Why budgeting apps lead to overspending

by Anastasiya Pocheptsova Ghosh is Assistant Professor of Marketing at Eller College of Management, University of Arizona and Liang Huang is a Doctoral Student in Marketing at Eller College of Management, University of Arizona

The fintech market is rife with budgeting apps – they’ve become symbols of money management and hailed as go-to tools for helping consumers spend less and save more. Financial advisers, and consumer financial-wellbeing advocates alike, preach the importance of keeping track of your spending, suggesting that budget apps are a useful resource. However, does knowing exactly how much money is left in your budget actually help you save money?

In reality, the answer is no. 

Contrary to popular belief, budgeting apps actually increase spending by almost a third in the average user.

How? Well, suppose you have a monthly budget of £400 to spend on going out to eat. At the end of the month, before going out, you check your budget app and discover you still have £100 left. While you were initially debating whether you can afford to go out for dinner, after checking your budget, you decide that not only you will go out, but you will also order a bottle of wine with your meal.

This visibility around available funds drives overspending. Whilst budgeting apps are useful in addressing cognitive errors and motivational biases around calculating, creative allocation and budget (mis)interpretation, they add a new issue: certainty in available money. 

In a nutshell, people tend to spend more when they are confident there is money left in their budget. 

What is the solution? Reducing certainty around available spending money, whether through checking budgeting apps less frequently towards the end of the month or moving away from the idea of a budgeted amount as a fixed spending goal is key to decreasing expenditures. 

To effectively help users manage their money and achieve saving goals, app developers have an important role to play in reducing certainty around available funds. 

One way to do this is by focusing consumers’ attention towards a smaller budget window. For example, by looking at weekly rather than monthly budgets. Budgeted amounts should also become more flexible, allowing for a ‘cushion’, or by letting users update and re-set their budgets as they go. 

Spending feedback also needs to be made less precise. Rather than telling users exactly how much they have spent, this figure should be provided in a range to avoid consumers actively trying to spend their pre-allocated budget. 

Finally, consumers will find it easier to reach their financial goals if the end of the budget period is made less salient, for example by facilitating the carry-over of money from one budget period to the next. 

Financial wellbeing is all about being in control of your finances and being empowered to make the financial choices that allow you to enjoy life. It’s important that financial tools support users in managing their money, which means maximising saving goals. Financial budgeting apps must therefore be (re)designed with flexibility in mind – from flexible time periods to flexible budgets – to truly curb overspending.