Mapping out expected income and expenses for any given time frame is crucial for sensible financial planning and management. To some, it’s easy to plan and be disciplined. However, for most people, planning for the future is difficult, especially when it comes at the expense of the present – this is the “Present Bias.”
Present bias is over-valuing immediate gratification/gains at the expense of potential rewards in the future. Overspend in the near term as opposed to more logical longer term decisions. This can present itself in many forms; Paying more for a product in order to receive it early, selecting service plans that start out inexpensive but elevate over time, spending money as soon as it comes in rather than investing or saving it, etc.
Imagine someone offers you the choice between paying $250 now for an entire year of internet service, or to have you join a plan where you pay $25 a month, every month, for the entire year. Of course, the sensible option is to pay $250 all at once, instead of paying $25 a month, which would amount to $300 a year! However, most of us don’t want to spend $250 all at once, and would rather make more frequent, smaller payments in order to have more money in our pocket today – that is our present bias messing with our heads (if we can afford the larger sum up front.)
There are some adjustments people can make to combat the bias and make healthier financial decisions. One idea is learning to view decisions from a long term perspective; Monthly budgets are important, but they should always be seen as a part of a larger sensible annual budget. It really is that simple – consider decisions with a long term lense – calculate your expected yearly expenses and find ways to reduce them over the long haul.
If we apply this logic to financial decisions, we’ll be better off in the long-term. Eventually, enough sensible, forward thinking, financial decisions will stack up and can save real money. For example, if we were to buy a bulk pack of laundry detergent once a year, it would end up considerably less expensive than buying new medium sized bottles more often throughout the year.
This principle can be applied more widely in life to save us hundreds, if not thousands a year. When you learn to master this mode of thinking, you’ll be surprised to find that the long-term decisions add up, and eventually greatly diminish temptations for short-term gratification, as you are now reaping the benefits of previous decisions.
Think past the here and now; buy in bulk, negotiate your phone and internet bills, invest in services that save money over time. Take control of your future. Beat the bias.