Building emergency savings is a little bit like getting a colonoscopy when you turn 50 – it’s something that we know we have to do, it’s in our best interest – but it’s actually not that pleasant and the best-case scenario is that we go through the pain and discomfort for nothing (we don’t have an emergency and we don’t have colon cancer). About 30% of older adults haven’t had their recommended screening and 25% of Americans have no emergency savings. This can be partially explained by access, like no doctor or un-/underbanked, and partially explained by income sufficiency, like no health insurance or barely earning enough to cover basic necessities. But some of it is because of the very real cognitive barriers that cause us to avoid and procrastinate.
Unlike a colonoscopy, however, many households would like to be building emergency savings, and the COVID-19 pandemic has been a motivating factor for many households to start saving today. In partnership with Qapital, an App that uses smart automatic savings rules to help people reach their savings goals, we saw the proportion of new users creating an emergency savings goal increase by 500% at the start of the pandemic.
But the truth is, saving for an emergency is hard. It’s asking people to give up something today to prepare against a potentially negative thing at some unknown date in the future. So we try to do it in painless ways, even if those ways aren’t as effective. In our work with MasterCard and their partners, we looked at automatic savings mechanisms that people might find attractive. Our user research found that people overwhelmingly were interested in trying round-up savings, even though they also overwhelmingly acknowledged that they would save the least with that savings rule. People wanted to save, but they wanted to reduce the pain of it, even at the cost of progress.
With the BlackRock Emergency Savings Initiative (ESI), we are partnering directly with innovative organizations to harness that motivation and address the challenges and cognitive biases around things like mental models, procrastination, and present bias that prevent households from building meaningful emergency savings.
With UPS and Voya, the ESI is reducing cognitive effort by building on existing mental models. Mental models are our current understanding and associations in the world. Employees are used to saving for retirement out of their paycheck. UPS is using that same mental model to encourage workers to also save for emergencies by offering an out-of-plan short-term savings fund where they can set aside after-tax savings automatically as part of their 401(k) retirement plan. This rainy day fund was launched to it’s 90,000 non-union workers in October 2020.
With another large employer, the ESI is combatting procrastination and loss aversion (the desire to avoid loses, such as losing money out of your spending account, even if you’re gaining it in your savings) by providing timely prompts to encourage employees to send some of their paycheck directly into a savings account. This makes savings easier because it gives them a reason to act today and it reduces the saliency of “losing” that money from one’s spending account. We are further boosting the prompts by providing recommendations from co-workers and peers within the messages. This project was launched in November 2020.
With MX, a white label software provider for financial institutions, the ESI is reducing present-bias: the finding that we are more motivated by costs and benefits today than costs and benefits that accrue in the future. With MX’s FinStrong product, users are presented with sub-goals and clear, concrete next steps to reach those goals. This can make the future feel closer to today. This project is poised to launch in 2021.
As more partners join the ESI, like our recently announced new partners Varo, ADP, Best Buy, Self Financial and Truist, we are continuing to find new and innovative ways to combat cognitive barriers and work toward a world where all households are saving because it’s possible, it’s motivating, and it’s easy. So stay tuned.
BlackRock’s Emergency Savings Initiative
BlackRock announced a $50 million philanthropic commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis.