By Anastasiya Pocheptsova Ghosh, Associate Professor at Eller College (University of Arizona).
The FinTech market is teeming with budget apps. Consumers mainly use these applications on their computers or smartphones to help them save money or better allocate their spending. The majority of apps check how much users have spent so far and provide guidance on how much is left in their budget over a specific time frame. Financial advisers and influencers quite often encourage using such apps, suggesting that these budgeting tools are useful to curb unnecessary spending. However, the question is: does knowing exactly how much money is left in your budget actually help you save money?
To find out, a field experiment was conducted to test whether those who use budget apps end up saving or spending more. 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, the information access group, received personalised budget information every other day, similar to that provided by a budget tracking app. The second group did not receive any information on how much they had spent against their determined budget. Consumers in both groups set similar budgets and did not differ in their commitment to budgeting goals or desire to save more money.
Upon analysis of both groups’ spending, we found that on average the consumers in the second group did not go over their budget. The first group, however, overspent their budget by 26.7% on average. Importantly, this increase in spending occurred at the end of the budget period – when users in the first group were aware of exactly how much money they had left in their “kitty”.
This finding suggested that users may be spending more based on the knowledge of how much money is left in their budget. To mitigate for this, we designed four simple interventions, making the spending feedback or the budget amount either less precise or more flexible. We then compared this with consumers in the first group as described above.
The first intervention divided the weekly budget into several smaller budget windows: Monday-Tuesday, Wednesday-Thursday, Friday-Saturday, Sunday. We reasoned that this may make the end of the overall budget period less important, decreasing the likelihood of spending acceleration.
The second intervention provided participants with an opportunity to update their weekly budget every two days. By allowing participants to reset their budget, we hypothesised that it would make the budgeted amount more flexible, decreasing their likelihood to increase their spending by the end of the budget period.
As time progressed towards the end of the budget period, the original information access group tended to overspend when there was money left in their budget. However, both interventions mitigated against this and spending remained in budget.
For the next intervention, participants were provided 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 of the third or fourth interventions did participants increase their spending, even when their budget allowed it, as compared to participants in the information access group. It is therefore clear to see that focusing consumers’ attention towards a smaller budget window can help them with their financial goals.
Recommendations to FinTech developers
Our findings demonstrate that using apps to access budget information may actually lead to a decrease in savings for consumers. With this in mind, we list four simple interventions that may potentially attenuate this negative effect. By following these four simple guidelines, FinTech developers can better help consumers with their financial goals:
- Focus consumer attention towards a smaller budget window.
- Allow them to reset their budget after receiving feedback.
- Provide users with a range rather than precise information about their spending.
- Encourage users to add an extra amount to their regular budget to allow for more flexibility in spending.
Source link