It’s well documented that we’re not always particularly good at planning the future. Research from Texas A&M University highlights how harmful this can be when it comes to budgeting.

The researchers found that when we try and estimate how much money we might spend in the future, we often underpredict the total amount by hundreds of dollars. Interestingly, this only applies to expected expenditure, as when we think about unexpected spending, we’re much more accurate in our forecasting.

The results suggest that we often base our spending predictions on fairly typical expenses, such as fuel and groceries. These can make it harder to accurately account for less regular expenses, such as nights out or car repairs, which is what causes us to underpredict how much they might cost.

We might overcome this pattern by thinking of irregular expenses as well as more typical expenses. During the research, people rarely did this unless explicitly prompted to by the researchers.

Financial health

The researchers argue that being able to accurately forecast our spending is crucial to our overall financial well-being. Indeed, they argue that the $7 billion payday loan industry largely exists because people are unable to meet their monthly expenses.

What’s more, the speed with which such loans have to be repaid, and the extremely high interest rates they incur, often result in people borrowing again in order to repay the first loan. If people were better able to predict how much they might spend in the future it might mean they don’t need to rely on such unfair sources of credit.

Indeed, the researchers actually found that following a better prediction strategy not only improved people’s spending estimates but also increased their likelihood of saving.