Trend Alert: Automatic Savings is the New Black for 2011

As fashion designers have New York Fashion Week to debut the hottest fashions for the year, financial services policy makers have America Saves Week (going on now from February 20-27) to showcase the hottest trends in personal savings. This year’s theme is “Make Savings Automatic.” Consumers are encouraged to set up auto-payments into a savings product. The FDIC went multi-media with Chairman Sheila Bair premiering a Press Release and YouTube video yesterday that endorses automatic savings.

 Putting the spotlight on automatic savings as a way to build a savings habit is awesome. The first step to changing behavior is recognizing when there is a better option than the status quo. However, it is only the first step. As humans, we are all prone to procrastination and other natural habits that keep us from acting upon something we value. These tendencies often prevent us from making the right decisions, like saving on a consistent basis, though we know it is better for us in the long term.

To help people steer clear of this trap and take action, there needs to be the right guides to gently nudge people along the right path. Decisions are not made in vacuums. Going back to the fashion example, let’s consider how a really cute 60’s style swing coat becomes the rage. It starts with a designer showing the item at Fashion Week, helping to shape expectations and set a standard for the upcoming season. Soon, the coat might be featured in a splashy photo shoot for a glossy magazine. Then, racks of coats appear in local stores. Managers build up demand for the coat by putting it on display in the store window, having a sales associate to answer questions, and making payment lines as quick and hassle-free as possible. These are the guides that nudge a person to go from a fashion wannabe to real life fashionista.    

In the savings arena, people need the same kinds of nudges to help turn automatic savings aspirations into actual behavior. One of the goals of our AutoSave Pilot is to figure out what the appropriate nudges are for savings. AutoSave is a unique savings plan that automatically diverts, through payroll deduction, a small amount of post-tax wages into an individual savings account. While we haven’t completed a detailed examination of the pilot, some of our initial observations indicate that there are a couple of potentially helpful strategies to guide people on the savings path. First, we’re seeing that people are following the “recommended” savings dollar amount that was pre-checked on the AutoSave program enrollment form. Participants are either saving the recommended amount each month or more. Second, we’re seeing higher enrollment rates at sites that had program representatives available to explain AutoSave in detail to participants. Finally, we’re seeing that sites with easy, immediate enrollment procedures had higher enrollment rates than sites with more complex procedures.

All of these observations need more evaluation, but it is interesting to see that there are some parallels between successful nudges in the fashion world and successful nudges in the AutoSave program. These parallels mean that financial services policy makers and providers need to spend more time thinking about what nudges people need to help them achieve their savings aspirations. America Saves Week is trying to be part of the solution and we look forward to seeing more solutions to make automatic savings easier.