A theory of personal budgeting

Prominent research argues that consumers often use personal budgets to manage self‐control problems. This paper analyzes the link between budgeting and self‐control problems in consumption–saving decisions. It shows that the use of good‐specific budgets depends on the combination of a demand for commitment and the demand for flexibility resulting from uncertainty about intra temporal trade‐offs between goods. It explains the subtle mechanism that renders budgets useful commitments, their interaction with minimum‐savings rules (another widely studied form of commitment), and how budgeting depends on the intensity of self‐control problems. This theory matches several empirical findings on personal budgeting.