent just as much. But when asked to again predict how much they would spend the following week, they again predicted they would spend less next week.

People are optimistic about all kinds of future events, from believing this year will be the year they submit their tax return early, to making overly ambitious promises to their partner, to believing they personally are at less risk to experience severe COVID symptoms if infected than other people. Being optimistic about how little you’ll spend next month, or how much a shopping trip, a vacation, or a wedding will cost you is just one instance of the tendency to see the future through rose-colored glasses.

This optimism can become a problem if people expect to have more money available than they really do have. They might commit to expenses they cannot afford or make choices they later regret.

Why are predictions so optimistic?

One reason is that people tend to consider the best-case scenario when making predictions. It is, by definition, difficult to anticipate unexpected expenses. We don’t consider our car breaking down or the unexpected dinner or birthday invitation when predicting next week’s spending. Even when trying to write out all the expenses that are likely to occur in a given time people are likely to forget some of them.

Another reason is that people want to believe the most optimistic estimate will come to pass. In fact, those people with the strongest motivation to save money showed the greatest underestimation in their weekly spending predictions, those most motivated to submit their tax returns showed the greatest bias in time estimations, and those most motivated to make their partner happy overpromise the most.

What can you do to estimate future costs more accurately?

One way to make more accurate predictions is to look to the past. What have you spent on similar events before? What have you spent last week or month? Past behavior is often the best predictor of future behavior. When estimating expenses, start from past experience with similar expenses rather than starting from zero and adding expenses (you are bound to forget some!).

Another way to make more accurate predictions is to broaden the way you imagine the future unfolding. Don’t just think of the best case scenario, but think of what could go wrong as well. When planning a trip, consider the possibility that the airport shuttle is unavailable and you have to pay for a cab ride. Having a range of possible spending estimates rather than one estimate will make predictions more accurate and make you think of contingency plans for overspending.

A third way is to be aware of your goals that might be biasing your predictions. Take a step away from the project you are predicting, taking a more distanced view of it (one way to do this is to imagine the event in the distant future or as happening to someone else!) to avoid your goals biasing your predictions.

Of course, any of the techniques above addresses predictions of spending only. Having a more accurate sense of how much you’ll spend in a given month or on a specific project can help with better financial decisions. Of course, you might want to adjust actual spending downward to match those optimistic predictions, but that is a considerably more difficult task!