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By Martha C. White
October 29, 2015

Conventional wisdom for savings is the “out of sight, out of mind” principle: Sock away money in a separate account you’re not tempted to tap for everyday expenses. In general, that’s good advice, but you can run into problems if that rule is so fixed in your mind that it overrides a near-term financial need.

A little flexibility goes a long way toward keeping your finances healthy in the aggregate, according to the findings of a new paper forthcoming in the Journal of Marketing Research.

Researchers found that people, when presented with a choice to spend money they’ve already accrued in a savings account or take on credit card debt to cover an unexpected expense, often choose to borrow on credit even though that costs more than “borrowing” from themselves.

That doesn’t make sense because, in theory, money is all the same: If you have a $5 bill, it doesn’t matter if you buy a magazine or a snack with it. When we budget, we’re essentially creating artificial categories — a necessary tool, but one that can backfire if your efforts cause you to take on debt out of the fear of sacrificing your savings.

“By earmarking money, we set money aside for one specific purpose and make it less likely that dollar will be used for something else, even if it might be more useful for another purpose,” says Abigail Sussman, an assistant professor of marketing at the University of Chicago Booth School of Business and the paper’s lead author.

A lot of this is tied to our sense of responsibility and the idea that we’re doing the right thing. This is especially true if the savings account in question is earmarked for something like a child’s education rather than, say, a vacation slush fund. “The key is making sure that the actions people take that make them feel responsible are consistent with actions that maximize their overall welfare,” Sussman says.

Of course, you’ll also incur costs if you withdraw money from something like a 401(k), and Sussman acknowledges that it’s equally short-sighted to dismiss those consequences. “When there are financial penalties associated with withdrawing funds, these should definitely be taken into account,” she says. Her findings, though, reveal that our hang-ups about spending money earmarked for our kids or for a big purchase like a car are sometimes more emotional or ego-driven than financially practical. “Ideally, people will be focusing on these economic costs rather than on the psychological barriers,” she says.

Another reason people borrow even when they have savings is that they’re “forced” to pay off their credit card bills, while there’s no equivalent incentive to put that money back in a savings account. Sussman notes that setting up a plan to do so can help make you feel more in control. “Having a plan for replenishing money in savings is important,” she says. She suggests setting up an automatic deposit to move money from your main account into the depleted savings account, or setting up alerts on your phone or computer reminding you to transfer money into savings on a regular basis.

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