In this three-part blog series, we delve into the role of behavioral science in influencing savings behavior. Last time, we presented potential barriers to saving for especially lower-income Americans. In this blog, we cover different strategies to boost savings habits and outcomes.
Here are the five strategies we present in this post:
- Choice Architecture
- Mental Accounting
- Leveraging Friction Appropriately
- Gamification and Incentives
- Socio-Emotional Messaging
Make sure to check out the original webinar, How Behavioral Science Enables Better Savings Habits.
Savings choice architecture: streamlining the decision to save
Choice architecture can guide decision-making and help establish savings habits, especially in the normal flow of employees’ required decision-making. One such approach is the “active choice” method, highlighted by Brian Gilmore at Commonwealth. This approach requires employees to answer ‘yes’ or ‘no’ when asked to join a workplace emergency savings program. As Gilmore puts it, “This could be part of a mandatory process like benefits selection at onboarding or open enrollment. By using active choice, you are ensuring you are getting employees’ attention, which can be challenging in a crowded workplace benefits environment.”
Heidi Johnson, Senior Director, Behavioral Economics from the Financial Health Network, also supports the idea, noting that the “Financial Health Network has also found that using techniques like ‘active choice’ encourages people to take action towards their savings goals. We partnered with a fintech to implement this technique and found that it boosted enrollment in automatic savings from payroll deductions by 31% for workers who saw this prompt during onboarding to the app.”‘
Mental accounting: how money gains meaning
Mental accounting – or helping employees think about savings in different buckets, goals, envelopes, jars, or any other such term – can create an additional emotional incentive. This technique, popularized by Richard Thaler, can significantly motivate individuals to save larger amounts and adhere to their savings goals.
For example, if an employee was saving for an emergency, they may decide to put away only $30 per paycheck. However, if the employee can also save for a goal like moving into a new apartment, they may put away an additional $50, for a total of $80. In the worst case, the total amount will remain available for emergencies.
Leveraging friction: focusing on saving and purposeful spending
As mentioned earlier, any friction to an employee’s decision and action to contribute to saving can reduce follow through – so it must be reduced.
One way to do so is through automation. As Adam Zuckerberg noted, automatic enrollment worked wonders for the 401(k) when it was introduced, but that’s currently only feasible for in-plan workplace emergency savings programs through the SECURE Act 2.0.
Though out-of-plan workplace emergency savings programs have the added friction of requiring voluntary enrollment, their wider impact and simpler product more than make up for it. In both cases, it’s also possible to design in auto-escalations, slowly increasing how much an employee choose to save, into the employee’s onboarding experience. Both auto-enrollment and auto-escalation were first popularized for the 401(k) space by Thaler and Shlomo Bernartzi’s Save More Tomorrow program.
But not all friction is bad – consider what happens when an employee decides to spend out of their emergency savings. Just like with retirement savings, there may be leakage or there may be spending for non-emergencies. Here, some intentional friction – like verbalization or loss aversion, defined below – could be a good thing to make the employee think twice before spending down their emergency savings.
Verbalization encourages individuals to voice their savings goals and spending intentions, typically via a self-written memo. This active engagement helps to reinforce the reason to save.
Loss aversion highlights potential losses that could occur if individuals do not save, which taps into the innate desire to avoid negative consequences. For example, highlighting that the employee may lose $50 in incentives from their employer if they withdraw today can give pause. By combining these techniques, employers and emergency savings benefit providers can create a more effective approach to encouraging and sustaining consistent savings habits.
Gamification and incentives: rewarding savings outcomes
By incorporating strategies like instant gamification and incentives, employees can become extra motived to take action in an engaging and enjoyable way.
Gamification adds an element of interaction to the savings process and is often built around achieving certain savings goals or saving consistently. For example, SaverLife and Commonwealth collaborated to launch prize-linked savings, which leveraged small dollar rewards to create collective action towards saving more. SaverLife’s “Scratch & Save” competition, reminiscent of a lottery scratch ticket, provides members with a weekly opportunity to win a $5 cash prize if they save money or take steps towards improving their financial health. These initiatives not only incentivize regular savings but also infuse a sense of thrill into the process, despite the possibility of winning being relatively low. As Johnson puts it, “people get excited about having a chance to win a prize.”
More broadly, economic incentives can come in the form of sign-up bonuses, milestone rewards, or a scaling reward model. Commonwealth documented a few such approaches in their recent research on incentives to drive engagement with workplace emergency savings.
While approaches and results vary, Sunny Day Fund has found most success with a small sign-up bonus of $25 to $50, and an additional $200 to $300 in cash rewards paid out periodically over the course of a year based on consistent net savings activity. For an out-of-plan program, not all employers need to have the same reward approach.
Gilmore emphasizes the impact employers have in shaping employees’ savings habits. He notes, “The idea of the employer putting more money in people’s pockets…we already do that in the retirement sector, why not apply that to the emergency saving side of thing? And that goes a long way to make savings feel positive rewarding rather than self-sacrifice and delayed gratification that comes with a future-focused approach.”
Socio-emotional messaging: power of communicating all the small wins
Communication is a core part of shifting behavior. Specifically, socio-emotional messaging seeks to connect with individuals on a personal level, appealing to their aspirations and highlighting the benefits of saving. Tailoring messaging based on personality types and employing grassroots efforts to build a sense of community and champion saving can significantly influence behavior. “The more you can tap into to what people can achieve and build on those wins then you see greater success,” said Leigh Phillips. Marketing and communication initiatives that frame savings as a positive and celebratory achievement can further reinforce the significance of saving.
Additionally, recognizing savings milestones can offer intangible incentives. Celebrating these achievements, including withdrawals, can help individuals feel valued and appreciated, which in turn can fuel their motivation to continue their savings journey and boost their financial confidence. By coupling tangible rewards with positive reinforcement, these strategies make the path towards financial wellness more engaging and rewarding.
Emergency savings start with the paycheck
Employers can leverage behavioral science to make their program savings program go further. The biggest lesson we’ve learned at Sunny Day Fund is that the power of automation from the paycheck is crucial for employees to save regularly.
In other words, for most working Americans, the choice to save may actually start with the employer themselves deciding to provide an emergency savings program. If you’re curious to get started, reach out to us or learn more here.