Testing if budgeting makes us more willing to change our behavior

Background

Imagine you’ve signed up to meet regularly with a financial coach or a financial counselor to help you improve your financial situation. Likely one of the first things that you’ll do is create a budget based on your current spending. Changing how we manage our finances can feel overwhelming, but creating a budget is seen as an important first step to making other positive changes to our finances.

Practitioners also find budgeting useful. They often use an initial budget exercise to get a general sense of someone’s financial situation and to bring up specific problem areas that they can address together. In a financial coaching session. For example, the coach might use a budget to figure out if there are changes that the client can make so that they can start saving for a long-term financial goal.

However, practitioners will tell you that the initial budget is rarely accurate. People’s financial lives are complicated and volatile, which makes budgeting difficult. Furthermore, people just don’t remember the specifics of their spending. An accurate budget is useful because it makes problem areas easy for clients to see.

However, on a deeper level, budgeting might also change the way we interact with our finances. If this is the case, perhaps having clients create a budget is more valuable than just getting a sense of their financial circumstances – budgeting might make us more willing and receptive to changing our behavior.

Key Insights

As we set out to redesign the budgeting exercise that practitioners give their clients, we hypothesized that budgeting might have a couple of other psychological benefits.

• Budgeting might strengthen our self-efficacy and encourage us to believe that we are going to be able to manage our finances in ways to support our financial well-being.

• Budgeting might make us more confident and comfortable engaging with our finances. Dealing with financial problems can be painful, so perhaps budgets make us less likely to avoid issues.

• Budgeting might make us feel like we have more control over our own finances. This sense of control is important to forming intentions to change our behavior, but it can also make us feel better about our finances in its own right too.

Experiment

We wanted to test whether the extra time spent getting a very detailed budget would make people perceive the budget as more accurate and whether it had any other psychological benefits. We randomly assigned 462 respondents to one of three conditions.

• A short budgeting exercise: participants completed a budget that required less specificity, asking for only 17 fields of information.

• A long budgeting exercise: participants completed a budget that was much more granular, asking for 83 different fields of information.

• A control where participants read an article about budgeting.

Results

We initially saw that people tended to view the more intensive budget as more accurate, but that differences disappeared after controlling for other factors, like how often they use a budget in their own life. We did not find that people felt any differently about their finances after completing the simple budget compared to the more intensive budget.

Our analysis does suggest that participants who created either type of budget felt significantly less confident and significantly less in control of their finances. We asked all participants about their confidence in managing their finances before and after the budgeting exercises. All three groups had similar levels of confidence before the exercise. People who read about budgeting actually saw about a 6% increase in self-confidence. People who went through a budgeting exercise on the other hand experienced about a 3.5% decrease in self-confidence.

Taken together, this suggests that the process of budgeting does not make people more willing to change the way they manage their finances. On the contrary, this evidence suggests that budgeting may actually make people less likely and receptive to change. Budgets may still be a helpful tool for guiding or informing our choices, but this study suggests that our assumption that people ought to make a budget before they consider other changes to their finances may be misguided.