Creating Creatures of Habit

Policy Paper
July 26, 2012

Youth savings accounts are emerging as a potential poverty reduction and youth development tool, with initial evidence indicating that children and youth who save in accounts earlier in life begin to think positively about their futures. Researchers have observed asset effects, or as the YouthSave Consortium defined the term in a 2010 publication, the “economic, social, behavioral, and psychological impacts of asset ownership,” in a number of studies. For example, qualitative findings from the SEED (Saving for Education, Entrepreneurship, and Downpayment) Initiative, a national demonstration of 1,171 child development accounts in the United States, showed that, in addition to gaining financial savings, participants had higher self-esteem, hopes for the future, financial knowledge, and security.

Still, economic choices weigh heavily on the lives of the poor, making saving a challenge even when they have access to financial services and understand the benefits of saving. In a precursor to this paper, “Accelerating Financial Capability among Youth,” the authors highlight the psychological barriers that can prevent individuals from making rational financial choices, namely saving, and how specific mechanisms, or “nudges” can be used to overcome those barriers. Unfortunately, even with a nudge to save, the decision often remains a deliberate and conscious one. For the poor, who are already taxed daily by financial stress and conditions of poverty, the choice to save regularly may be tough to make since they are faced with other conflicting financial considerations, such as how to put food on the table, pay for medical bills, or finance children’s education.

Fortunately, in many ways, human beings are creatures of habit. Forming a habit of saving at an early age when behaviors are still malleable may have significant impacts over the lifecycle, or the developmental phases, of low-income youth. It can convert an otherwise taxing mental process into an automatic and easy action through practice over a longer period of time. In effect, practicing skills that are part and parcel of saving, such as self-control and planning, can also improve cognitive strength and livelihoods with the proper support services. In this paper, we argue that practitioners and policy makers can maximize the effects of savings-habit formation in youth by: a) nudging saving as early as possible; and b) taking advantage of developmental touch points in the lifecycle of youth.

First, we explore how economic decision-making can exact a mental or psychological cost among financially constrained populations. Second, the paper describes how establishing savings habits can help overcome those psychological challenges to sound economic decision-making. In exploring savings-habit formation, we identify cognitive skills that are germane to the saving process, namely self-control and planning, and how practicing those skills early in life can lead to powerful multiplier effects in youth. Finally, we identify ways in which policy- and program-level interventions, when delivered during transitional phases in the youth lifecycle, can maximize the impacts of savings-habit formation.

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