When it comes to your spending patterns, you probably consider yourself something of an efficiency expert.
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Maybe you browse multiple retailers’ sites before buying a new pair of shoes, to help ensure you’re scoring the best price possible. Or perhaps you save all your shopping for one outing, running from one store to the next, coupons in hand.
And because you’re a savvy deal hunter, you may feel that following a strict budget or a financial plan is unnecessary, because you’re already saving by virtue of your shopping habits. Right?
Not so fast. According to a study from the University of Colorado, you’re actually not doing yourself any financial favors with your excessive coupon clipping, bulk buying or mega shopping trips. Rather, the researchers found, budgeting in advance of spending is actually what helps consumers make better money decisions.
Specifically, budgeting facilitates what researchers call “priority planning.” Rather than expend resources trying to take advantage of all the deals out there, a priority planner knows how to make tradeoffs on their time and purchases in order to focus on the things that are most important on their to-do list.
By contrast, an efficiency planner stretches their resources, both time and money, in order to yield cost savings. The issue, however, is that efficiency planning may end up encouraging behaviors that don’t save the consumer money in the long run.
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How Budgeting and Priority Planning Go Hand in Hand
The researchers discovered the key link between budgeting and priority planning when they looked at spending behavior among a group of college students on spring break.
In the experiment, half the students were told to create a budget before the vacation and log their expenses while they were away. The other half wasn’t asked to budget or track their spending.
Afterward, the students were asked about how they managed their money.
Results showed that the group who budgeted beforehand was more likely to engage in priority planning, meaning they eliminated expenses that they couldn’t afford to focus on the ones that were more important. They were also less likely to exhibit “dysfunctional” responses to overspending, like impulse purchasing or deciding they simply wouldn’t deal with their finances until after the trip.
“Budgeting makes it very clear how much you have to spend, making it difficult to deceive yourself into thinking you can accomplish more than you can,” the researchers wrote in a press release. “This forces you to make tradeoffs sooner, before the situation is too dire.”
The catch? Priority planning tends to “hurt” more than efficiency planning, because you may be forced to eliminate something you like—for example, forgoing a new haircut to restock the fridge.
By contrast, efficiency planning often feels like you’re getting “something for nothing,” even though you’re technically spending time—and eventually, money—sifting through those flash deals or two-for-one sales.
As such, it’s easy to fall into the efficiency trap—but in the long run, being a priority planner will be better for your finances, the researchers suggest. Ultimately having a budget gives you a better idea of how much money you’re working with—and how much you can save for future goals.
Flummoxed as to where to start with your brand-new budget? Try the one-number strategy, which provides an easy way to categorize your spending so that you can stay on financial track—without feeling like you’re depriving yourself.
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