Spending Plans and the Family Managerial Decision Process

Ivan F. Beutler, University of Missouri
Kristine M. Sahlberg, Iowa State University Extension Service
ABSTRACT - The formality of cash flow planning or family budget use is examined. A simple path model is used as an empirical tool to analyze planning formality in the context of a family managerial decision process. Findings indicate those financial and family characteristic variables which seem to motivate formalized expenditure or budget planning. These variables provide insight for segmenting a market according to the likelihood of a family engaging in formalized planning. Cash flow planning as an intervening throughput variable is also examined for its impact on output variables such as net worth and satisfaction with level of consumption. The analysis has implications with respect to the payoff from formalized cash flow planning and implementation.
[ to cite ]:
Ivan F. Beutler and Kristine M. Sahlberg (1980) ,"Spending Plans and the Family Managerial Decision Process", in NA - Advances in Consumer Research Volume 07, eds. Jerry C. Olson, Ann Abor, MI : Association for Consumer Research, Pages: 480-485.

Advances in Consumer Research Volume 7, 1980     Pages 480-485


Ivan F. Beutler, University of Missouri

Kristine M. Sahlberg, Iowa State University Extension Service

[Contribution from the Missouri Agricultural Experiment Station. Journal Series Number 8396 .]


The formality of cash flow planning or family budget use is examined. A simple path model is used as an empirical tool to analyze planning formality in the context of a family managerial decision process. Findings indicate those financial and family characteristic variables which seem to motivate formalized expenditure or budget planning. These variables provide insight for segmenting a market according to the likelihood of a family engaging in formalized planning. Cash flow planning as an intervening throughput variable is also examined for its impact on output variables such as net worth and satisfaction with level of consumption. The analysis has implications with respect to the payoff from formalized cash flow planning and implementation.


This paper reports empirical results from a study in which the family is viewed as the basic consumer decision-making unit. The focus of this study is on cash flow management planning and its role in the family managerial decision process. In this context several aspects of consumer behavior are addressed which have received limited attention in the literature.

First, the family cash flow management or budget process is examined in the context of the rather well developed home management systems model (Deacon and Firebaugh, 1975). This theoretical model provides an integrative and much needed broad and systematic perspective in which to view the family budget or cash management process. Second, the extent to which families use formalized repeat-use cash flow plans is reported from a representative sample. Third, the relationship and apparent influence of several family characteristics and financial situations on the use of formalized planning is examined. This analysis provides insight into the questions of which characteristics identify the formalized planners and what may be the payoff from implementing formalized planning. The empirical results from this analysis could also provide direction in identifying a market segment made up of households with varying degrees of formality in their cash flow management.

Textbooks on effective consumer decisions and family management emphasize the importance of adequate spending plans. Entire chapters are devoted to detailed discussion of the mechanics for formulating plans. Written plans covering a time span of up to one year are often recommended. Methods are also given for implementing such plans to achieve desired outcomes. However, more theoretical and empirical research is needed to provide practitioners with a well-founded approach. Tests of the managerial model from a family expenditure planning perspective have not been previously reported in the literature. In fact, very limited work in general has been reported concerning financial cash management and planning. As Ferber (1973) notes, it is odd that so little research has been directed toward this topic which receives so much attention from a normative point of view in virtually every text on personal finance and consumer management.

In connection with saving behavior studies, empirical attention has been given to the meaning and nature of financial security.

However, little attention has been given to the nature of financial cash flow management plans and what types of families engage in them. According to Ferber, the few studies which do exist in the literature tend to focus on farm families and give very general information about financial planning. Studies tend to be limited to small convenience samples reporting: (1) the percent of families making use of a financial plan (Wells, 1959), (Honey and Smith, 1952), (2) the dominating influence of housewives on financial plans (Bortel and Gross, 1952), the potential influence of financial plans on the economic welfare of the family (Honey, 1957) (Freeman, 1961), and the work of Rueben Hill (1970) which suggested that family record keeping and budgeting have been increasing over the generations with the younger families.


The Deacon and Firebaugh (1975) systems model of home management provides the theoretical context for the empirical analysis of this paper. The systems model furnishes a unified framework for identifying and analyzing the relationship between pertinent managerial variables in the consumption process. The family is viewed as managing tasks that meet both external requirements of society and the internal needs and demands of family members by planning the use of resources and implementing the plans to meet demands.

The aspects of the systems model relating directly to this study are shown in Figure 1. The basic model is comprised of inputs, throughputs, outputs and feedback. The relationship of these components is illustrated in Figure 1 with the specific variables analyzed in this study identified with an asterisk. The Deacon and Firebaugh managerial system assumes that all resource and demand inputs operate through the managerial system or bypass it completely. Planning is a primary throughput process consisting of standard setting and action sequencing. Once standard(s) and sequence(s) are developed into a plan consistent with demands and resources, implementation of the plan is necessary to meet the standards set. However, a repeat use plan may be used to circumvent unnecessary duplication in planning. The repeated use bypass plan is of major interest in this study. Specifically, cash flow management through the family budget is an example of a repeat use plan. The formality of spending plans is an empirical variable used in this study to measure the extent to which repeat plans are used by the family in cash management. In implementing the family budget plan, expenditure records help to facilitate the controlling function of the budget process. Expenditure records facilitate review and evaluation of family spending which can serve as an important control in achieving the standard(s) of the budget plan. Thus the family budget serves as a potentially important component of the throughput process.

The use of formal budget plans could be expected to impact on outputs of the managerial system. Several types of output are listed in Figure 1 which may be affected by repeat plan implementation. Nevertheless, the implications of system theory suggest that inputs in the form of demands and resources will have an impact upon outputs. However, the impact of inputs on outputs is usually indirect. Inputs impact directly on throughputs which in turn impact upon outputs. Thus, throughputs are intervening variables through which inputs operate to impact upon outputs. The focus of this study is upon a particular throughput variable, formality of spending plans. The way in which this variable is influenced by input variables is examined in this study. The impact of these variables upon outputs, the major dependent variable of the complete theoretical model, is also examined here.



The aspects of the systems model of particular interest here can be represented for empirical purposes as a basic path model. Figure 2 illustrates such a path model showing the hypothesized relationship of the cash flow plan (planning formality) throughput variable with the empirical input variables and the net worth output variable. The plus or minus sign (+ or -) indicates the priori hypothesized relationships. The path model provides a means for analyzing both the direct and indirect effects of the inputs, resources and demands, on each of the outputs. However, of greater interest here, it also furnishes a framework for ascertaining the influence of the input variables on planning formality and the impact of this intervening variable on output variables.


On the basis of the literature reviewed and the data available for analysis, nine independent variables were selected as potential factors influencing the formality of spending plans formulated by households. These variables were classified in Figure 1 according to the type of input they represent within the context of a managerial system. The two types of input in the model are resources and demands. Outlook is listed separately since it may represent aspects of both resources and demands.


Resources provide the means for achieving goals or for meeting the demands placed upon the family by events (Deacon & Firebaugh, 1975, p. 51). Four of the variables in Figure 2, education of the household head, total household income, age and non-employment time, were classified as resources. Each resource variable was evaluated independently for its hypothesized relationship to plans and is so designated as plus or minus.

Education of the head of the household was hypothesized to have a positive relationship to plans, suggesting that more formal plans are expected in households where the head has a higher level of education. Education of the head was chosen over other measures of education for the family on the basis of findings in related literature (Hill, 1963; Jackson, 1968).

Age of the household head was also chosen as an indicator of experience (Rosen, 1972). Both experience and becoming set in one's ways would likely lead to less formal planning. Income reflects a resource obtained primarily through time allocated to employment. Thus non-employment time was chosen as a variable to help capture the additional resource which the household would have when adult members are not employed in the market (Beutler and Owen, 1979). Neither theoretical nor empirical considerations in the literature provided a priori grounds for hypothesizing the relationship between planning formality and the last two variables. Therefore, the hypothesized sign was left as + or -.

Numerous additional factors could have been selected as measures of resources. However, given the data available, and the financial planning focus of this study, resource variables were limited to these four measures: education, age, income and non-employment time.


The second input classification was demand inputs. A positive relationship was hypothesized, meaning that as demands on the managerial subsystem increase, more formal spending plans were expected to be observed. Demands on the system may originate from within the family system or externally in the environment. Consistent with the literature (Fitzsimmons et al., 1971; Ferber, 1954; Hill, 1970; Deacon & Firebaugh, 1975), family size in terms of number of children and stage in the family life cycle were hypothesized as demand inputs originating within the family system. As the number of children increase, each additional family member makes demands upon the system. Literature suggests that demands are also higher for young growing families than for older established families in the empty nest or retirement stages of the life cycle when children have left the household (Fitzsimmons & Williams, 1973; Deacon & Firebaugh, 1975). Recent change in a family's situation or expected change places additional demands on the system and both are expected to elicit a positive response with respect to formalized planning.




The final type of input tested in the model is outlook. It is a measure of the respondent's general attitude toward life. As suggested by Deacon and Firebaugh (1975) and Hill (1963), an individual or family with an optimistic outlook may be more inclined to engage in planning and thus have more effective control over the future. Outlook was thus hypothesized to have a positive relationship to formality of spending plans.


The primary intervening variable included in the path model consisted of the formality of spending plans made by households. Cash flow management plans may range from very formal to very informal in their extensiveness and scope. Within the context of this study, very formal spending plans were those written down with planning in advance for up to a year's period of time. Conversely, very informal plans were rarely written down and intended to allocate income for a week or less.

Two additional throughput variables were analyzed which are integral parts of effective formalized cash flow management. These were (1) keeping records of family expenditures, and (2) reviewing and evaluating family spending. Records are required for effective review and evaluation. In turn, systematic review and evaluation of family spending would serve a controlling function to help meet the plan and also update it. Both record keeping and review-evaluation were expected to be positively associated with formalized planning.


Six individual measures of output were chosen. The choice was constrained to include variables which were both available from the data and those likely to reflect the influence of variations in cash flow planning formality. The output variables included the family's: (1) wealth accumulation measured by net worth, (2) reported satisfaction with their level of consumption, (3) perceived adequacy of their income, (4) satisfaction with their own money management, (5) perceived preparation for small emergencies, and (6) preparation for large emergencies.

In summary, an operational path model was proposed to test the effect of nine input variables on six individual output variables. The formalized planning variable as a throughput and intervening variable would be of primary interest in the analysis.


Source of Data

The data used for this study were a portion of data collected during the summer of 1976 under a joint Home Economics Research Institute and Department of Family Environment projected entitled, "Comprehensive Development of a Standard of Need for Iowa ADC Recipients.'' [For a more complete description of the data source, collection procedures, and sample design, see (Beutler, 1978).]

The Iowa Income and Expenditure Survey was designed and conducted by the Department of Family Environment, in conjunction with the Iowa State Statistical Laboratory. This survey instrument was the vehicle by which data were collected in 33 counties throughout the state. A random sample was drawn from a sample population of all currently existing households in Iowa. Excluded from the sample were households consisting solely of unrelated persons.



The Income and Expenditure Survey was designed to obtain data on a variety of characteristics of the family, including subjective measures of well-being. Extensive income and expenditure data were obtained on a recall basis for the period of June 1, 1975, through May 31, 1976.

Measurement of the Variables

Details concerning the definition and measurement of each of the variables included in the path model are presented in Table 1. Basic statistics are also given for each variable.


The planning formality variable is of particular interest in this study. Note that just over a third of the population reported no advanced planning for the manner in which income was to be spent. The next third of the population reported advanced planning with a horizon of one week to a month with these plans being written down seldom or sometimes. A group of approximately 25% of the population reported having plans usually written with a planning horizon of 3 to 6 months. Few families, only 9.5%, always kept written plans with up to one year as the planning horizon. Thus the variable is skewed toward the lower end of the scale with a disproportionally large group of households which report little, if any, repeat-use formalized planning.

The Path Model

Data analysis consists of a series of ordinary least-squares (OLS) regression equations that estimate the direct effects of the input variables and the mediating effect of the throughput variable on each of the output variables. A separate regression equation estimates the indirect effects of input variables as they operate through the throughput variable. Each of the estimated standardized regression coefficients are given in Table 2 with R2 for each equation. Although not technically warranted, tests of statistical significance have been included in order to indicate whether observed effects are random or systematic (Winch & Campbell, 1969). Although many of the variables are measured at an ordinal level only and represent statistical difficulties, the OLS estimation procedure is robust and should be tolerable (Labovitz, 1970).



The first row of Table 2 shows the direction and relative magnitude of influence which each input variable has on the throughput, planning formality. Each of the resource inputs has negative coefficients except education although income and non-employment time are not significantly different from zero. The beta estimate for total household income is a most interesting result. As indicated in Table 2, the family income beta estimate is not significantly different from zero. A check for a nonlinear relationship between income and planning indicated no such phenomenon.

Consistent with the non-significant income beta, the resource, non-employment time, is also not significantly different from zero. However, the education coefficient is exceeded by only one other variable in the equation. Education also has a positive influence on planning formality as hypothesized and represents one of the more important measures of human capital in the model.

Age as a resource representing experience is highly negative and the third largest beta in the equation. Because of the extremely high correlation between age and stage in the life cycle (.75) the regression equation was also computed without age to ascertain the effect of multicollinearity which surely exists. The effect was an increase in the life cycle coefficient and non-employment time with which it is also highly correlated. However, the model appears quite stable with age in the equation and its inclusion helps clarify the substantial negative relationship between age and planning formality.

All the demand inputs have a positive impact on planning formality as hypothesized. Although the life cycle beta coefficient is negative (-0.155), it represents a positive relationship between planning formality and demands associated with stage in the family life cycle. Stage in the family life cycle has an estimated beta coefficient of the greatest magnitude in the equation. Careful analysis of the model suggests that the significant and relatively large beta coefficient for life cycle has a logical explanation. The life cycle variable apparently captures three very salient influences on planning--education, age, and demands. Higher education, greater demands and, of course, younger age, are all associated with household heads in the earlier stages of the life cycle. In fact, extra demand is the unique element which life cycle is intended to capture. Yet all three of these factors work together in this single variable.

The two other variables representing demands, expected and experienced change in the recent past and near future, have the hypothesized positive sign, but represent a modest impact as might be expected from such short run phenomenon.

The final variable in the equation outlook, is a measure-merit of the affective domain. A positive outlook would primarily be a resource: effective planners are thought to be optimistic, believing they are capable of manipulating circumstances to positively influence their destiny. However, optimism is also expected to result in higher standards and increased self-induced demands. Thus, outlook is expected to represent aspects of both demands and resources with both components having a positive effect on planning formality. Consistent with this expectation the beta coefficient (0.092) is significant and positive.

Before leaving the topic of variables which influence planning formality, note the highly positive impact of record of family expenditures on evaluation and review. In turn, evaluation and review had a very positive impact on planning with a beta coefficient of (0.360). These two relationships are shown by equation at the bottom of Table 2 and represent both the magnitude and directional impact anticipated since both are part of the throughput process.

Further insight into the role of planning formality can be gained by considering the mediating effect of planning on each of the six output variables. The planning formality beta estimate for each of the output regressions varies considerably in size from (-0.004) for money adequacy to (+0.133) for net worth. The coefficients are positive for six of the equations and negative for only one. However, only two of the regression betas have a positive magnitude of much consequence. These are the beta for net worth (-.133) and the family's perceived preparedness for large emergencies (0.068). The relative magnitude of these two coefficients in their respective equation is fourth and fifth out of ten variables. In the remaining four regressions, the planning formality beta estimates are either ninth or tenth. Thus, in general, planning formality could be said to have a persistent, but rather modest effect on outputs. However, net worth and preparedness for large financial emergencies show planning to have a fairly important role. Thus, planning formality appears to have mediating effects which have substantially more impact in the long run than in the short run.


Several generalizations emerge from the analysis. First each of the demand input variables had a positive impact on the planning formality throughput variable. This is consistent with the implications-of the Deacon and Firebaugh systems model. Thus, households tend to implement more formalized cash flow plans as a result of extra demands. This appears to be the case whether the extra demand is associated with early stages of the family life cycle, number of children or change in the family's situation. Thus, the effects of resources on planning formality was mixed and included a positive effect, a negative effect and no effect. Human capital resources had the greatest impact on planning; education had a marked positive influence; a positive outlook also contributed to additional planning, and age as an indicator of experience, had a negative impact.

Perhaps the most interesting variable found not to impact on planning formality, was total household income. Although the literature does not suggest an a priori relationship, this is a rather surprising result in the light of several situations. Each of the other resource variables had a greater than moderate impact on planning. Income is usually found to be a very important predictive variable in financial related models. As described in the previous section, the direct effect of income on the six output variables was generally more substantial than any of the other eight input variables. Thus, in spite of the fact that income is usually found to be of great importance in financial models, it was not here.

A substantial variation was found with respect to the intervening effect which planning formality had on each of the six output variables (net worth, consumption satisfaction, money adequacy, management satisfaction and preparedness for small or large emergencies). It was anticipated that cash flow planning formality or family budgeting would have at least as much impact on the short term output variables as on long term variables. This was not found to be the case. The planning variable had a considerably greater intervening impact on the two long run variables--net worth and preparedness for large emergencies. This finding may be explained in part by peculiarities which may result from the narrow ordinal range in each of the output variable, with the exception of net worth and consumption satisfaction. Nevertheless, from a normative point of view, findings of this study would suggest that the potential payoff for cash flow planning or budgeting may have a cumulative impact over time which substantially outweigh short run benefits. This thesis warrants further examination.

Finally, from the multivariant analysis of this study, the primary variables can be identified which typify those families which implement more formalized planning. Formalized planners would most likely be found among young, well-educated families experiencing relatively high demands compared to their resources.


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