Add Incentives to Build a Bigger Nest Egg



Saving money is an essential objective for UK consumers. Though most people know saving is important, finding the wherewithal to set by cash can be easier said than done, for well-intentioned Britons.

In many cases, monthly income stretches just far enough to cover spending obligations, with little left for building a nest egg. As a result, a substantial number of UK households are underserved by their savings, with little or nothing to draw from in the event of a financial crisis or an unexpected expense. Saving isn’t easy, but a subtle push in the right direction may help you boost your savings ratio and build a proper nest egg.

India Example Illustrates Savings Psychology

A recent BBC article reported about an experiment undertaken in India, assessing some of the psychological components of setting aside money for the future.

The interesting analysis tracked saving habits among a group of labourers working in rural parts of India. Study subjects were drawn from a group of low-paid construction workers willing to participate in a payday experiment. To help them save more on payday, the workers earnings were split into multiple envelopes. One of each subject’s envelopes was designated for savings.

As if the clear distinction between monies was not enough, the experiment went one step further, attaching pictures of the workers children to the savings envelopes. It was found the workers felt guilty tearing apart pictures of their sons and daughters to get at the money inside, for everyday use. To avoid the guilt, the labourors did so less frequently, which ultimately resulted in their savings increasing.

The experiment in India took separated savings to new heights, but many Britons also use a similar strategy, designating separate pots and bank accounts to help their savings grow. Savings technology has even been advanced to help UK savers.

One system enables users to download images to an app, depicting top savings priorities. Whether you’re saving for a house or building a holiday fund, an image representing your goal helps you meet your mark. The more progress you make reaching your savings targets, the brighter the image shines, but when withdrawals are made, the picture fades and becomes less clear. This example of saving tech from Wagestream gets results using the same guilt mechanism that was effective for the India labourors recently studied.

Has the UK Lost Good Saving Habits?

The savings ratio measures the proportion of income saved, after taxes. In the 1990’s the figure topped out near 15 per cent, meaning UK savers were setting aside 15 per cent of their disposable income toward personal savings. Hovering around 4 per cent in recent years, the drastic drop in the UK savings ratio is cause for alarm among some observers, feeling as though consumers have lost sight of the importance of building an adequate nest egg. Worse, many are not confident good saving habits will return any time soon.

Beyond personal savings, financial resources are available online, offering payday loans for UK workers. With savings rates expected to remain low for another five years or more, access to short-term funding helps cover unexpected expense and pressing financial demands, between paychecks. Government initiatives, such as Help to Save have also been launched to stimulate savings, but the scheme has been taken up by only half the expected number of low income individuals eligible to participate.

In another concerted effort to incentivise saving, the Money and Pension Service has turned to a Behavioural Insights Team (BIT), for help identifying effective ways to help working Britons with financial limitations, increase their ability to save money.

Individual savings are low, particularly among young UK workers and those on the lower end of the earnings scale. It is thought adding incentives may help people develop better saving habits. And, in fact, one study conducted in India showed positive results, using a guilt and reward system to stimulate savings.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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