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Balancing savings and debt: Findings from an online experiment

Many consumers have savings and debt at the same time, and so are faced with a trade-off: how much debt to pay down versus how much savings to retain. This brief summarizes the results of an online experiment using hypothetical scenarios to explore how the amount of available savings might influence whether a consumer is willing to use savings and, if so, how much savings, to put toward credit card debt. The findings suggest that consumers balance two goals: preserving a savings cushion and reducing debt.

Suggesting that participants wanted to preserve a savings cushion, most participants chose to continue holding some credit card debt to preserve more savings. In nine of the ten hypothetical savings scenarios, fewer than half of participants put the maximum amount of savings toward debt reduction. Only in the hypothetical scenario where savings was double the size of the debt ($10,000 versus $5,000), did even a majority of participants—77 percent—eliminate credit card debt. Suggesting that participants wanted to reduce debt, over 90 percent of participants used at least some of the savings to pay down credit card debt. Further, on average, participants allocated more than half of the savings they could to debt reduction, even among those assigned to the scenario with the lowest amount of savings.

This study provides a valuable first step to understanding how consumers balance goals of preserving a savings cushion and pursuing debt reduction. Our results suggest that the savings-debt trade-off is a balancing act, with most participants in the hypothetical scenarios allocating some of the savings to debt reduction (50 to 85 percent) while preserving the rest as a savings cushion.

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