Common Cents Lab improving America’s financial health

Social scientists have coined a term called the intention/action gap to describe situations where people define a goal and maybe even identify steps to take, but fall short of reaching it. Perhaps life is just too busy to adjust or existing habits are too ingrained.

One area of life where many people display this gap is in their financial well-being, a new report from the Common Cents Lab details. The Common Cents Lab is a financial decision research lab at Duke University that creates and tests behavioral economics interventions designed to improve the financial health of 1.8 million people with low to moderate incomes. It is supported by the MetLife Foundation.

Kristen Berman and Mariel Beasley are two members of the Common Cents leadership team (along with Dan Ariely and Wendy De La Rosa). They said many Americans have to maintain a delicate financial balancing act lest they fall into financial difficulty. In a study of close to 1,000 people with low or moderate incomes they discovered 36 per cent has less than $500 in savings, including retirement funds.

Those people are acutely aware of their situation, as 92 per cent can list at least three actions they could take that would improve the situation within one month.

But many do not and the Common Cents Lab wants to learn why and identify behaviors to help them develop financially healthy behaviors. They have identified five key areas where people say they need the most help:

  • Improving cash flow management
  • Decreasing expenses
  • Debt management
  • Increasing short-term savings
  • Increasing long-term savings

“People have a lot of different areas of life to focus on, like their job, or saving for a down payment on a house,” Ms. Berman said. “Identifying what goal is right for them can be a difficult psychological step.”

The team determined it was important to identify goals that could be attained within six months and which came with measurable steps that could be celebrated along the way. Half of program participants in one study got punch cards where they could mark completed steps when they met with an advocate.

“Small things help people achieve savings goals faster,” Ms. Berman said.

Kristen Berman

Kristen Berman

A growing number of socially inclined organizations have realized the same thing and 17 have worked with Common Cents Lab since their launch last year to design experiments and product prototypes addressing challenges such as getting people to save more of their tax refund, raising the application rate for people eligible to use food stamps and increasing the use of short-term savings accounts. Intervention methods follow a “3Bs approach” of behavior identification, barrier removal and benefit amplification.

One Common Cents partner is EarnUp, a consumer-focused fintech platform that automates loan payments.

“EarnUp pays off your loan faster by matching it with when you get paid, taking money from the point you get paid and decreasing your loan term” Ms. Berman said.

For some people, the problem isn’t a lack of money, it is appropriately portioning that money out until the next check arrives. We tend to spend money when we have it and deal with tomorrow later on. Companies recognize this and help consumers maximize their money by automatically taking portions of paychecks to cover mortgage and automobile payments. Some even take more than the usual payment to dramatic effect.

“The majority of people pay the minimum balance because it is the default,” Ms. Berman explained. “How can we get people to pay more? We just ask in a way that makes it easy to budget.”

“There is also a scarcity mindset,” Ms. Beasley added. “When people have scarce resources every extra decision is an added cognitive load.”

 

Mariel Beasley

Mariel Beasley

(Common Cents also works with Propel, an innovative initiative that helps people with low incomes maximize the benefits of SNAP, aka the food stamp program. They employ similar principles of stretching out the benefits over an entire use period. Learn more about Propel here.)

Simple tactics can make a big difference, Ms. Beasley said. Ask people if they want to round up their payment to a psychologically pleasing number and many will say yes. Asking at purchase time if they want to overpay, simply getting them to look beyond default mode, yields a 10 per cent yes rate. A lone email message gets 10 per cent more.

Alaska’s Credit Union 1 employed this to both their benefit and the borrowers, Ms. Beasley explained. The Alaskan terrain is hard on vehicles and repairs are more expensive due to part shipping costs. That led to a problem of people simply abandoning vehicles when an expensive bill arose.

Credit Union 1 devised a solution which saw borrows add a few extra dollars to each payment, with the surplus directed into an account that could be used for repairs when they arose. A painless step kept more people in their cars and making payments.

“We think about money in relative terms,” Ms. Beasley said. “Starting from zero is different that starting from 50 or 55 per cent.”

Thinking longer-term as opposed to the tangible present is also different, but is worth trying. Digit, a savings app, increased short-term savings by 51 per cent by asking people in February if they want to save some of their income tax refund come April.

Many other Common Cents partners are combining behavioral psychology, technology and economics to help the traditionally underserved. Duke Credit Union automatically opens a “Rainy Day Savings Account” for half of new members, while the Community Empowerment Fund helps people who are either homeless or in transitional housing make and keep savings goals.

“Technology can be distracting, but it can also help people reach their long-term goals,” Ms. Beasley said. “We are using it to help make things easier.”

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Common Cents Lab, Chime unveil BankFeeFinder.com

The latest Common Cents partnership product comes courtesy of Chime, a new type of bank account that eliminates unnecessary fees. BankFeeFinder.com shows users how much they actually pay in bank fees, which is multiple times what they estimate.

In interviews Common Cents found people estimated spending an average of $5 each month on fees. If only. A 2016 study conducted by money transfer company TransferWise pegs the actual average at $25 per month or $290 each year.

“Our mission at Chime is to help people to live healthy financial lives, and that starts with having a bank account that helps you avoid fees and save money,” Chime cofounder and CEO Chris Britt said. “We created Bank Fee Finder to shed light on how much people are actually paying in fees so they can take steps to avoid them in the future.”

“Our hope is to help consumers realize how much they are paying in bank fees and, if it makes sense for them, to switch to a low or no-fee bank” Common Cents founder Dan Ariely said.  “It’s shocking that in the last year alone, banks made $33 billion from overdraft fees.”

 

Learn more about Chime here.

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