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Sinking Funds and the Research on Exceptional Expenses

Ordinary versus exceptional

Abigail Sussman and Adam Alter published "The Exception Is the Rule" in the Journal of Consumer Research in 2012. They place purchases on a continuum from ordinary, meaning common or frequent, to exceptional, meaning unusual or infrequent. Their observation is that many of the largest expenses, such as electronics and celebrations, are the most exceptional ones. Across seven studies they found that while people are fairly adept at budgeting and predicting spending on ordinary items, they both underestimate their spending on exceptional purchases overall and overspend on each individual purchase.

The proposed mechanism

Drawing on mental accounting and choice bracketing, Sussman and Alter argue the discrepancy arises in part because consumers categorize exceptional expenses too narrowly, construing each one as a unique occurrence. A wedding gift is not filed alongside the birthday gift, the car repair, or the vet bill. Each stands alone, so no running total ever forms, and the aggregate goes unbudgeted while every individual instance feels justified.

The attention problem

Dean Karlan, Margaret McConnell, Sendhil Mullainathan, and Jonathan Zinman's Management Science paper on reminders develops and tests a model of limited attention in intertemporal choice, positing that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. Their intervention, reminders, increased saving. The theoretical claim and the empirical result point the same direction: lumpy future costs are the ones that fall out of view.

Expense neglect in forecasting

Jonathan Berman, An Tran, John Lynch, and Gal Zauberman reported evidence of expense neglect in the Journal of Marketing Research in 2016. Although people generally expect both income and expenses to rise, they systematically under-weight the extent to which growing expenses will cut into their spare money. Across their studies, participants placed roughly 2.7 times the weight on income change as on expense change. The authors report ruling out measurement error, low confidence in estimating expenses, belief in greater flexibility of future expenses, and general optimism bias as complete explanations.

What a sinking fund is trying to fix

A sinking fund is the practice of setting aside a monthly amount toward an expense that arrives annually or unpredictably. The research above describes the failure mode it targets: exceptional expenses are underestimated in aggregate, lumpy future costs escape attention, and expense growth is under-weighted relative to income growth. None of the cited studies evaluates sinking funds as an intervention. They characterize the problem, not the solution.

Sources

Every source below was retrieved and checked. Findings are reported as the source states them.

• The Exception Is the Rule: Underestimating and Overspending on Exceptional Expenses — Journal of Consumer Research, 2012
  Across seven studies, people budgeted ordinary purchases fairly well but underestimated exceptional spending overall and overspent on each individual exceptional purchase, in part because they categorized exceptional expenses too narrowly as unique occurrences.
• Getting to the Top of Mind: How Reminders Increase Saving — Management Science, 2016
  Develops and tests a model of limited attention in intertemporal choice in which individuals attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities; reminders increased saving.
• Expense Neglect in Forecasting Personal Finances — Journal of Marketing Research, 2016
  Consumers under-weight the degree to which expected future expenses will consume future income, placing roughly 2.7 times the weight on income change as on expense change; the authors report ruling out measurement error, low estimation confidence, perceived expense flexibility, and general optimism as complete explanations.

Common questions

Why do I keep blowing my budget on things I 'never buy'?

Sussman and Alter's account is that each exceptional purchase gets categorized too narrowly as a unique event, so the running total across all such purchases never forms. They found people underestimate exceptional spending in aggregate while overspending on each instance.

Is there research showing sinking funds work?

Not in the sources cited here. This literature documents the underlying errors, including expense neglect and inattention to lumpy future costs. It does not test the sinking-fund technique itself.

Do reminders help?

Karlan and colleagues report that reminders increased saving, in a framework where people fail to attend to some future lumpy expenditure opportunities. That is field evidence for reminders, not for any particular budgeting structure.

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