On May 7, more than 60 thought leaders and providers met as part of the Savings Interest Group, sponsored by BlackRock’s Emergency Savings Initiative (ESI). The group explored the latest trends in short-term savings.
The panel included Parker Cohen from Prosperity Now, Tim Lucas from SaverLife, and Emory Nelms from Common Cents Lab, moderated by Heidi Johnson, Director of Behavioral Economics, Financial Health Network.
This year, the Savings Interest Group focused on behavioral economics tools and techniques to spur savings – as well as the immediate issues related to global pandemic and economic crisis.
A Trend Toward ‘Not Spending’
The discussion first focused on trends in savings behaviors sparked by the COVID-19 crisis. SaverLife, a nonprofit that creates prosperity for working families by helping them save and invest in their futures, has been closely tracking the impact of COVID-19.
SaverLife presented findings to the group that showed early indications that consumers are spending significantly less in at least two areas – credit cards and healthcare.
SaverLife’s findings are underscored by other data reported in The New York Times, which indicates that Americans have shifted their spending away from travel, restaurants, and even healthcare toward groceries, general merchandise, and streaming media services.
These spending trends raise questions about basic needs, particularly for low- and moderate-income people who have little cushion for new and different costs.
“We believe members are reducing spending wherever possible to prepare themselves for the unknown. The economic situation is unprecedented, and our members know that it could be months before their financial lives return to normal,” said Tim Lucas, Director of Research at SaverLife. “We are concerned that many of our members are spending more money on groceries, especially for those who are supposed to have their nutrition expenses covered through the SNAP program.”
Data indicates that healthcare spending is also significantly different from 2019. SaverLife’s data showed a 15% decrease in members spending money on healthcare in 2020 as compared with 2019. Historically, this is the time of year when SaverLife members are much more likely to spend money on healthcare.
How Does ‘Not Spending’ Impact Savings?
With many weekly and monthly expenditures for households temporarily on pause or shifting to basic needs, the question that remains to be answered is: How does this current trend impact overall savings for households?
Some economists classify the kind of savings that stem from simply not spending money – for example, not having childcare or tuition to pay for a few months – as residual savings.
While these unspent funds may appear as savings in the form of extra money and liquidity in the near-term, Emory Nelms, Senior Behavioral Researcher at Common Cents Lab, an ESI industry expert, cautioned that this shouldn’t be confused with the kind of savings one intentionally puts aside for a rainy day.
“Where I think ‘not spending’ falls short of saving… is the importance of partitioning and setting savings aside as separate,” Nelms said. “The research has consistently shown that people are less likely to draw across mental accounts.”
“This is particularly important in this context, because reduced spending as a consequence of unexpected events is essentially a windfall that people are likely to spend,” he added. “To the extent that savings can be partitioned away from discretionary expenses, the more likely that it will be used as a financial cushion, rather than just serve to inflate spending over the near term.”
For fintechs, banks, and other credit unions looking to help their customers build more savings, this distinction between residual savings and intentional savings could be an important one to make with customers.
Systemic Savings Solutions Still Needed
It’s still too early to tell how these sudden changes in cash flow and residual savings translate into broader long-term financial resiliency for households.
ESI believes that one way to improve the state of emergency savings requires system-wide change through partners, such as financial institutions and employers. These organizations can help people, especially those earning low and moderate incomes, access savings accounts more easily and make the act of saving more rewarding.
BlackRock’s Emergency Savings Initiative
BlackRock announced a $50 million 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. UPS, Uber, Mastercard, Etsy, Brightside, Arizona State University, and Acorns have joined BlackRock’s Emergency Savings Initiative to help their employees, customers, gig workers, and college students take the essential first step toward long-term financial well-being.