As soon as we can speak, we insist we can do it ourselves. Try telling a two-year old she can’t tie her shoes or that she’s putting the dress on upside down. Unfortunately, we don’t seem to grow out of this tendency to resist help – and that includes when it comes to personal finance.
People almost universally agree that seat belts save lives, distracted driving is a bad thing, and that flossing is important. And yet, despite awareness of the right choice and our own best intentions, a text message chime while driving is nearly irresistible while flossing our teeth is not. Carrying through on our plans requires more than motivation. Behold the action-intention gap.
For help, we often rely on others, such as government, businesses, or landlords to save us from ourselves. Legislating seat belts, turning on a text message auto-reply when driving, requiring renter’s insurance—all guardrails for decisions made in the service of our own self-control and wellbeing.
What does this have to do with personal finance? With one in five Americans not saving any money for the future and 39 percent of all Americans reporting they do not have $400 cash on hand to cover an emergency, financial institutions can do more to help us help ourselves. Whether you call it paternalism in financing, nanny bankers or helicopter banking, looking beyond the label shows that it can work to our advantage just as it has in other industries.
Consider the undeniable success of the finance industry’s most protective action yet: default enrollment in retirement plans. The shift to automatic enrollment in U.S. employer sponsored retirement programs has been enormously impactful on household savings.
A recent report estimated that about 50 percent of American companies default new employees into retirement savings, and the result is that anywhere from 80 to 90 percent of defaulted employees remain enrolled. Given the successful implementation of automatic enrollment in retirement savings, why hasn’t this approach been adopted more widely by financial institutions across budgeting, spending and other products and programs?
Perhaps one reason is the concept of paternalism. It’s a loaded term! As a woman first and a consumer second, the idea of external restrictions can grate . . . but maybe that’s the point. My savings account doesn’t grow when I have the freedom to forget it. We have to push back against knee jerk reactions and natural tendencies to secure long-term gain.
As behavioral scientists, we define paternalism in finance as an academic term that means a deliberate decision by a bank or credit union, government agency, or an employer to design procedures and products in a way that set consumers up for both short- and long-term financial wellbeing.
This can be as basic as nudging people toward savings or away from excessive spending, helping people find new ways to earn money, or distributing income in a way that smooths cash flow. This is because financial literacy programs do not work on their own, accounting for only 0.1 percent of the variance in financial outcomes; that is, just 1 out of 1,000 students in a financial education program acts on their knowledge to improve their outcomes.
Behaviorally informed nudges can have much larger effects. In 2017, our work at the Common Cents Lab in partnership with 27 financial organizations resulted in an additional $10.5 million saved. Imagine that same type of impact delivered at scale.
People do want to make the right financial decision. Most will say they want to save more money but stopping for takeout or getting a Lyft or taxi instead of waiting for the bus can be a more tangible and convenient reward, especially at the end of a day full of frustration and setbacks.
Our readily available account balances and access to cash can make it too easy to choose now over the future. At the same time, locking savings up in a CD or bond is too restrictive.
To help people strike this delicate balance, the Community Empowerment Fund in Durham, NC, offers a SafeSavings account that makes it easy for members to deposit money but requires a 24-hour waiting period to access funds after requesting a withdrawal. An emergency withdrawal loophole exists but requires an extra phone call.
When we asked about whom members were guarding against, one respondent replied: “From me!” Members rely on the account’s restrictions to help them rethink purchases they might want to delay while trusting that they can access the funds when they decide it’s time.
As a self-control strategy, these users have realized that the best way to resist temptation is not to grit one’s teeth and power through, but instead to prevent the opportunity for temptation in the first place.
This program punctures the myth held by many financial providers that their customers will balk at overly managed products because they restrict autonomy. In fact, it shows that people will embrace products that help limit their exposure and encourage better financial decisions by default.
In our work with banks and credit unions, we regularly witness customers using existing products in ways that limit their autonomy, like those who use the lost card feature in an app to toggle their credit cards on and off to avoid spending. We’ve also seen people design their own version of round-up and savings sweep products, as with the member who keeps his checking account at a round number by transferring all odd values into savings. Every. Single. Day. And we’ve seen people bring more tangibility to their budgets by using prepaid cards for their different spending categories.
The lesson is that people are already working hard on their own to create interventions and processes that help them save using the tools at hand. For providers, the clear message should be that better tools would be welcomed.
Image credit: Austin Distel/Unsplash
Lindsay Juarez is a Senior Behavioral Scientist at the Common Cents Lab, supported by the MetLife Foundation and BlackRock Emergency Savings Initiative. In partnership with leading financial institutions, she creates and tests interventions using behavioral insights to encourage streamlined savings and decreased spending, creating happier, healthier, and wealthier individuals.