Monzo has introduced a new feature on its money managing app. And when Monzo goes, many others follow. What is this new feature? Hiding your money.
I beg your pardon? Hiding? My money?! Although it may sound like a scam (fraud, theft, you name it), it’s actually quite a clever idea. Why? Because you’re not likely to spend what you can’t see!
When I initially read the idea that Monzo allows for making multiple pots of money, I thought to myself: “interesting…” When I read that you could hide some of these pots, I got a bit worried. When it comes to finances, a lot of people rather put their head in the sand. Like an ostrich. I know that’s not technically accurate, but it’s where the ostrich effect gets its name from. Head in the sand, dead to world, pretending everything is fine. So I initially thought that that was what Monzo was doing. If you’re bank balance wasn’t beautifully black but slightly more worryingly red, tap one button and you don’t have to look at it any more. Or you could hide away any other forms of debt that you didn’t want to permanently stare you in the face. The hiding of debt is bad, for obvious reasons: ignoring it doesn’t make it go away. Less obvious reasons are the interest that gets collected on the debt. The longer you ignore it, and not pay (or try paying) it off, the more money you owe: debt PLUS interest. And the interest over debt can be quite high. Credit cards have an APR of 22-26%. That means you’d have to pay 22% of your debt, to have the debt. Being “only” $1000 in debt would cost you (at least) $220. Who wants to pay to have debt?! Further reasons to not ignore your debt is that lack of repayments, or a certain duration of debt will disqualify you from further loans such as mortgages. Not good.
Anyway, I feel like we’re getting to far removed from the original idea here: hiding pots of money. Monzo is not letting you hide away your debt (I think?). Rather, it’s letting you select pots of money that you don’t want to see on the regular, with a focus on your savings. Looking at the behavioural insights behind these features, we do find some solid research. Having different pots of money is basic mental accounting. This allows you to divide your money by how you want to spend it. Or sometimes, how you’ll have to spend it. One pot for rent and utilities (housing). One pot for groceries. One pot for insurance, etc., etc. This is all fine. As long as you don’t forget that money is still money and it can be moved, if necessary. If you’re wondering why I’m emphasizing why this money can still be moved from pot to pot, let me explain. I wrote an article about a year ago on mental accounting mishaps. Because this can, in fact, backfire. When you put all your money away in pots it seems all neat and organized (good for you!). Having this organization in place is a good thing, until it isn’t. A rather odd behaviour comes with this organization: unwillingness to break it. Once money is in a pot, it damn well isn’t leaving it! The problem here is that if you suddenly can’t manage your monthly finances because an additional expenditure occurred (car broke down, health insurance increased, new washing machine needed etc.), the pot system can backfire. Rather than “moving some money around” (in a non-shady way), people grab their credit cards. People rather go into debt, albeit temporarily, than change the pot system. Even if one of those pots is savings, meaning money that is available to them (aka not debt). And this is exactly the type of behaviour that I am worried about with Monzo. I think hiding your savings away makes intuitive sense: out of sight, out of mind. And this would lead you to forget about them, and leaving it alone. Not tempting to you to spend that little bit extra, because your savings can make up for it, this time. Because this time then also turns into the next time, and dipping into your savings then becomes a habit. That is definitely bad too.
Just because Monzo is proposing to steer you away from this scenario, doesn’t mean there aren’t any other pitfalls to look out for. I do think they have the best intentions, but I wonder if what we’ll see is a backlash of mental accounting. I hope Monzo looks out for this, and accurately researches the (unintended) consequences of this feature. Given how data driven the banking app is, I doubt this’ll be any problem. That’s it for me today. What more can I say? Hide away. With caution!