Humans. With finances, as with so many other things, we’re often not very rational creatures, especially when it comes to saving. It’s true that some of us are good at playing the long game – saving from an early age, putting considerable sums away every month, signing up to a pension. But many of us are not. Some save nothing at all. Others half-heartedly and erratically save a bit, but not enough to deal with unexpected emergencies, old age, or for instance, COVID-related reductions in income.
Why is it that many of us don’t do the logical thing and save for the unknown times ahead? And what can be done to nudge people into better saving behaviour and financial decision-making? Here are some of the behavioural traits that we’re all fighting against, together some of the tactics we can use to encourage people to develop good savings habits and enjoy a more comfortable future.
Our brains love short-term gratification. We might have good intentions to save a certain amount, but when something more interesting like shopping or a night out comes up, we procrastinate. Putting money away is postponed – again – until the next payday. The trouble is that years can go past in this fashion with nothing to show at the end of them. This is present bias: valuing short-term rewards over long-term ones and constantly moving the goalposts to suit your instant-gratification orientated brain.
Decision-making uses a lot of brain power and is taxing physically as well as mentally. So we make short cuts, quickly scanning for the most prominent, interesting and obvious points of any information or situation, while ignoring the rest. This reduces time and effort but doesn’t always lead to the best decisions. Thinking about the benefits of long-term savings is heavy on brain power, and it’s far off in the distant future. This makes it hard for people to get their heads around, especially when they’re so constantly distracted by all the other things front of mind they could spend money on.
Status quo bias
Our brains prefer things to stay as they are. This natural tendency towards inertia minimises risk but also leads to people missing out on opportunities. Just think about all those times you’ve stayed with a utility supplier, despite knowing another is cheaper, just because you can’t be bothered to switch. Connected to this is loss aversion bias, the fact that your brain is twice as upset by the idea of losing something than it is happy about gaining the equivalent amount. And even though putting money away is the very opposite of losing it, that’s not necessarily how it feels when it disappears into a bank account, despite the fact that it’s a ‘gain’ for the future-you. This puts people off saving, because it doesn’t feel like they’re getting a reward.
So, what can we do to beat our natural tendencies to value short-term gratification, make quick but irrational decisions and beat inertia? Here are some strategies we can use to encourage people to make regular savings that their future selves will thank them for.
Make it easy
Saving has to feel effortless. Auto-filled forms, streamlined processes and simple navigation are crucial, while setting small, short-term goals builds confidence. Saving needs to feel like a series of achievable challenges, not a mountain that’s impossible to climb. When it comes to pensions, suggesting starting off with small amounts that auto-scale up when an employee receives a pay rise is one way of increasing savings without making it seem too arduous.
Create a habit
Children and young people who get into the habit of saving are far more likely to continue these habits into adulthood. It’s important to encourage saving behaviours in people of all ages but targeting younger generations will likely have beneficial effects that will last a lifetime.
Make a commitment
Actively committing to savings, either making yourself a promise or doing it in front of family and friends also helps combat present bias. A study found that participants who reflected on their saving goals gave a higher initial contribution and saved more throughout the experiment. This is because it makes people feel positively about themselves when they’re consistent with words, intentions, and actions — this effect is stronger when we make these promises explicit by writing them down or declaring them publicly.
Put savings front of mind
Sending reminders via text message or email has been shown to effectively nudge people into the recommended behaviour. A field experiment among low-income youth in Columbia found that savings reminders were far more effective than generic financial education messages in changing behaviour and the effects of the messages outlasted the experiment by eight months.
Make money management transparent
People tend to hide from the facts, so creating money management apps which provide transparency and visibility of finances will encourage users to take more control. Being able to set goals, track progress and receive reminders and notifications on spending and saving is key. Visualisations are also useful, for instance showing how saving the price of a cup of coffee every day could amount to thousands over a few years.
Provide ways to auto-save
The more effortless saving feels the better. Auto-save functions that automatically round up the cost of purchases or put any money left at the end of the month into a savings account get people into the habit of saving in a way that doesn’t feel like an imposition. Making auto-save the default option taps into status quo bias; it’s been shown that automatically enrolling employees in a pension plan, with the option to opt out rather than opt in significantly increased participation.
How do you get young people to engage with saving for a pension? Gamification is one answer, for instance turning it into a serious of mini challenges with real or virtual rewards, levels to be reached and congratulatory messages. This appeals to two things humans like, socialising and being competitive.
Frame savings as for a specific goal
Setting concrete goals – a new car, a holiday fund – works much better than just amorphous ‘savings’. In one study 43% of debt advice clients were encouraged to save alongside paying off their debts when it was positioned as a ‘safety net’ vs 32% of the control group. It was also very good timing, as the benefits of having a safety net was front of mind for them because they were already dealing with the consequences of not having one in the past.
Visualise the future
Getting people to imagine their future self, for instance picturing yourself saving for the long term, is one way to overcome present bias. One study took the ‘picturing’ aspect literally, using software to ‘age’ a current photo of the participants. Seeing this plausible version of their older selves led people to allocate more than twice as much money for their retirement as those who only saw the current photo.
Make an emotional connection
In rural India labourers were encouraged to save money in an envelope marked with a photo of their children. Dipping into these savings, by ripping the photo, gave them negative feelings so they saved more. Similarly, pay management app Wagestream allows users to upload an image of something they want to save for, e.g., a car, and the more they save the clearer the image becomes. Withdrawing money causes the image to become fainter, reminding them that they are moving away from achieving their goal.
Give instant rewards for long-term savings
Upfront rewards can counter present bias and loss aversion when it comes to putting money into a savings account. It’s a long-used tactic: think of the free cinema tickets given out for opening bank accounts, or the cashback sums offered on some mortgage products. Small rewards at regular intervals that will cease if savers stop saving may also keep them ticking along.
Create jam-jar accounts
People who habitually save tend to keep their savings separate from their everyday funds. One way of making this easy is offering a ‘jam-jar’ account: a bank account where customers can split money into different ‘jars’, but don’t have to go through the hassle of setting up lots of separate accounts. The idea is to keep a certain amount set aside to cover essential bills, then split your disposable income between as many ‘jars’ as you want, which could be for savings, a holiday, home improvements or whatever else. It’s a straightforward way of helping people manage their money in a more logical way.
These are just some of the behavioural tactics that can be used to turn spenders into savers who not only have better control over their finances but who can also improve their wellbeing in the wider sense. It’s a useful reminder that while sometimes there’s suspicious around using nudges to influence behaviour, when done for the right reasons they really can be a force for good.
If you’d like to talk to us about encouraging better financial decision-making using behavioural science, contact us.