How budgeting app users may overspend rather than save

By Anastasiya Pocheptsova Ghosh & Liang Huang
Posted on August 12, 2020

Imagine you have a weekly budget of $100 to spend on restaurant visits. At the end of the week, before going out, you check your budget app and find out that you still have $30 left. While you were initially hesitating to go out for dinner, after checking your budget, you decide that not only you will go out, but you will order a bottle of wine with your dinner.

The FinTech market is teeming with budget apps. Consumers mainly use these applications on their computers or smartphones to help them save rather than spend. They check how much they spent so far, and how much is left in their budget. Financial advisors and consumer advocates encourage them to keep a close eye on their expenses - suggesting that budget apps are useful tools. The question is: does knowing exactly how much money is left in your budget actually help you save money?

In our TFI research project, we explore how budget apps may lead to more rather than less spending, and why this increase in spending happens. We further explore how developers can change the design of budget tracking apps to help consumers put a few dollars away into their savings accounts at the end of the month.

Field experiment

First, we conducted a field experiment of a longitudinal budget management to test whether budget apps lead to more spending. We recruited over 350 US consumers in June 2020, asking them to manage a weekly budget allocated for dining out and grocery shopping for a total of one week. One group of consumers received personalized budget information every other day, just like they would in a budget tracking app. The second group of consumers did not receive any information. Consumers in both groups set similar budgets and did not differ in their commitment to budgeting goals or desire to save more money.

Next, we observed our participants' spending over the period of one week. We found that on average the consumers in the second group ('no information group') did not go over their budget. The first group ('information access group') overspent their budget by 26.7% on average. Importantly, this increase in spending occurred at the end of the budget period.

“People tend to spend more when they know there is money left in their budget”

Four interventions

To mitigate this effect, we designed four simple interventions, making the spending feedback or the budget amount less precise or more flexible, and compared them to consumers in the ‘information access group’ as described above. We tested the first two interventions in June 2020, in a field study with almost 100 US consumers.

  • The first intervention was to break down a weekly budget into several smaller budget windows: Monday-Tuesday, Wednesday-Thursday, Friday-Saturday, Sunday. We reasoned that dividing a long budget period into multiple small ones might make the end of the overall budget period less salient, decreasing the likelihood of spending acceleration
  • The second intervention was to provide participants with an opportunity to update their weekly budget every two days. We reasoned that allowing participants to reset their budget would make the budgeted amount more flexible, decreasing their likelihood to increase their spending by the end of the budget period.

We found that, as time progressed towards the end of the budget period, the information access group did tend to spend more when there was money left in their budget. However, we also found that consumers in either intervention groups did not increase their spending.

The next two interventions were tested in the lab with 198 participants in October 2019 and 99 participants in February 2020 respectively.

  • We provided participants with a range rather than a precise amount of their spending. For example, instead of telling participants that they already spent $30 dollars, we told participants that they spent between $15 to $45.
  • In the final intervention, we kept the spending feedback precise, but made the budgeted amount less precise, by asking participants to add $25 dollars to their budgeted amount.

In neither intervention conditions 3 or 4 did our participants increase their spending, even when their budget allowed it at the end of the budget period, as compared to participants in the information access group.

“Focusing consumers' attention towards a smaller budget window can help them with their financial goals”

The effect of COVID-19

Since we conducted some of our experiments in 2019 and some in the last few months, we are able to look into the impact of COVID-19 on consumer spending under budget constraint. Looking at consumers in the information and estimation condition in the 2019 and 2020 field studies, we calculated total number of purchases made during the budget week.

Comparing the data from the two field studies, we observe that - despite consumers setting similar budgets before and after COVID-19 - their purchase instances changed: it seems that COVID-19 increased the shopping frequency of consumers who get access to budget information, while consumers without access to budget information decreased their shopping frequency.

Also, while the total weekly spending amount per person slightly decreased for consumers in the information condition pre and post COVID, it remained the same for consumers in the estimation condition. This preliminary data suggests an interesting joint effect of COVID-19 and access to FinTech on consumer spending decisions and budget adherence.

Recommendations to FinTech developers

Our research cautions about relying on FinTech devices to manage finances. Overall, our findings demonstrate that using apps to access budget information may negatively affect budget performance and decrease savings, by increasing spending at the end of the budget period. Our four simple interventions may potentially attenuate this negative effect.

FinTech developers can better help consumers with their financial goals by following four simple guidelines:

1. Focus consumer attention towards a smaller budget window.

2. Allow them to reset their budget after receiving feedback.

3. Provide them with a range rather than precise information about their spending.

4. Encourage them to add an extra amount to their regular budget to allow for more flexibility in spending.

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

Liang Huang is a Doctoral Student in Marketing at Eller College of Management, University of Arizona