One of the more infuriating challenges of personal money management goes as follows. Suppose your dishwasher breaks down. It makes sense to replace it with a good one, instead of something cheap that will need replacing again next year, so you buy a high‑end model, congratulating yourself on your wisdom. The following month, it’s your 10th wedding anniversary. You’re not the type to splurge on champagne-fuelled city breaks, but this is different, a once-in-a-lifetime event, so marking it properly seems right.
The month after that, you buy a pricey new work outfit, as an investment in yourself. The problem with all these “exceptions” isn’t that they’re unjustifiable – it’s that, if they crop up all the time, they aren’t really exceptions. Which is one reason it’s so hard to stick to a budget: there’s often a solid case for spending beyond your means just this once. But if “just this once” happens every month, there’s a name for that: it’s a monthly expense.
The researchers Abigail Sussman and Adam Alter have studied what happens when we classify expenditures as exceptions, and their answers are unsettling. We chronically underestimate how much they’ll cost us – and, when it comes to each individual purchase, we’re prone to overpay. This is due to a flaw in what psychologists call our “mental accounting”: we don’t think of dishwashers and city breaks as the same kind of thing, so we don’t think of the money as coming from one pot marked “exceptional expenditures”; we also forget there will be other demands on those funds later on. This has its upsides: in another study, Alter and colleagues showed that people will donate more to charity if the request is framed as an exception to their usual spending. That’s a positive, because the beneficiary happens to be a good cause, but it’s still bad mental accounting.
Our ineptitude isn’t confined to money. A working paper from Sussman and others suggests it applies to “caloric budgets”, too: we’re likelier to stray from self-imposed rules of healthy eating if we can classify the occasion as a special event or the food as somehow unusual. Then there are time budgets: I know I ought to spend the first few hours of every day on my most important projects, and I’d only ever break that rule for a truly urgent reason. But if there’s one of those twice a week, am I following my rule at all?
This is one of those idiosyncrasies of psychology for which the best antidote may be simply remembering it exists. If you’re in the habit of drawing up a budget, you could include a category for exceptions and brainstorm what that might include. (Birthday presents are a good example: it’s possible to buy them almost weekly yet still think of them as one-offs.) To counter the tendency to spend time badly, you could add a “slack day” to your week, keeping one day free of scheduled work to deal with all the exceptions that – I promise! – will arise.
Above all, develop the habit of distrusting the inner voice that tells you a given expenditure, of money or anything else, is worth breaking your rules for. Maybe it is. But you always say that.
The best book on managing your money remains the slightly new-agey but deeply wise Your Money Or Your Life, by Vicki Robin and Joe Dominguez, which was published in 1992. A revised edition has just been released.