Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings

Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings

7 July, 2020    

Maintaining savings is an important financial goal. Yet, there are times when savings should be spent; for example, when people face unavoidable costs and spending savings means avoiding high-interest rate debt. Existing behavioral research has focused on consumer decisions between savings and discretionary spending and has developed interventions to promote savings in these contexts. However, when spending is non-discretionary, these interventions risk exacerbating a pattern found in economic research that people borrow high-interest rate debt while maintaining savings earning low levels of interest. We examine how mental accounting interacts with considerations of personal responsibility and guilt to contribute to this pattern. Specifically, we explore whether people will spend savings in times when they need money most: emergencies. Across six studies, we find that people’s tendency to preserve savings in favour of borrowing from a high interest rate credit option varies as a function of the savings’ intended use. Paradoxically, people are most likely to turn to high interest rate credit under the belief that doing so is the responsible option.

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