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Why Savings Nudges Might Sabotage Your Finances (And What To Do About It)

Why Savings Nudges Might Sabotage Your Finances (And What To Do About It)

Plus are 'cash back' rewards a scam?

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Ben Le Fort
Jun 09, 2025
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Making of a Millionaire
Why Savings Nudges Might Sabotage Your Finances (And What To Do About It)
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Welcome back to the MOAM weekly newsletter, as always each Monday I round up 2-3 academic studies discussing personal finance, and I provide analysis to see if these ideas are worth your time.

If you have any articles you think I should cover in future newsletters, reply to this email and send them to me.

(Paid subscribers: Read to the end of today’s newsletter for a new paid subscriber benefit where each week I’ll introduce an exercise based on the type of research we cover in this newsletter that is aimed at improving your financial decision making.)

If someone forwarded you this e-mail, feel free to subscribe here:

#1—Do Savings Nudges Lead to More Borrowing?

A recent study by Medina and Pagel titled "Do Savings Nudges Cause Borrowing?" tries to answer a simple question: do nudges aimed at increasing savings inadvertently lead to more borrowing?

The researchers utilized detailed data from a major fintech company that introduced a savings nudge—a small automatic savings feature—to see whether users responded by increasing their credit usage. They compared users who opted into the savings feature against those who did not, providing a clean test of causality.

The findings were surprising.

While the nudges successfully increased savings by $400 a year, there was an unintended consequence—participants simultaneously increased borrowing by about $120 per year, roughly 30% of their increased savings. The nudge, designed to promote financial health, had partially offsetting effects.

This speaks to the most important rule about setting up automated savings plans: Don’t try and save more than your budget allows.

In terms of your monthly money-in-money-out, an automatic savings plan acts a lot like a bill payment. If your bills are higher than your income, your going to end up taking on debt.

Awareness is key, and regularly monitoring your finances can help you reap the benefits of savings nudges without falling into the trap of higher debt.

Read the full paper here.

#2—Cash-back Rewards: Are You Really Winning?

In "Cash-back Rewards: Effects on Spending and Debt Accumulation," researchers Sumit Agarwal, Swee Hoon Ang, Yonglin Wang, and Jian Zhang investigate how seemingly minor incentives like a 1% cash-back reward on credit card spending influence people’s spending habits.

Analyzing account-level data from a leading U.S. financial institution, the researchers discovered that cash-back rewards led consumers to spend significantly more. On average, consumers increased their spending by 32%, and their revolving debt rose by 8%.

1% cashback vs 32% increase in spending.

That is one hell of a deal…for your credit card company.

The effect was particularly strong among less financially literate consumers and those with low savings. In other words, those who might least afford to carry extra debt were the most impacted by the allure of cash-back rewards.

Rewards programs can feel like "free money," but they come with real financial costs. If you find yourself tempted by these offers, step back and evaluate your spending habits. Remember, rewards are designed to encourage spending, often leading to debt accumulation far exceeding the value of the reward itself.

Read the full paper here.

Bonus: If you want to find out how to be less susceptible to this type of incentive, check out this article on the importance of ‘financial numeracy’:

This Is the Most Underrated Skill in Personal Finance

This Is the Most Underrated Skill in Personal Finance

Ben Le Fort
·
October 31, 2022
Read full story

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#3—Commitment Contracts: Are They Really Effective?

Afzal et al. conducted a fascinating field experiment in Pakistan titled "Demand for Commitment in Credit and Saving Contracts," published in The Economic Journal. They offered microfinance clients various credit and saving contracts with different commitment features—such as penalties for missed payments, flexibility options, and reminders.

The research aimed to discover whether people genuinely prefer contracts that help them stay disciplined.

Surprisingly, additional commitment features like penalties or reminders did not significantly increase demand.

However, combinations of flexibility and reminders were popular among financially disciplined clients, while penalties combined with reminders appealed to less disciplined clients.

Commitment tools aren't one-size-fits-all. Knowing yourself is crucial: if you struggle with financial discipline, pairing reminders with stricter terms might help. Conversely, if you're disciplined but need flexibility for life's unexpected events, look for contracts that provide gentle nudges without harsh penalties.

Read the full paper here.

Bonus: Want to increase your financial discipline, in this article I review the research that suggests the first place to start is with an emergency fund:

Are Emergency Funds a Bad Idea?

Are Emergency Funds a Bad Idea?

Ben Le Fort
·
February 13, 2023
Read full story

This Week's Behavioral Finance Intervention (for Paid Subscribers Only)

Starting today, every week, I will share one actionable behavioral economics intervention you can try out at home. The idea is to take some of the lessons we are learning from the research we review in this newsletter and apply it.

Use Mental Accounting to Budget Better

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