Why a timely nudge might help us save money
Anyone struggling to save money might take inspiration from labourers in rural India.
These low-paid construction workers took part in an experiment. When they were paid, some of the cash was put into one envelope, or two, and earmarked as savings.
The stakes were raised for some when a picture of their children was attached to one of the envelopes.
Dipping into those savings for everyday spending - by ripping through the image of their sons and daughters - made them feel guilty. So, as they tried to avoid this guilty feeling, the amount they saved increased.
Can't save, won't save
This is more than just a theory. In the UK today, millions of people set money aside in a separate savings account to stop them spending it day-to-day.
Financial technology companies such as Wagestream, which allows workers to extract pay and save directly from their wages before payday, are trying out the use of reward and guilt.
It allows users to load an image of their savings goal onto the app, such as a car or a holiday destination. The more they save, the clearer the image becomes. If they withdraw money, the picture starts to disappear.
"It subtly reinforces the reality of what they are doing and can materially influence their behaviour," says Peter Briffett, co-founder of Wagestream.
The reality, and the concern for many, is that the UK has lost its savings habit. This graph shows that experts are not expecting it to return any time soon.
The proportion of income left after taxes that we save is known as the savings ratio. For the last couple of years, the UK has saved about 4% of disposable income. In the 1990s, it came close to 15%.
The independent Office for Budget Responsibility (OBR), which makes forecasts for the government, predicts it will stay at or around this 50-year low for the next five years at least.
It is not all bad. The OBR, the Bank of England, and others expect interest rates to stay low too. Many people are deciding to pay off debts when the costs are low, rather than save when the rewards (in interest payments) are low too.
However, the Institute for Fiscal Studies says the increase in consumers' spending has outstripped any income growth in the last couple of years.
A lack of savings has real consequences for the lives of millions of people - particularly the young and low-paid.
No savings means no financial buffer for the unexpected - no way to pay when a deposit is needed to rent a home, or when the vet's bill lands after the cat is ill. or when the car breaks down. No car may mean no job.
Data shows the extent of the problem:
- Official statistics reveal half of 20-somethings have no savings at all
- Research by the Financial Conduct Authority found one in six people could not cope with a £50 rise in monthly rent or mortgage costs
- In 2016, the Money Advice Service found that 16 million people in the UK had savings of less than £100
- In Northern Ireland, the West Midlands, Yorkshire and Humber, North East England and Wales, more than half of the adult population had no more than £100 tucked away
Free money offered by the government has done little to reverse the situation. The Help to Save scheme offers a 50% bonus to certain people on low incomes if they save for two or four years. Take-up has been below half the level expected by the OBR.
So MAS, now called the Money and Pensions Service, wanted to find new ways to encourage people to save. It turned to the Behavioural Insights Team (BIT), commonly known as the "nudge unit".
In a tiny meeting room, one wall of which is entirely a whiteboard, sits someone with big ideas. Elisabeth Costa, is a director at BIT and leads a team of five trialling various projects aimed at encouraging those who are in work, but financially squeezed, to save.
A total of 244 ideas about savings, guidance, and managing debts were thought up, before 17 were chosen for trials.
In the end, many boil down to this: using timely reminders and automatic technology can help people manage their finances.
We "underestimate behavioural factors", she says, which can be as powerful a motivator as, for example, an increase in the interest paid on savings.
"The industry should make [customers'] decisions as easy and as automated as possible," she says.
We make big changes at important times in our lives, so we might review our finances when we move home, or when children are born.
Yet reminders can work on a more regular basis, if they are well-timed, according to Ms Costa. Research in Mexico showed three-quarters of workers whose wages were paid into their bank account immediately took the money out in cash. They received a message on pay day urging them to keep it in.
- BBC News has set up a UK Facebook group all about affordable living. Share your ideas and join the conversation at the Affordable Living group here.
One trial being planned in the UK is at supermarket check-outs, both physical and for online shoppers. The idea is that the shopper receives a message at the check-out asking whether they would like the equivalent of money saved from store discounts to be diverted automatically into a savings account.
The team also plans to test the same theory with longer-term savings. This would prompt people to save some of their wages into a "sidecar account" alongside any pension savings. Employees would contribute in the same way as a pension, but the extra would go into a more easily accessible savings account for a rainy day, or to pay emergency bills.
Other trials are planned or already in operation to help people pay off debt quicker, or block spending on gambling sites.
Prizes at the end of the tunnel
Ms Costa explains that when it comes to finances, people often display "tunnelling" behaviour, when their short-term decisions clash with their long-term interests. For example, someone squeezed for cash may borrow a payday loan rather than save the same amount by switching to a cheaper energy deal.
We also tend to value rewards that are offered today rather than in the long-term.
That is why prize-linked savings accounts are popular. One study in South Africa found savings increased by 38% when people were offered the chance to win a cash prize rather than being paid interest.
In the UK, Premium Bonds have been attracting people in much the same way for 60 years. It is the most popular savings product in the country. Yet, Ms Costa argues that for some people on low incomes, the £25 minimum investment may be too expensive.
Many will argue that the financially squeezed need a little more help, as well as a little more luck.