New research provides ideas on how to help Americans do the right kind of saving.
America has a saving problem. It starts with the confusion, in a consumer-spending society, over the word “save”. When we talk about saving as a culture we use the following definition: to hold back money for the future. Unfortunately, too many Americans think of saving as spending less than what circumstances normally require. Who hasn’t heard something like “I saved $25 at the sale!”?
What’s the nature of this saving problem?
- Researchers have mustered a broad array of facts to demonstrate that Americans aren’t saving enough: One indicator is the average personal savings rate, which has declined from 14% of disposable income in 1974 to 5% of disposable income in 2015.
- Saving for the long-term, especially for retirement, is a challenge for many Americans. According to the most recent EBRI data, four in ten Americans are not confident they will have enough to live comfortably in retirement.
- The number that jumps out as most startling comes from the Federal Reserve Board’s “Report on the Economic Well-Being of U.S. Households in 2014” [PDF]. Nearly half of all Americans said that they either could not cover an emergency expense costing $400, or that they would have to cover it by selling something or borrowing money. Among households with incomes under $40,000 this number rises to two in three.
How to tackle this problem? Based on recent research, here are three steps that can help motivate Americans to build a habit of saving.
1. Build a Saving Habit Early. Building awareness of the importance of saving and setting an example by providing tools and support early in life dramatically increase both personal expectations for saving and the habit of saving. Research from cfed indicates that low- and moderate-income children with college savings of just $500 or less are 3 times more likely to enroll in college and 4 times more likely to graduate than children that don’t have savings. Moreover, family ownership of assets can give children a transformative sense of possibility and hope for the future.
2. Build Confidence through Competence. Americans know they need to save. They just don’t always know how much to save, At Artemis Strategy Group, our proprietary research concludes that Americans are still feeling the effects of the global financial crisis. Those who can are taking action by reducing debt and cleaning up personal finances, becoming more informed and recognizing the need for longer term planning. In fact, we see three attitudinal inclinations growing in strength—people are accepting personal accountability, becoming more engaged in personal financial activities and developing a sense of self-reliance.
How does that apply to motivating Americans to save? Americans are seeking greater confidence in how they manage their money and make good financial decisions. Organizations can help by providing tools to increase knowledge about options and opportunities; by helping people form better relationships with credible, trustworthy institutions and intermediaries; and by developing communications strategies that emphasize building confidence and financial security.
3. Break Inertia Using Behavioral Biases. Behavioral economics and related psychological studies provide clues to useful product features in the form of “nudges”, which are designed to overcome people’s natural inertia when it comes to anything financial.
There is a lot of energy around incentives in the form of prize-linked accounts. For example, Save to Win™ is a prize-linked savings product created by the Michigan Credit Union League & Affiliates, Doorways to Dreams Fund, Filene Research Institute and eight Michigan credit unions to help low-to-moderate income people start to save. Now in its 6th year and in several U.S. states, more than 70,000 Americans have used these accounts to save more than $40 million.
For some people an auto-enrollment or opt-out option is the best way to start saving and stick to it. Matched contributions, special savings accounts that provide matching deposits to help save for events like college, are another good option because they can get people excited to begin saving. Finally, some people really thrive on goal setting. Tools like SmartyPig were designed to fulfill this need by providing a venue to publicly identify savings goals via an online portal that is used to create and manage an account. Friends and family can even contribute to these accounts, because they are public.
America has always had a self-reliant orientation. Over the last couple decades, our structures for savings and other activities are moving back to being the responsibility of the individual: we’re less and less a “defined-benefits” society and more and more a “defined-contributions” one when it comes to saving. Things will continue to move even further in this direction in the future. Effective communications strategies built on understanding how people make decisions and new, innovative tools and products will help Americans develop a renewed awareness of the importance of saving, giving them confidence to break the inertia, start saving, and meet their goals for financial security.