Five 'tricks' to help us save more
Saving is at its lowest rate on record. Experts predict that by 2060, 15 million retired workers will be living on inadequate incomes. So the question many policy experts are asking is: how can we get people to save more?
We thrive on inertia, doing nothing, the path of least resistance. We are lazy, lazy, lazy.
Behavioural economics is one of the hottest ideas in town. It’s a blend of psychology and economics. One of its leading exponents is David Halpern who heads the Behavioural Insights Team - a reincarnation of what was The Nudge Unit. That started life inside 10 Downing Street as the world’s first government institution dedicated to the application of behavioural sciences. He and his team spend a lot of his time thinking about how to incentivise us to save more money. Here are some of their most important findings:
When it comes to saving, we thrive on inertia, doing nothing, the path of least resistance. We are lazy, lazy, lazy;
The brain favours an approach called mental accounting; putting money into various pots which are earmarked for specific purposes. That means we’re more likely to save for a holiday than save ourselves interest payments by paying down debts;
Oh and we really are terrible at it. The present is much more salient to us than some time in the future - we just want to spend the money today.
So they’re the problems. How do behavioural economists suggest we get round them?
1. Stick a photo on it
In a study in India, workers were given their pay packet in two envelopes, rather than one. That way they were much more likely to save the contents of one of the envelopes. Add a photograph of their objective to the “saving” envelope and they were even less likely to spend it.
Placing the photograph so the workers had to tear through the photo to open the envelope increased the savings rate still further.
2. Make saving fun
It sounds obvious but making saving cool and playful might well help. David Halpern believes new mobile phone based technology means it can be done.
Already there are phone apps available which assess your spending habits and siphon off money to a saving account or work as a buffer between you and your wage, drip-feeding cash back into your account when you need it or rounding up your everyday small purchases and putting the excess into an ISA.
3. Keeping things easy
Guess what? Research shows we are much more likely to do things if they are easy and friction free. It’s something that’s been applied to pensions in the UK. As from 2012, employees have been automatically enrolled into a workplace pension scheme – described in behavioural economic terms as the default position.
You can choose to opt out but it’s a bit of a hassle.
4. Rainy days
People on low incomes have proportionately less money to save and less of a financial cushion if things go wrong. One idea to help them through the financial shock of the car breaking down or the washing machine going kaput is to create a ‘rainy day’ saving element into their pension arrangements.
This would allow people to withdraw some of the money they’ve already saved for emergencies. Currently it can’t be accessed until you are at least 55. Suddenly pension pots have a short term purpose as well as the long term aspiration of funding retirement.
5. Save more…but without reducing your income
This is an idea dreamt up by Nudge Theory guru Richard Thaler at the University of Chicago. It’s called Save More Tomorrow (SMT) and builds on the idea of default. Employees who are enrolled in a workplace pension with initially low contributions sign up to increase them as their pay increases.
The key thing here is at the same time as you ramp up your savings, you never experience a reduction in cash income. In the US which has a similar opt out pension system to ours, savings rates at companies who offer an SMT pension have quadrupled.