We recently brought together industry experts and researchers to discuss what may be preventing working Americans from saving better today. In this blogpost, we share what we learned.
The webinar, entitled How Behavioral Science Enables Better Savings Habits, included:
- Leigh Phillips, CEO of SaverLife
- Brian Gilmore, Vice President of Commonwealth
- Adam Zuckerberg, Vice President Worksite Solutions of Western & Southern Financial Group
- Sid Pailla, Founder of Sunny Day Fund
- Moderated by Les Williams, Director of Partnerships at Sunny Day Fund
This topic is important because many Americans are facing financial challenges and living paycheck-to-paycheck. Credit card debt has skyrocketed to nearly $1 trillion on the heels of inflation, according to the Federal Reserve Bank of New York. Further complicating matters, a study by Financial Health Network found 1.76 million US households overdrew their accounts more than ten times in 2022, and nearly half of these overdrafts were triggered by transactions of $50 or less.
The resulting financial stress doesn’t stay at home. It follows employees to their workplace, impacting productivity, wellbeing, safety, and retention.
We know that saving helps, but what’s stopping people from saving better today? Here are six possible barriers:
- Insufficient and inconsistent income
- Inflation and rising cost of living
- Unfit financial products, especially for lower income workers
- Overburdened individuals
- Psychological barriers
- Lack of trust in financial institutions
Saving is tougher with insufficient or inconsistent income
Irregular income, particularly common among gig workers, low-wage earners, hourly workers, and self-employed individuals, can pose a significant challenge to consistent saving. Policymakers and states are considering solutions. For instance, Colorado is considering implementing laws to guarantee a minimum number of work hours for workers, stabilizing income and making it easier to track finances.
Hourly workers often lack fixed work schedules, which makes it hard to connect with them about saving. Leigh Phillips says, “It’s really hard to reach those workers even if they do have a stable employer.” That’s why it’s important to find creative ways to get these workers interested in saving.
Inflation eats into how much people can save
Escalating living costs and inflation significantly impede the ability to save. This is particularly challenging for those with inconsistent incomes, as they risk falling into a debt cycle due to spending more on essential needs compared to high-income earners.
Stagnant wages, alongside an expanding gap between expenses and income, further complicate financial stability for Americans. Sid Pailla explains that spending during inflation rather than saving money may actually be seen as rational because money is losing value quicker over time. He points out, “The national average savings interest rate is 0.42% according to the FDIC, but inflation is much higher than that.” In essence, the money loses 3.6% in real value after a year if saved.
Unfortunately, elements of inflation may stick around longer too. Adam Zuckerberg adds, “The rate of growth of inflation may be dropping a little bit but prices are still going up. Just that rate of growth is what’s changing.”
Inflation can also force especially lower-income employees to become more selective about their employee benefits. For example, a recent survey from Allianz Life found more than half of working Americans adjusted down their retirement contributions. This shift intensifies wealth inequality as especially lower-income people must prioritize immediate needs over future savings.
Too many steps, too little time, too difficult to save
Current financial systems and products, like checking accounts, credit, and savings accounts, are designed for people who earn more than they spend routinely. However, we know that may not be case for hourly, seasonal, or gig workers. So the underlying financial products may actually be unintentionally dismissive of these populations. Phillips recommends that we “center users and individuals and really design for them as opposed to trying to change people to fit into existing products.”
Another reason people may not contribute to savings is because of the amount of friction to getting started. As Brian Gilmore puts it, “there’s many steps and decisions that need to happen to get on that savings habit. And the more steps you put between someone wanting to save, and them actually being able to save, especially in the context of volatile income,” the harder it is to save. Challenges like not knowing how much to save regularly, aligning automated savings with irregular income, and dealing with decision overload on workplace benefits platforms further complicate the savings process.
Finally, the user experience of traditional financial products leaves much to be desired. “The experience that someone has trying to save, it doesn’t feel as good as spending,” highlights Gilmore. Savings can be re-designed to feel easier and more rewarding.
Workers overburdened with increasingly complex financial lives
As the economic landscape changes, responsibilities are increasingly shifting from employers to employees. “Finances become more complicated for people who are working in the economy,” Phillips points out. Self-employed workers must manage their income, taxes, and other financial aspects that are not automatically sorted from their earnings. The lack of access to benefits compounds these financial intricacies.
Take for example the report by SaverLife on micro-entrepreneurs where “82% are using their own personal money to finance their micro-entrepreneurship.” Many people earning income from self-employment tend to mix personal and business expenses and income, often with no distinct separation. On top of that, many gig workers don’t see themselves as self-employed, which can lead to missed deductions and future penalties. Individuals are juggling many responsibilities beyond their work and family, all while trying to navigate a complicated mix of regulations and tools. It is important to acknowledge and address these added complexities to better support such workers.
Lack of trust in financial institutions
Trust in financial institutions, or rather the lack of it, can also deter individuals from saving. A recent poll found only 10% trusted financial institutions a great deal. Employers have a golden opportunity here. In an Edelman Trust Report, employers were found to be the most trusted party, even accounting for partisan divides. Leveraging this trust factor, employers can deliver workplace emergency savings programs to automate their employees’ intent to save.
Psychological challenges to getting started on a better financial journey
Saving can be a challenging journey, often accompanied by stress and feelings of inadequacy. Gilmore says that saving can demand us to prioritize the future over the present. He remarks, “Just as people, we really are not great at prioritizing the future over the present.” Whether that lack of future orientation comes from prior trauma, lack of guidance, cultural factors, or shared human psychology, the outcome remains the same.
Moreover, conversations about savings are often driven by fear, which can lead to feelings of shame, which both Phillips and Pailla affirm with SaverLife’s and Sunny Day Fund’s user stories. To change this narrative, it is important to overcome inaction bias and fear of uncertainty. The insights from behavioral science can help us understand these psychological hurdles and formulate strategies to overcome them.
How organizations can help their employees start saving
Employers can help their employees save better through automation and incentives. By doing so, they can also advance financial inclusion and equity. To start, organizations can evaluate their existing benefits and understand where to incorporate savings automation.
They can also offer emergency savings as an employee benefit. Workplace emergency savings can reduce the likelihood that workers resort to costly payday loans or credit card debt. More recently, research has shown that emergency saving can also reduce loans and withdrawals out of retirement plans like a 401(k).
Keep reading in our recent blog post where we go on to share key insights into the interplay between behavioral science and those savings activities and outcomes, and strategies to overcome savings barriers.
