How Do You Get People to Save More Money Revisited

Transcript of Podcast Episode 176

Hello, this is Bill Rainaldi with another edition with Security Mutual’s “SML Planning Minute.”  In today’s episode, how do you get people to save more money?

 The trend cannot be denied.  Over the last few decades, savings rates have dropped dramatically among all Americans, and most notably among young Americans.  Our personal savings rate as a nation is hovering near record lows.  But why?

In 1975 the U.S. savings rate was around 17%.  Today it is less than half that.  Student loan debt is an often-cited culprit, but the relationship to the savings rate is not as direct as many people think.  A much bigger issue is the cost of housing and health care, which have increased in recent years as a percentage of income.  And people are simply beginning their careers—and their savings—at a later age than they used to.

So what’s a good way to increase savings?  A recent study in the Journal of Financial Planning offers us a clue. The article states that savings behaviors are heavily influenced by emotion.  The authors argue that traditional financial education programs have focused primarily on financial literacy, which have only resulted in modest behavioral change.

The authors performed an experiment.  They took 102 people and gave half of them a financial education training session with follow up.  The other half was given a financial psychology training session with follow up.

The sessions lasted anywhere between 40 and 80 minutes.  In the financial education sessions, subjects were given a PowerPoint presentation on the financial planning process as outlined by the CFP Board.  This included information on the importance of savings to fund retirement, the so-called “time value of money,” how savings goals and financial ratios work, and the various savings vehicles available.

The financial psychology sessions were much less specific about finance.  The participant was asked to bring in something of sentimental value, such as a photograph.   They were then asked to describe in detail how and where they got the sentimental item.  They were also asked to think about the feelings and values they have attached to that sentimental item.

Only after all this were they asked about their savings goals.  Finally, they were asked how the feelings and values associated with their sentimental item can be applied to enhance their motivation to save.

Notice: they didn’t mention anything about stocks, bonds, CDs, 401(k), etc.  Rather than describing their savings goals in terms of numbers, people were asked to create visual images of them.  One cited example is where the participant cited retirement as a goal.  Instead of being asked specific financial questions, the participant was asked questions such as “Where do you picture yourself living?”  “What do you see yourself doing?” and “How does it feel?”

After three weeks the results were startling.  The second group—the people trained on financial psychology—reported a 72% increase in their savings rate, vs. 22% for the people trained in financial education.

So what are the practical applications of this study?  First of all, even though it got the lesser result, financial education still has significant value.  A 22% increase in savings rate is a significant accomplishment.  However, the study suggests that using the techniques of financial psychology engages an individual on an emotional level, and this tends to facilitate an even more significant behavioral change.

To quote the authors, “The results of this study would seem to be a strong endorsement of the broad and holistic approach to financial health that is embodied in financial psychology.”  They further suggest that core values play a critical role.  If you want to increase your savings rate, maybe you should spend some time thinking about why.  The study used a sentimental item to link to the participant’s core values, then linked the core values to a savings goal.  In other words, the best results were obtained by thinking in pictures rather than thinking in numbers.

There are certainly limitations.  The participants volunteered for this study in the first place, so they were likely pre-disposed to be interested in the topic.  And no matter what, you still need to have financial literacy.  After all, what good is it if you save a lot of money but invest it on some wild scheme and end up losing it all?

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