NJCFE-Saving Money-Research Insights-Meeting Presentation-02-21-14


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Description of implications of research about saving money

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NJCFE-Saving Money-Research Insights-Meeting Presentation-02-21-14

  1. 1. Saving Money: Research Insights https://learn.extension.org/events/1442 Barbara O’Neill, Ph.D., CFP®, AFC, CHC Rutgers University oneill@aesop.rutgers.edu
  2. 2. America Saves Sound Bite
  3. 3. Did You Ever Wonder… Does Research Support The Three Keys to Saving?
  4. 4. Research Study Topics • Savings behaviors of Americans • Characteristics of successful savers • Resources for saving money • Barriers to saving money Mix of government, non-profit, and academic studies
  5. 5. Research About Savings Behaviors
  6. 6. Savings Behavior • 6th Annual Savings Survey (national) by CFA & ASEC (2013): http://www.consumerfed.org/news/644 • 54% of Americans “have a savings plan with specific goals” • 43% have a spending plan that allows them to save for goals • 50% of pre-retirees save for retirement at work • 41% preauthorize transfers from checking to savings or investments • 49% know their net worth • 65% have sufficient emergency savings Implications • Provide tools for financial goalsetting and net worth and spending plans • http://njaes.rutgers.edu/money/pdfs/goalse ttingworksheet.pdf • http://njaes.rutgers.edu/money/pdfs/networ thcalcworksheet.pdf • http://njaes.rutgers.edu/money/pdfs/fs421w orksheet.pdf • Provide tools to sign up for employer savings plan at financial seminars and benefit fairs
  7. 7. Savings Behavior Implications • 5th Annual Savings Survey (national) by CFA & ASEC (2012): • Provide planning tools and http://americasavesweek.org/image encourage future-mindedness s/asw2012pr.pdf – http://www.americasavesweek.org/forindividuals/picture-your-savings-goal • 2/3 of Americans spend < their • Provide successful savings role income and save the difference and models…people with “street cred” have adequate emergency funds • Having a savings plan with specific goals can have beneficial financial effects, even for lower-income families (< $25,000) • Those with a savings plan are much more likely to spend < income and save (85% of all 1,007 respondents vs 44%)
  8. 8. Savings Behavior • 2013 Retirement Confidence Survey (EBRI): 57% of U.S. workers have < $25,000 in total savings including 28% that have < $1,000 (excluding a primary residence and DB pension plan) • Only 12% have saved $250,000 + • Workers who participate in a retirement savings plan at work (45%) are considerably more likely than those who are offered a plan but choose not to participate (22%) or are not offered a plan (18%) to have saved at least $50,000 • http://www.ebri.org/pdf/surveys/rcs/2013/Fin al-FS.RCS-13.FS_3.Saving.FINAL.pdf Implications • Stress the benefits of employer savings plans • Sign people up at workplace seminars or auto-enroll them • Fine line between educating people and scaring them so they say “Why bother? I’ll never be able to save enough money” • Example: Showing the 4% withdrawal rule on a low sum: $25,000 x .04 = $1,000 a year.
  9. 9. Savings Behavior • Fidelity: 401(k) plan participants save 8% of their salaries in 401(k) plans; When a typical employer match is factored in, the savings rate increases to 12% • Average 401(k) at end of 2012 had $77,300 • Younger workers use Roth 401(k)s the most: 10% for workers in their 20s vs. 6% of workers overall • http://www.fidelity.com/insidefidelity/employer-services/fidelity-analysisfinds-record-high-average-401k-balance Implications • Teach the “Kick It Up a Notch” behavior change strategy: http://njaes.rutgers.edu/sshw/workbook/21 _Kick_it_Up_a_Notch.pdf • Show people the dollar benefits of an “extra notch” • 1% More Calculator: http://www.nytimes.com/interactive/2010/0 3/24/your-money/one-pct-morecalculator.html?_r=0 • Use a Monte Carlo calculator to show how extra savings increase the chances of retirement success
  10. 10. Savings Behavior • In 2012, 11% of 401(k) participants contributed the maximum possible amount (Vanguard) – $17,500 < age 50 (2014) – $23,000 age 50 + (2014) • Saver’s Credits were claimed on 6.1 million tax returns in 2010 but most people received small benefits: $122 for individuals and $204 for couples • http://money.usnews.com/money/retireme nt/articles/2013/11/04/modest-401k-andira-changes-coming-in-2014 Implications • Many government incentives to save are under-utilized • Boosting your savings rate is a sure way to improve your retirement prospects • “Reference group” info like this is good so people know how they’re doing compared to others
  11. 11. Characteristics of Successful Savers • Okech et al. (U of Georgia): Paying rent with cash, using VITA to prepare taxes, and witnessing parents save money in financial institutions were positively associated with likelihood of having a motivation to save: Implications • Encourage parents to model good financial management practices for children • Foster deliberate parent-child interaction about savings; use normal events as “teachable • http://www.tandfonline.com/doi/abs/ moments” 10.1080/15588742.2013.766917#.U uARJ00o6M8 • Coordinate savings outreach programs with tax preparation outreach
  12. 12. Characteristics of Successful Savers • When kids have even a small savings account in their name, it increases the chance that they will persevere and do what it takes to graduate from college • Those who have an account are about seven times more likely to attend college than youth without savings • The correlation between savings and college graduation is particularly strong among young adults in families earning < $50k • http://www.newamerica.net/node/69416 • http://link.springer.com/article/10.1007/s1 0834-012-9341-0#page-1 Implications • Even modest savings can be empowering and has aspirational effects: gives people a sense that they have control over their destiny • Having money saved for college reinforces the message to go to college and work hard for good grades • Encourage youth savings and stress the psychological benefits
  13. 13. Characteristics of Successful Savers • Fisher & Anong (2012): 2007 SCF data: 46% saved regularly, 32% irregularly, 22% did not save Implications • Motives are strong predictors of disciplined saving • Precautionary and retirement • Emphasize the importance of motives, long-term planning identifying goals to encourage a horizon, and higher income regular habit of discretionary saving increased likelihood of saving and automated saving regularly or irregularly vs. no saving • Households in all income groups can be regular savers • Retirement motive separated regular savers from irregular savers: 1.5 times more likely http://www.afcpe.org/assets/pdf/v23_j4.pdf • Stress saving small amounts over long time horizons which makes goal attainment more feasible
  14. 14. Characteristics of Successful Savers • • • Grinstead et al. (2011) study of IDA program participants in American Dream Demonstration Implications • Learning needs vary. If resources allow, financial education should About 4 of 5 low-income working be tailored and individualized (e.g., families are “asset poor” with < 3 financial coaching) months expenses at the federal poverty level to survive a financial crisis • Peer financial counseling is a lowcost option to savings coaches Hours of participation in financial education program, higher matched • cap, prior use of a savings account, and greater educational attainment were • associated with greater likelihood of savings and saving goal achievement http://www.afcpe.org/assets/pdf/vol_22_issue_2 _grinstead_mauldin_sabia.pdf High match rates and match caps motivate people to save Provide a link between people’s saving goals and financial education content
  15. 15. Characteristics of Successful Savers • Hogarth & Anguelov (2003) study of savings by low-income households, SCF data Implications • Even poor households can save although amount is low; people at all income levels were savers • Ability to save was associated with socioeconomic (e.g., income) • Poor households could still probably & demographic (e.g., education) not meet short-term emergencies characteristics, expectations (e.g., about future income), motivations • Hispanics were more likely to be (e.g., a reason to save), access to savers than White households in resources, & institutional this study; not always the case environment (e.g., credit checks • Expectations and motivations matter on potential depositors) • 60% of households at or below poverty level indicated they saved http://www.afcpe.org/assets/pdf/vol1411.pdf • Support policies and programs that promote saving
  16. 16. Research About Savings Barriers and Resources
  17. 17. Savings Barrier: Scarcity of Attention • Urgent current expenses trump saving for future priorities • Scarcity engrosses people in current needs • If financially distressed: less mental capacity to address problems & future goals Implications • Automated savings • Auto escalation (e.g., Save More Tomorrow) • Form 8888 for automatic tax refund savings • www.futureme.org (send e-mail to • Eldar Shafir (Princeton): Why your future self) Having Too Little Means So Much: http://money.cnn.com/2013/12/01/lead • ership/saving-money.moneymag/ Target-date lifecycle funds
  18. 18. Savings Barrier: Exponential Growth Bias • “Tendency to linearize exponential functions when assessing them intuitively” – People severely underestimate how much interest they earn on savings or pay on credit cards • Biased people borrow more, save less, and favor shorter maturities • Stango, V. and Zinman, J. (2009), Exponential Growth Bias and Household Finance. The Journal of Finance, 64: 2807–2849. Implications • Teach The Rule of 72 so people understand “doubling periods” • Use hands-on activities to illustrate the effects of compound interest on debt and savings – http://rci.rutgers.edu/~boneill/assignm ents/sliderule1.html – http://rci.rutgers.edu/~boneill/assignm ents/sliderule2.html
  19. 19. Savings Resource: Visualizing the Future • People need to visualize the future impact of their savings • Many people are not good with long-term decisions • Hal Hershfield (NYU) et al.: people save more money after being shown digitally altered pictures of themselves at older age • http://www.marketingpower.com/ab outama/documents/jmr_forthcomin g/increasing_saving_behavior.pdf Implications • Show people what they could look like: – http://faceretirement.merrilledge.com/ – http://in20years.com/ • Show people how much money they can lose by not saving: http://rci.rutgers.edu/~boneill/assignments/s liderule2.html
  20. 20. Savings Resource: Workplace Savings Planning Aids • Lusardi et al. study: simplifying the process of enrolling in employer plan motivates employees to save • Used flyer that broke the process down into 7 steps and video program • 56% increase in election behavior within 30 days of viewing communication programs vs. employees not exposed to them • Differences were sustained after 60 and 90 days • http://www.nefe.org/Portals/0/WhatWeProvide/ PrimaryResearch/PDF/DartmouthStudy.pdf Implications • Design initiatives that overcome barriers to save • Make “how to” information “sticky” • Break down financial recommendations to save into “baby steps” • Develop videos that feature actors from the target audience being reached
  21. 21. Savings Resource: Future Forecasts • People are motivated to save by knowing how much income they can withdraw from 401(k) in retirement Implications • Study by Gopi Shah Goda (Stanford) et al.: Workers who received brochure showing increased income from increased savings saved $1,150/year more than those that didn’t get pamphlet • Use retirement income calculator tools such as http://www.bankrate.com/calculat ors/retirement/retirement-planincome-calculator.aspx and http://money.cnn.com/calculator/r etirement/retirement-need/ • http://crr.bc.edu/wpcontent/uploads/2013/04/IB_13-4508.pdf (projections help to overcome tendency to procrastinate) • Lobby employers or plan providers for personalized retirement income projections • Translate savings RATES into savings INCOME
  22. 22. Savings Resource: Prize Linked Savings (PLS) • People are more likely to save when offered the chance to win cash or prizes • PLS products more effective at inducing savings than standard interest-bearing accounts offering the same expected return • Controlled experiment by FilizOzbay (U of Maryland) et al.: http://www.nber.org/papers/w19130 http://econweb.umd.edu/~ozbay/savings.pdf Implications • Combine features of savings and a lottery, especially for low-income people who spend a high % of income on lottery tickets and view lotteries as a form of financial planning (not necessarily irrational) • Resources: http://www.savetowin.org/ http://saveyourrefund.launchrock.com/ http://www.d2dfund.org/ http://blogs.wsj.com/economics/2013/06/21/promi se-of-prizes-helps-people-save/
  23. 23. More About PLS Programs • Savings account that pools some of the interest from all depositors (or uses sponsorship funds) and pays out a big lottery prize every month or so • Combines the thrill of a lottery with the safety of a savings account • A “no-lose lottery” because depositors have a chance to win but can’t lose their deposited savings • In 2009, Americans spent $58 billion on lottery tickets; about $200 per person • In all but a few states, PLS is illegal – Big obstacle: state-run lotteries http://freakonomics.com/2010/11/18/freakonomics-radio-could-a-lottery-be-theanswer-to-americas-poor-savings-rate/
  24. 24. Savings Resource: Understanding the Impact of Compounding • When shown the positive effect of long-term compounding, people were motivated to increase their savings Implications • People incorrectly assume that savings grows linearly rather than exponentially • “Recency bias” of current low interest on savings doesn’t help • Median estimate of what account balance would be was < 10% of what it would be after 40 years with a given rate of return • http://www.scribd.com/doc/76254607/Mis understanding-Savings-GrowthImplications-for-RetirementSavingsBehavior • People have a hard time grasping the concept of exponential growth in savings • Need to provide hands-on experience with savings growth – Time Value of Money Problems: http://rci.rutgers.edu/~boneill/present ations/index.html – CEE Compound Interest Calculator: http://www.econedlink.org/interactive s/index.php?iid=2&type=educator
  25. 25. Savings Resource: Text Messages • Karlan et al. (Yale): conducted experiments with text messages • Even low-income bank customers managed to save part of their income when nudged by regular text messages • “Reminders will be more effective when they increase the salience of a specific expenditure” • http://karlan.yale.edu/p/Top-ofMind-April2010.pdf Implications • Regular “nudges” can motivate people to save • Text messages are an effective motivational tool • Reinforce the connection between saving and specific financial goals • Brain studies: imaging a future goal is almost as powerful a “zing” as achieving it (e.g., buying a car)
  26. 26. Other Relevant Research Related to Saving Money
  27. 27. The Power of Social Norms • Goldsten et al, (2008) study of social norms to change behavior; experiment about environmental conservation program in hotels • Telling people “the majority of guests reuse their towels” proved superior to traditional appeals used by hotels that focus solely on environmental protection benefits • Even more superior results for the setting that closely matched participants’ immediate circumstances (“the majority of guests in this room reuse their towels”) • http://www.carlsonschool.umn.edu/ assets/118359.pdf Implications • Provide positive financial frames of reference such as % of employees participating in an employer’s retirement savings plan • Provide relevant research findings about financial behaviors of Americans • Use the “Wealth Test” from The Millionaire Next Door: formula based on age and income: http://www.bauer.uh.edu/drude/Net .Worth.Worksheet.pdf
  28. 28. The Marshmallow Test: Delayed Gratification and Self-Control Implications • Mischel et al. study of delayed gratification (late 1960s/early 1970s) • When people are put in situations where they trust in a clearly • 4-year old children offered a choice defined long-term gain, they are between one small reward now or 2 more likely to pursue it rewards if they waited 15 minutes • Willpower appears to breed longterm success in life (strategic • Children who waited had better life reasoning skills and trust too?) outcomes including higher SAT scores and scholastic performance, • Teach long-term gains of saving less substance abuse, fewer behavior problems, and better social • Develop learning activities that encourage people to develop skills and stress coping skills willpower http://harbaugh.uoregon.edu/Readings/UGBE/Mi schel%201989%20Science,%20Delay%20of%20 Gratification.pdf • Foster trust by learners
  29. 29. IDA Program Research • Matched savings program for income-eligible individuals and families to buy a home, pay for education, or start/expand a business; operated by government or non-profit agencies: http://cfed.org/programs/idas/ida_basics/ • Often a 50 cent/$1 or $1/$1 match • IDA programs include a financial education component • Effects of financial education level off after 12 hours: http://econpapers.repec.org/paper/wpawuwp he/0108001.htm • Those who successfully complete IDA program have higher levels of asset ownership than dropouts: http://www.joe.org/joe/2009december/rb3.php Implications • Financial education has been found to have a large effect on savings outcomes in IDA programs • IDA matching is a powerful incentive to save • Financial education should compliment institutional structures like IDA programs that foster saving (“teachable moment”): http://www.urban.org/UploadedPD F/311224_financial_literacy.pdf • Encourage qualified individuals to find supportive community savings programs
  30. 30. America Saves Sound Bite: Not Just a Slogan but Saving Strategies Informed by Research