Budgeting and Decision Making in Poor Households in Emerging Economies
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Abstract
Budgeting and decision-making processes are very essential in the development of the household and the nation at large. It is important as it ensure all the earned dollars are put into good use. It also reduces over spending and overborrowing from creditors which give high interests. Proper budgeting help individuals make rational and optimal financial decision. This study focuses on the advantages of budgeting and proper decision making in the family. It also investigates some of the challenges that may hinder rational financial decision making and budgeting. It concludes that even though low-income households may be willing to strictly follow their budgets, factors such as peer pressure and lack of goals may reduce chances of strictly adhering to the budget. Finally, the paper also discuses some of the saving policies and decision makings in poor households. It focused on behavioral perspectives that may affect financial decision-making. It states that situations affect the behaviors of individual in the household.
Keywords: Budgeting, Decision-Making, Low-income households.
Budgeting and Decision Making in Poor Households in Emerging Economies
In many nations, the poor always behave differently compared to rich households. That is, decision-making and budgeting processes in both underdeveloped and developed nations are highly influenced by the financial income of the household. For instance, poor households are prone to making use of check-cash services and expensive payday loans to borrow continually at a higher interest rate and play lotteries. The argument about the reason for the variation in budgeting and decision-making between the rich and poor households has a continuous and long history of both economic and social science. The two contrasting opinions are that the poor households sensibly adapt and make the most favorable decisions for their economic environment or that the poverty culture molds their choices making them more likely to make mistakes. The argument among the economists has been evident in the lasting question that the poor have lower self-control, are more risk-averse, and more impatient, all of which could affect their decision-making and budgeting processes. Furthermore, the economists also debate that scarcity affects decision-making budgeting. Scarcity is having less than individuals feel they need. Scarcity hinders cognitive functioning, thus leading to errors in decision-making and biased behaviors. Therefore, poor households in emerging economies are more prone to making poor decisions during budgeting processes.
Poor households in developing countries always live without enough resources (education and Money) to meet their needs and to fully contribute to the wellbeing of society. They lack enough income to make themselves proper shelter and to always provide decent meals for their families. Many of the individuals from poor households are not employed and incur instability in their environments which exposes them to stress. Due to lack of education, most of them can only be employed as casual workers in the company to perform hard and technical jobs. They have to make proper decisions with the little amount they earn daily. Such a strained decision-making situation initiates changes in key functioning of their social, cultural, and psychological processes. Once the functioning of their key social and cultural processes has been altered, the poor individuals will tend to make wrong decisions that promise them a high income. They will get into behaviors such as gambling and unplanned lending with the aim of earning more income to sustain their families. Therefore, poverty and low-income force poor households to make unrealistic decisions such as gambling and playing the lottery, which eats more of their income without much return.
Besides, decision-making can be realized in relation to the basic patterns in terms of whether the poor households serve more distant or immediate goals. Particularly, several suboptimal behaviors and decisions linked with low-income groups are by attending to immediate needs and goals (Carvalho, Meier, & Wang, 2016). They always focus on the present goals instead of the future plans, on the actual goal and not the hypothetical, and on those who are socially close and distant. While certain decisions may have unsafe distal effects like the consequence of unhealthy eating on the health of old aged individuals in the household, they always perform essential proximal functions like offering a sense of social connectedness and immediate comfort. The decision-making processes of the poor households can be reorganized from being a result of psychosocial deficit or suboptimal to being adaptive and rational when considering the proximal functions they prefer.
Importance of Budgeting and Proper Decision-Making in Poor Households
Budgeting is an essential process in a poor household since it helps manage the little income earned by the family. Many people in poor households in developing countries fear budget since they think it is a hassle and restrictions to use their finances. Many of them even think that they are too poor to budget; therefore, they forego budgeting. Nonetheless, budgeting is important since it helps an individual reduce overspending and enables them to save on money and make use of every coin they earn (Baker & English, 2011). Budgeting and proper decision making have several advantages to the low-income households, which include; reduction in overspending. Budgeting gives an individual a chance to optimally and rationally think before spending their income. Spending without carefully thinking where the money all goes can result in overspending every month. Overspending makes an individual dual for exhausting their incomes just a few days after payment. They will end up borrowing survival money from creditors and friends. The future spending power is limited due to overspending since more of the income is used in paying off debts. Budgeting plans how every coin in the paycheck will be sent, reducing the stress of finding a way to pay daily needs. Therefore, budgeting reduces overspending by rationally and properly thinking before using the money.
Similarly, budgeting helps the household reach its goals. Planning and budgeting help the household prioritize its spending. Through budgeting, the household will focus on the things that are most essential to the household. For instance, when a family is planning to save up for a home, to start their own business, or to get out of debt, budgeting will help plan on how much to be spent and those to be saved for the target objective (Carvalho, Meier, & Wang, 2016). The household will set aside finances each time they earn an income to ensure their goals are met. Budgeting, therefore, helps a household develop a plan and track it to ensure the target goals and objectives are met.
Besides, budgeting is an essential technique to help a low-income household save on money. Studies have shown that people with no budget tend to save less from their income than those with a budget. Budgeting helps save money since every dollar will be assigned to meet a specific goal. Individuals can have money transferred automatically into investment or saving accounts every time they earn a salary. Similarly, a budget helps an individual or a household stop spending their savings every time they are broke (Carvalho, Meier, & Wang, 2016). Through advance planning of finances, spending of emergency money aimlessly is highly reduced. Savings and budgeting give individuals financial freedom and help them develop wealth.
Furthermore, a budget signals an individual against possible future cashflow problems. For instance, it alerts people if they have several direct debits from the bank accounts, then what can be covered by their salaries (Baker & English, 2011). Once signaled, an individual can take essential measures like seeking an overdraft facility to cover the shortage or getting a small loan to cover the deficit. Similarly, the household can contact the involved firm concerning the direct debits so that they can alter their payment plans. Budgeting also gives an individual a clear idea of the exact amount of money they expect or which is coming into the family. The household may try to increase monthly wages in different ways they prefer, such as seeking a pay rise, starting a small new business, or finding a better job.
Finally, budgeting helps an individual to obtain more affordable credits. With proper budgeting, the household will take a credit they can afford. Budgeting and planning give an individual a clear picture of the amount of credit they can take without getting into many debt challenges. People who do not follow a budget of the household always land in a debt trap and sometimes may find themselves making an excessive purchase without clearly knowing where they will obtain money to pay. Making a budget is a good practice in a family as it ensures the smooth running of the household, therefore, gradually improving the living standards of individuals.
Challenges Facing Budgeting in Low-Income Households
There are several budget challenges that people experience when trying to get into financial freedom. Budget challenges may push individuals to make irrational and suboptimal decisions. Some of the budgeting challenges include worrying too much about what other people will think. Many poor households find themselves making certain suboptimal decisions since they focus too much on what others think. In developing countries, studies have shown that people are embarrassed to say no when their friends invite them out even if they know they understand going out is not in their budget (Carvalho, Meier, & Wang, 2016). People will always follow their friends out to a fancy restaurant where they will spend lots of money. Peer pressure makes budgeting hectic in developing nations. There are only a few in the underdeveloped nations who will clearly explain to their family and friends that they have a budget and only have a specific amount to be spent on entertainment. People will always forego their budget since they are worried about what their friends will think. Peer pressure is the main budgeting challenge because it makes people forget or ignore the reason they are budgeting and make irrational decisions.
Similarly, people may feel like they are depriving themselves of good things while they are budgeting. As people tend to follow a financial plan, they always forego what they feel is not important for them ((Baker & English, 2011). Therefore, individuals in the low-income group will feel deprived when they start following financial plans strictly. Therefore, they always prefer living their lives freely without much of a plan. In developing countries, many male individuals staying alone prefer eating in a fancy restaurant instead of cooking at home. Preparing a meal at home is actually cheaper and healthier than eating at restaurants. Following a financial plan means that an individual finds an alternative, cheaper way of enjoying life. Therefore, people will fear making a financial plan since they feel they will be deprived of good things, which is a budgeting challenge.
Another budgeting challenge is the lack of goals and purpose. Budgeting works best when people in the household have a goal they want to achieve, such as opening up a new business and building a home (Baker & English, 2011). To accomplish anything in life, there must be a goal. Similarly, there must be a goal to ensure proper budgeting. The household must give themselves a reason why they are starting a budget and the amount they want to save. Lack of goals reduces the focus of the family to achieve anything. They will be working just to satisfy their daily needs and then stop there.
Saving Policy and Decision-Making in Poor Households
Poverty theories have held regular folks, economists, and social scientists to fall in either of the two camps. One of the camps is for those who view the behaviors of the low-income individuals as the intended adaptation to existing circumstances. The other camp regards the behaviors of the economically disadvantaged as originating from a unique poverty culture that is prevalent with different values (Mullainathan & Shafir, 2010). The first perspective assumes that individuals are highly rational, well-informed, justified beliefs, hold coherent, and effectively seek their goals with no systematic error and need no help. The second camp characterizes the economically disadvantaged as attitudinal and psychological shortcomings, assumed to be endemic that make the perceptions of the poor ill-informed and misguided. They believe that the poor’s behavior is impulsive and their choices fallible, therefore, leaving them in need of protective guidance.
The behavior of human beings proves to be heavily dependent on the context, that is, the purpose of both the situation and the person. One of the researches conducted by modern psychologists concluded that situation exerts remarkable power (Mullainathan & Shafir, 2010). They stated that people have a persistent trend to undervalue the power comparative to the assumed effects of personality traits. Different researches have reported the spectacular ability of situational factors to affect behaviors that are usually seen as insightful to deep personal characters. They proved that situation could push an individual into making a suboptimal decision or rather a wrong decision. The current situation of an individual has a greater effect on the decision they make in their households. The decisions made, in turn, influence the budgeting, saving, and investing processes.
Many of the low-income households in developing countries are unbanked; therefore, they have to depend on alternative financial organizations like check-casher to process and cash their cheques. The alternative financial institutions often charge high fees for their operations and the and the families that use them have no source for borrowing formal instruments. Rather, they opt for loans with high interests from relatives and friends to cover emergency spending or make ends meet. Some of the low-income households prefer living without access to credit even during hard and emergency times. The financial status of a household, therefore, affects the decision of individuals. They decide whether to borrow or stay without credits.
Besides, the difference in payment systems between low-income individuals and those well-off also influences saving decisions. For instance, most low-income individuals are paid through cash methods (Mullainathan & Shafir, 2010). On the other hand, the economically advantaged are always paid using electrical methods. Cash payments give low-income individuals limited opportunity to save for future use. They can not set part of their salaries to be taken directly into saving or investment accounts. The payment methods and systems affect financial decision-making since electronic payments facilitate the automation of saving where part of the salary or wage is transferred directly to saving accounts.
Conclusion
In a nutshell, budgeting and decision-making are essential for the development of a household and the nation at large. Without a proper budget in a household, the individuals will find themselves spending too much of their wages. Low-income households are characterized by limited resources and finances to meet their basic needs for survival. Therefore, proper spending and making rational financial decisions may help improve the living standards of individuals from poor households. However, there are some challenges that may hinder decision-making and budgeting processes. The challenges include peer pressure, lack of goals, and concentration of what other people will think.
References
Baker, H. K., & English, P. (2011). Capital budgeting valuation: financial analysis for today’s investment projects. John Wiley & Sons.
Carvalho, L. S., Meier, S., & Wang, S. W. (2016). Poverty and economic decision-making: Evidence from changes in financial resources at payday. American economic review, 106(2), 260-84.
Mullainathan, S., & Shafir, E. (2010). Savings policy and decision-making in low-income households. Insufficient funds: Savings, assets, credit, and banking among low-income households, 121, 140-142.
