Think a budget is all you need to make smart decisions on big purchases? Research says you're wrong. Here's how to do it right.
Budgeting is a great tool to help you reach financial independence. But what if your budget is actually hurting you?
It can happen when you budget for a purchase. In fact, consumers who start shopping with a price in mind spend up to 50 percent more than those who don’t, according to researchers from Brigham Young and Emory universities. And if you’re buying expensive items this way, think of all the money involved.
Coming up in the video, Money Talks News founder Stacy Johnson explains the psychology behind the research finding and how you can avoid it. Check it out and then read on for more details.
What goes wrong
You decide you want to make a purchase – a household appliance, a new laptop or a new TV — and you select the maximum price you’ll pay. Because you have a budget in mind, your thinking goes, you won’t spend more than you planned on the item.
But, the researchers found, it doesn’t work out that way.
Brigham Young University explained how the study was done:
Experiments tested consumers’ thinking about buying televisions, pens, laptops, earbuds, garage doors, mattresses, Blu-ray players and luggage. Various approaches got shoppers thinking about price – they could select a target price from a set of choices, identify their own target price, select a maximum price they were willing to pay, or determine a budget for a specific purchase.
“The results were always the same – a preference for higher-quality, higher-priced items,” said study co-author Jeffrey S. Larson. “The most surprising aspect of this study was that people’s decision-making process can change so easily. Doing something as simple as asking, ‘Hey, how much would you budget for this product?’ completely changes their thinking.”
Once the shoppers had a set amount in mind, they stopped thinking about price and focused on quality. As a result, they overlooked less expensive items that met their needs in favor of ones with more bells and whistles.
From the university press release:
For example, in one of the experiments, the researchers asked a group of consumers how much they would be willing to spend on a new TV. Those consumers were then given the option of choosing a TV $18 above their target price and a lower-quality one $18 below. About 55 percent of them chose the higher-priced option that was above their target price range. But among a set of consumers who were given the same options WITHOUT being asked how much they would be willing to spend, only 31 percent chose the higher-priced option. Those who set a maximum price first also rated the difference in quality between the choices as much greater than those who didn’t.
You might be doing the same thing and spending more than you want or can afford. But there are ways to counteract it.
1. Set your budget anyway
It may sound counterintuitive, but you still need to know how much you can afford to spend. Another tip: For smaller purchases, plan on paying with cash.
2. Choose your features
Before you shop, decide what features are important to you. Read product reviews. If you know exactly what you want before you walk in the store, you may be less likely to be distracted by an upgrade.
3. Return your focus to price
Once you think you’ve made a decision, focus on price again. Is this really the model you want, or is there one that satisfies your needs and has a lower price? The university explained:
The researchers found that the effect disappeared after consumers had their attention drawn back [to] price after they had evaluated quality. “Just knowing that the effect is there is going to be enough for most consumers to be able to overcome it,” Larson said.
4. Comparison shop
Don’t forget the basics of saving money on everything. Before you buy, comparison shop; prices can vary widely from store to store. And once you find a deal, don’t be afraid to ask for a lower price.
To save some time, try a comparison shopping website like:
Can you recall a time when the effect described by the researchers caused you to spend more than you had planned? Let us know on our Facebook page.