Most people are aware of the necessity of budgeting as a healthy money habit. Yet, almost no one ever does it for various reasons, most of which are psychological. We spoke to two Lagos professionals who allowed us a glimpse of their books. Through the lens of behavioural psychology, their stories offer powerful lessons about why we make the financial decisions we do. As well as budgeting strategies that can help them and anyone with their financial profile, do better.
Sarah and Yemi
Sarah (we’ve changed her name for privacy) is a 28-year-old Senior Content Manager who earns ₦1 million monthly. Despite her substantial income, she admits, “I have to admit, I don’t have the best saving culture. My saving habits need a lot of work.”
Yemi, (we’ve also changed his name for privacy) 25, works as a Market Research Insights Manager with a monthly income of ₦628,000. His approach couldn’t be more different: “I find ways to live comfortably within my means so people think I’m richer than I am.”
Their contrasting financial circumstances and budgeting habits provide a perfect case study for understanding what behavioural psychology says about our spending and budgeting habits. And ways anyone who shares their financial profile can successfully modify their own budgeting habits.
Present Bias: Should I Buy this Now, or Later?
Present bias is a term psychologists use to describe our tendency to prioritize immediate rewards over long-term benefits. The present bias asks: Should I buy this now, or later? Generally, our ability to control ourselves is affected by whether we prefer smaller immediate rewards over long-term ones.
Sarah’s budget reveals classic present bias symptoms. With ₦500,000 going to her loan repayments monthly, plus rent and family obligations, she’s trapped in what behavioural economists call the “immediate gratification cycle.” “The debt repayments for my credit card and other loans take up almost half of my salary each month,” she explained. Research from Sheffield Hallam University shows this pattern: when we focus on immediate financial pressures, we struggle to make decisions that benefit our long-term financial health.
Yemi has somehow reversed this bias. By building an investment portfolio that generates ₦150,000 monthly, he’s created what psychologists call “forced delayed gratification.” “I sort my household recurring expenses shared with my roommate from interests/dividends from investments of the past,” he explained. This approach demonstrates how overcoming present bias requires structural changes, not just willpower.
The Expense Prediction Bias: Why Do I Always Spend More Than Expected?
University of Virginia researcher Ray Charles Howard, who invented the term, describes expense prediction bias as our tendency to “dramatically under-predict future spending. This happens because we base our spending predictions on really common or typical outcomes, and we do a very poor job of accounting for atypical, anomalous things.”
Sarah’s experience perfectly illustrates this bias. Despite earning ₦12 million annually, she struggles to save consistently. When asked about overspending, she identifies “definitely black tax and the related obligations” as her weakness. This reflects the psychological challenge Howard describes: “It’s really easy to think of things like groceries, gas, rent or the mortgage payment, but it’s a lot harder to think of things like a car repair.”
For Sarah, family emergencies and unexpected obligations consistently derail her budget plans because, as Howard explains, “those atypical events don’t end up being built into people’s predictions.” Yemi appears to have intuitively addressed this bias through what he calls doing things “my way” or essentially creating buffer systems. His ₦50,000 miscellaneous budget and investment-funded recurring expenses provide exactly the kind of contingency planning that psychologists recommend for overcoming prediction bias.
Mental Accounting: Why Do I Value Money Based On Its Source?
Mental accounting is another psychological insight into our spending behaviours. The term was coined by Nobel Prize-winning economist Richard Thaler in 1999. He described mental accounting as “the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities.”
In other words, we often treat money differently, depending on factors such as the money’s origin and intended use, rather than thinking of it in terms of the “bottom line” or as ‘fungible,’ or interchangeable and possessing no labels. This generally leads to poor financial decision. Avoiding the mental accounting bias means valuing all money as the same regardless of whether it is earned through work or received as a gift.
Sarah demonstrates problematic mental accounting by viewing her salary as one depleting pool. Family obligations, debt payments and personal needs all compete for the same mental bucket. This has created what she describes as feeling “stretched thin.” This unified mental account makes every expense feel like a direct trade-off against savings.
Yemi has mastered sophisticated mental accounting. He has created separate psychological categories: investment income covers recurring expenses (₦150,000), family support comes from investment returns (₦50,000), and salary funds discretionary spending. “I send 50k to my folks – it comes from investments,” he explains, demonstrating how he’s psychologically separated family obligations from his earned income.
The Impulse Buying
Impulse buying is the well-known phenomenon of making purchases on a whim, often without haven planned to do so, appears differently in both profiles. Impulse buying has been shown to cause buyers remorse.
Sarah’s impulse spending seems tied to obligation and care: “I do a great job at taking care of the people around me, especially my family.” While this is admirable, this emotional spending pattern can derail budgets when family needs arise unexpectedly.
Yemi’s impulse buying is more strategic and self-aware. His ₦20,000 tea budget reflects what he calls refusing to “take boring tea,” but he’s found creative solutions: “I save money by stealing tea from my father.” This shows awareness of his preferences while finding ways to satisfy them economically. His current goal, which is to buy the Samsung S24 Ultra, represents what can be described as ‘planned impulse buying’, a psychological middle ground between rigid saving and reckless spending.
Practical Budgeting Strategies
Both women resist traditional budgeting frameworks, which aligns with research showing that overly rigid budgets can backfire, especially for young professionals and gig workers. For instance, Sarah tried “the 60/30/10 rule, but I don’t strictly follow any one method. I try to stick to what works best at the time, but I know I need a more structured approach.” Yemi is more direct regarding his lack of a strict budget: “No, I do my things my way.”
Howard’s research suggests this resistance might after all, be psychologically healthy. He found that “optimistic budgets” or those budgets that seem unrealistically low, often work better than the more ‘realistic’ ones because they create stricter reference points that reduce overall spending.
Understanding these psychological patterns offers concrete budgeting improvements:
For Sarah-Type Budgeters (High Income, High Obligations):
1. Address Expense Prediction Bias
Sarah feels pressure from multiple social circles. “Being in a partnership, I also contribute occasionally to household or personal expenses with my partner,” she noted, while simultaneously supporting family members’ education and needs. This multi-directional social pressure contributes to what psychologists call “social spending stress.”
Howard recommends taking “some time to think of reasons why your expenses might be different than usual.” For Sarah, this means budgeting for family emergencies and unexpected debt-related costs.
2. Implement Forced Mental Accounting:
Create separate accounts for different obligations. Pay family support from one account, debt payments from another, personal expenses from a third. This reduces the psychological pressure of everything competing for one pool.
3. Use “Pay Yourself First” with Flexibility:
Automate savings immediately you receive your income, but build flexibility into other categories. In other words, make savings a priority by automatically setting money aside as soon as you get paid. Research shows this balance between commitment and adaptability works best for people with unpredictable expenses.
4. Set Optimistically Low Discretionary Budgets:
Instead of budgeting ₦100,000 for miscellaneous expenses, try ₦60,000. Even if you spend ₦80,000, you’ll have spent less than a “realistic” budget would allow.
Howard stresses the importance of setting a low discretionary budget: “This is a nuanced point and it’s really important: You actually don’t want people to make accurate budgets. You want them to set optimistically low budgets, because the lower the budget, the stricter that reference point becomes, and the more likely they are to reduce their spending, even though they’re almost certainly going to spend more money than they budgeted.”
For Yemi-Type Budgeters (Moderate Income, High Efficiency):
1. Scale Mental Accounting Systems:
As income grows, it will be necessary to maintain the psychological separation between investment income and salary that currently works well.
2. Prepare for Lifestyle Inflation:
Research shows successful budgeters often struggle when income increases. Plan how to maintain your current efficiency mindsets even at higher income levels.
3. Formalize Social Resource Strategies:
Yemi has developed what researchers might call “social resource optimization strategies.” When discussing subscriptions, he reveals: “My generous friends pay for my Netflix and Prime accounts, and I enjoy DSTV Premium courtesy of my generous family members.” Rather than feeling obligated to maintain expensive lifestyle symbols independently, he’s found ways to access them through her network.
His transportation approach illustrates this perfectly: “I use the staff bus, so I really don’t spend money.” This challenges the psychological pressure many Nigerians feel to own cars as status symbols. To optimize this style, document and expand the network-based cost reduction strategies that currently work informally.
The stories of Sarah and Kemi remind us that successful budgeting isn’t about perfect spreadsheets or rigid rules. Instead, it’s about understanding and working with our psychological patterns. When we align our budgeting methods with how our minds actually work, we create sustainable financial habits that can transform our economic futures. In Lagos’s expensive landscape, this psychological awareness might be the difference between financial stress and financial freedom.
