The practice of dividing money into labeled categories — rent, groceries, savings — before spending any of it is one of the oldest forms of personal budgeting. In behavioral economics, this practice is called earmarking or pre-commitment, and a substantial body of research has examined why it works, how well it holds up, and where it breaks down.
Save More Tomorrow
The most cited pre-commitment intervention in personal finance is the Save More Tomorrow (SMarT) program, designed by economists Richard Thaler and Shlomo Benartzi and first described in a 2004 paper in the Journal of Political Economy. The design was simple: workers committed in advance to directing a portion of future pay raises into retirement savings. Because the commitment was made before the raise arrived, participants experienced no immediate reduction in take-home pay.
In the initial implementation at a mid-sized manufacturing company, participants who joined the program increased their savings rates from an average of 3.5 percent to 13.6 percent over four annual pay raises. The program was subsequently adopted by thousands of employers and influenced the design of automatic enrollment provisions in U.S. retirement legislation.
The SMarT results are frequently cited as evidence that pre-commitment works. However, the original study lacked a randomized control group — participants self-selected into the program — and the firm where it was tested was a single employer with specific demographic characteristics. Later implementations at larger firms produced positive but more modest effects, and dropout rates varied significantly across settings.
Earmarking and Spending Discipline
Outside of retirement savings, researchers have studied earmarking in the context of everyday spending. Dilip Soman and Amar Cheema published a series of experiments in 2011 in the Journal of Marketing Research examining how physically separating money into labeled envelopes affected spending behavior among low-income participants in India. Their experiments showed that earmarking reduced temptation spending — defined as purchases participants later said they wished they had not made — compared to keeping the same amount in an unlabeled pool.
Soman and Cheema proposed that earmarking creates a psychological cost of "breaking" the label — spending grocery money on entertainment feels like a violation in a way that spending from a general pool does not. This mechanism is closely related to Thaler's mental accounting framework, where the pain of crossing a mental boundary deters reallocation.
A follow-up study by Soman, published in 2003 in the Journal of Consumer Research, found that the medium of payment also functioned as a form of earmarking. Participants spent more freely with credit cards than with cash or debit, partly because the physical act of handing over bills created a more salient loss signal. This line of research has implications for how supplementary income — often received digitally — is perceived relative to cash earnings.
Digital Envelopes
The physical envelope system has been translated into digital form by numerous personal finance applications. Researchers have begun to study whether digital bucketing reproduces the same behavioral effects as physical separation. A 2020 study by Eesha Sharma and Vicki Morwitz at New York University, published in the Journal of Consumer Psychology, found that digital earmarking reduced spending on targeted categories, but the effect was weaker than with physical cash. The authors hypothesized that the lower salience of digital transfers — tapping a screen versus opening an envelope — reduced the psychological cost of crossing category boundaries.
This finding is relevant to the growing share of supplementary income that arrives as digital payments. If digital formats reduce the effectiveness of earmarking, the shift from cash to electronic payment may systematically alter how households manage income from multiple sources. However, this remains a hypothesis supported by a single study with a convenience sample, and replication across broader populations has not yet been published.
The Sustainability Question
A persistent concern in the pre-commitment literature is sustainability. Initial enthusiasm and compliance tend to be high, but adherence declines over time. Economists John Beshears, James Choi, David Laibson, and Brigitte Madrian have published multiple studies through the National Bureau of Economic Research examining commitment device adoption and abandonment. Their work suggests that a significant fraction of people who adopt pre-commitment strategies — including automatic savings, spending limits, and earmarking — abandon them within twelve months.
The reasons for dropout are not fully understood. Possible explanations include liquidity needs that override the commitment, optimism bias about future self-control, and the cognitive effort required to maintain multiple budget categories. For households managing irregular supplementary income, the rigid structure of a pre-set budget may conflict with the flexible allocation that volatile earnings demand.
Researcher Katy Milkman at the University of Pennsylvania has studied "temptation bundling" — pairing a desired behavior with an immediate reward — as an alternative to pure pre-commitment. Her 2014 study in Management Science showed short-term effects on gym attendance, but follow-up work found that the effects faded once the bundling intervention was removed. The sustainability challenge appears to be a general property of behavioral interventions, not specific to financial pre-commitment.
What the Evidence Supports
The research consistently shows that earmarking money — physically or digitally — changes short-term spending behavior. The mechanisms are well-documented: psychological loss aversion when crossing category boundaries, reduced decision fatigue from pre-set allocations, and the commitment effect of making future-oriented decisions in advance. What is less established is the long-term durability of these effects and whether they translate into measurably different financial outcomes over periods of years rather than weeks or months.
Steady Ledger reports these findings as they stand in the published literature. Whether any particular approach to managing supplementary income is appropriate for a given household depends on circumstances that no published study can generalize.