Which mechanisms would you put in place if you wanted to save more?
Suggestions are given at the tail-end of a recent UK study by the Personal Finance Research Centre. The researchers ran four focus groups and 30 one-on-one interviews with low income citizens in the UK.
Here are some of the ideas that the respondents suggested:
1. Seize the bits. Identify small, affordable amounts that can be saved while hardly being noticed in terms of one’s day to day standard of living. Bank of America’s “Keep the Change program” is one example from the US. "Portfolios of the Poor" has good examples from Bangladesh and India. It’s always great to get something for (nearly) nothing, and the big question is whether those small bits will add up to something meaningful quickly enough.
2. Hide it. Automated deposits were a particular interest, particularly at the start of a budgeting cycle. People with the greatest financial constraints were most interested in having these payments be facilitated for them by employers, banks or the government. The key was a desire to take the money off the top – i.e., to have the money transferred into a savings account before it can ever gets into one’s hands (or mind). This is how most of us with salaries save for retirement, and it’s a big break from the structure of many commitment devices, which require people to actively save (e.g., to attend group meetings and make regular payments). Here, the desire is to remain passive and never even see the money. Electronic payments make the technical part easier. Can something be created that works well for people paid in cash?
3. Make accounts harder, but not impossible, to touch. Some specific ideas:
- Make depositing convenient. Make withdrawing inconvenient. Develop savings accounts where money can only be withdrawn at the bank teller, say, but can be deposited in other, more accessible ways (including online). Some deposit-taking institutions already do this for their own convenience. The argument here is that it’s good for impulsive customers too.
- Require notice. Develop “short notice accounts” that, for example, require a depositor to give the bank 48 hours notice before savings can be withdrawn. Time to cool off.
- Separate and label. Offer separate accounts for day-to-day spending and savings. Once again, labels matter.
None of these ideas are radical, but they show that simple tweaks to existing structures could matter to people who aren’t saving as much as they want.