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Can’t save won’t save
28 March, 2007
"I can't afford to" is a phrase often used when people are asked why they don't save; but why do some people save more and other save less, even though they are in similar situations?
When making the decision to save, we engage in a trade-off between the perceived costs and benefits of saving. There are numerous different influences on this decision that help to explain why individuals in seemingly similar situations choose to save vastly different amounts.
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Barriers to saving include the cost of foregoing current spending. Psychology also plays a part; for example, we place a much greater emphasis on sacrifices - like losing disposable income, than we do on gains - like building a pot of savings.
As a result, we often rely on trust, word of mouth and adopt a learning by trial-and-error approach to saving.
The report from the Building Societies Association suggests that the less financially capable someone is, the more important these factors are in their saving behaviour.
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Changing responsibilities, such as having children, can make people reappraise the costs and benefits of saving.
Key Findings
• The decision to start to save, or to save more, is made in advance of and separately to the choice of saving product
• Rate of return is not everything, but successful products need to be competitive. Products that focus on the rate alone are likely to be of limited appeal to non-savers
• People value products which can easily adapt as their circumstances change, with minimal effort from the consumer
• Savers respond to being rewarded for a desirable behaviour, such as committing to save by setting up a standing order
• People more readily understand rewards expressed in pounds rather than percentage points
• Savers appreciate having a choice, but dislike a large number of seemingly similar options
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Policy Recommendations
The report makes several policy recommendations to try to encourage people to think about their savings in a different way.
• Financial capability should be made a compulsory part of the school curriculum to instil a long-term financial outlook in all children. This should be linked to the Child Trust Fund to develop financial capability at an early and impressionable age.
• A public awareness campaign is likely to be required to make adults stop and re-examine their current saving behaviour - similar in nature to the stop smoking campaigns using stark imagery of a harsh future.
Adrian Coles, Director-General of the BSA said: "What is clear is that saving is a very individual decision and whilst some people in one situation view saving as a rewarding priority, others in the same situation see it as nothing more than a cost; the act of saving for them is a cost that outweighs the benefits.”
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