Money Watch – Personal Finance Blog

• Traditional budget apps have been shown to increase spending by almost a third (26% to 33%)
• People tend to spend more when they are certain there is money left in their budget, especially towards the end of the month
• Spending reduces when budgets are less salient – for example when users can roll over money to the next period or split the budget period into smaller timeframes

Research conducted by Think Forward Initiative and Eller College of Management, University of Arizona has found that contrary to popular belief, budgeting apps have been shown to have the opposite result to that intended, and in reality drive overspending. The design of the typical budgeting app which shows users the amount of money they have left to spend in their budgets provides certainty that there is money left to spend, which then leads to excess expenditure.  This behaviour is heightened towards the end of the budgeted period, when the available funds are most visible.

To combat these effects, measures such as providing users with less precise budget information (ranges rather than specific amounts), allowing users to update their budget during the budget period, or reminding them that they can roll over the money left in the budget into next budget period were proven to be successful.

Anastasiya Pocheptsova Ghosh, Assistant Professor of Marketing at Eller College of Management, University of Arizona says:

“Whilst budgeting apps are useful in addressing cognitive errors and motivational biases around memorising, calculating, creative allocation and budget (mis)interpretation, they add a new issue: certainty in available money. Presenting users with a specific amount of money left to spend, frames it as a spending ‘goal’ which users feel they can ‘reach’. In simple terms, people tend to spend more when they are confident there is money left in their budget. To better help consumers manage their finances, budgeting apps therefore need to be approached with care, or (re)designed with flexibility in mind – from flexible time periods to flexible budgets.”

To view the full article, please visit: https://www.thinkforwardinitiative.com/stories/how-budgeting-app-users-may-overspend-rather-than-save