Expense Neglect in Forecasting Financial Resources

How do people form expectations about how much money will be available in the future? Cross-sectional data show that as income goes up, so do expenses, suggesting that people should be sensitive to both. Across multiple studies, we find that people do not expect a similarly strong link in their own personal finances. People expect to have more “spare” money in the distant future (one to three years) than in the present or nearer term (up to 3 months); the expected growth in spare money is fueled by the expectation that income will be higher at more distant points in the future than it is today. Interestingly, people do not factor in their expense growth when estimating their future finances, and consequently, their expectations about spare money are determined primarily by their expected incomes rather than expected expenses. While this effect is very robust, we can debias, although not fully, the expectation of more spare money in the future by calling attention to increases in expenses over the past two years.