Savings as a path to improved financial well-being is at the core of the Consumer Financial Protection Bureau’s Start Small, Save Up initiative, which was launched in early 2019. In a complex financial environment where consumers face competing demands for their limited funds, as well as trade-offs between various savings goals (for example, retirement, children, emergencies), the CFPB has focused on the importance of an emergency savings cushion as a key pillar of Americans’ financial security. To support this initiative, today we released a report that synthesizes the rigorous research of programs and strategies aiming to help consumers achieve greater savings. The report is designed to support researchers, policymakers, and practitioners as they seek to understand and build upon the current state of the research on liquid savings.
To this end, we examine three broad research areas—savings products, financial incentives, and behavioral and psychological approaches—to increase savings. These three categories address ways to facilitate consumers’ saving behaviors by: providing a ready place to save (savings products), enhancing the motivation to save (financial incentives), and designing a choice environment that encourages saving (behavioral and psychological approaches).
The literature on savings products suggests that efforts to introduce or expand access to low-cost savings products generally increase the take-up of savings products and the amount saved. The research also finds that consumers are sensitive to account fees.
The financial incentives literature focuses on four approaches to providing consumers with financial incentives to save: interest rates, matched savings, prize-linked savings, and one-time incentive payments. While modest interest-rate increases (interest rates in the one to five percent range) have been found to have little effect on people’s saving behavior, more substantial interest rate increases (above-market rates in the range of 10 to 20 percent) and financial matches to save (for example, $0.50 match for every $1 saved up to $1,000) have been found to increase savings. However, the picture is not always straightforward. While there is consensus that higher match rates increase the share of people who save, the literature is less clear on how match rates affect the amount of savings. The matched savings literature has found some evidence that these programs can reduce economic hardship (for example, difficulty paying bills) and improve financial security (for example, greater confidence in meeting monthly living expenses). Prize-linked savings (PLS) accounts incentivize people to save by providing them with a chance to win financial prizes when they save. There is evidence that people save more dollars with a prize-linked savings account than with a more standard interest-bearing account, even when the two accounts have the same expected payout. However, rigorous research in this arena is limited.
Behavioral and psychological approaches
The literature has also explored behavioral and psychological approaches to increase savings. Saving interventions that draw on psychological concepts have mainly focused on factors related to the decision environment, such as default options, and factors related to the decision maker, such as the tendency for people to compare themselves to others. This literature finds that embedding features directly into programs and products—such as autoenrollment and auto-escalation—can lead to increased uptake of and deposits into savings-related products. Beyond major structural changes to products and programs, modest changes to the decision environment (for example, changing numerical savings targets and prompts) can also lead people to save more, although the estimated impacts can be quite modest.
The behavioral research also provides evidence that people will voluntarily use commitment mechanisms that limit—or even place penalties on—their ability to easily access their own money. The literature finds that there is considerable demand for commitment mechanisms, and generally suggests that commitment mechanisms that restrict behavior, provide psychological motivation, or induce peer comparisons can increase savings deposits and/or reduce savings withdrawals. However, commitment strategies may backfire for various reasons, such as when failure to achieve a targeted goal results in financial penalties.
Beyond the findings, this research review identifies gaps in the literature and provides suggestions for moving the field forward with an eye toward helping consumers build an emergency savings cushion as a step to improved financial well-being. And, while the Coronavirus pandemic has led to significant job loss, which likely undercuts the ability of many U.S. consumers to save, it has also highlighted the importance of building a personal safety net—if not today, then when consumers get back on their feet.