By Will Sandbrook, Executive Director of Nest Insight
What does it mean to be financially well? The Money and Pensions Service defines it as:
“…feeling secure and in control. It is knowing that you can pay the bills today, can deal with the unexpected, and are on track for a healthy financial future. In short: confident and empowered.”
‘Being able to deal with the unexpected’ feels especially important at the present time, when we hear the word ‘unprecedented’ almost every day. Even before the crisis, too many people in the UK had little or no savings on hand to deal with a financial emergency. And a lack of short-term savings is not only a problem in the short term. Those without savings are more likely to rely on debt or to fall into arrears, which of course can cause longer-term problems in their own right. They may also decide to stop paying into a pension to help manage nearer-term pressures, damaging their future financial health in the process.
The conventional wisdom around the crisis is that it will have further damaged people’s financial wellbeing and resilience, both today and in the longer-term. For many, this will be true. Loss of income, or significant reductions in income, will force people to tap into existing savings, delay mortgages, pension contributions, credit card repayment, and potentially borrow more or fall behind on payments. It is critical that we find ways to help these people manage these challenges today.
But while these issues will affect many people, the COVID-19 crisis may also create opportunities for us to reshape our financial lives. Income has fallen for some, but by no means for everyone. At the same time, spending has also fallen for many people. We’re commuting and travelling for leisure much less, eating out less, attending fewer sports and entertainment events. And in line with previous financial crises, we’re generally also more cautious about money, with a greater orientation to save more, if we can, to protect ourselves for future emergencies.
For those who find their spending has dropped off more than their income, there is now a window of opportunity to shift our financial behaviours. Research tells us people adapt quickly to changes in their circumstances, and we know from responses to the Renew Normal survey that not all the reductions in expenditure are really being missed. If the media coverage is to be believed, we may, for example, see a permanent reduction in commuting costs for some, as people adopt longer-term flexible working practices. This suggests an opportunity to embed lower spending habits, enabling more of our money to be saved for the future. At the same time, the opportunity won’t be there forever. Quick adaptation works both ways, and we also know people tend to spend their income as it rises. As the economy re-opens and incomes return to normal, people’s good intentions to save may well give way to the returning temptation to spend.
So how can we lock in those resolutions now? Here are some of Nest’s ideas – we’d love to hear yours:
- People find it easier to save when the opportunity to spend is taken away. This suggests that saving can be more effectively embedded if the money never reaches your current account. Payroll deduction savings, as is done with pension saving, and as we’re testing through our ‘Sidecar Savings’ trial, is one way of achieving this. Setting up payday standing orders to a savings account, so that you contribute to savings in the same way many people pay bills straight after being paid, is another.
- For the self-employed, where traditional payroll deduction is not an option, our research is looking at the idea of building similar savings mechanisms into the invoicing or payments process – so that, say, 5% of each invoice is diverted to a separate savings account. We’re also keen to explore more intelligent mechanisms where, perhaps, the divert only takes place in ‘good’ months when income is higher than an individual’s average.
- For those who have had to borrow more through the crisis but are making regular repayments to pay off that debt, we’re keen to explore opportunities to pre-commit to automatic debt-to-savings rollovers so that once your debt is repaid, the regular payments carry on but flow to a savings account.
These are just a few of the ideas we’re interested in exploring. We’d love to know what people think. Does this idea of opportunity to embed more of a savings habit resonate with people? Will the mechanisms I’ve described here work, and what others would people also like to see? We look forward to hearing your ideas. Please get in touch through Demos’ Renew Normal work or by contacting us at [email protected].
Nest Insight is a collaborative research unit set up by Nest Corporation to help understand and address the challenges facing Nest members and other defined contribution savers. For more information visit: nestinsight.org.uk