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Budgeting apps can encourage users to overspend rather than save

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, and in reality drive overspending.

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Budgeting apps can encourage users to overspend rather than save

Editorial

This content has been selected, created and edited by the Finextra editorial team based upon its relevance and interest to our community.

The design of the typical budgeting app which shows users the amount of money they have left to spend in their budgets can be a nudge to drive excess expenditure, the report states.

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.

The study chimes with research conducted two years ago by the George Washington School of Business that found that people who use PFM tools on smartphones to track their spending and manage their budgets are more likely to rack up debts and make poor financial decisions.

Proponents of whizzy money management apps lay great claims for the technology in helping users to better manage their finances, whether setting goals for savings or keeping their spending on an even keel.

According to the GFLEC research, conducted among 1000 adults, the reverse is often the case. The study among millennial users of smartphone banking apps found that those who use mobile payments are more likely to overdraw their current account, and those who use their smartphone to track spending are not doing better in this regard than those who do not.

The research found that one-quarter of people who use their phones to track spending reported overdrawing their accounts, compared with 20% of those who didn’t use their phones.

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.”

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Comments: (2)

A Finextra member 

Could selection bias be a factor? Clearly those people who install budgeting apps are only those who struggle to stick to a budget...

Ketharaman Swaminathan

Ketharaman Swaminathan Founder and CEO at GTM360 Marketing Solutions

By warning everyone that they will go bankrupt if they drink any more $5 coffee, PFMs and MoMMAs create tremendous anxiety and drive people to that $16 avocado toast. Yes, propensity for overspending totally makes sense.

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