A Stanford behavioral strategist on three opportune moments to save money

Let the apps help.
Let the apps help.
Image: Reuters/Mike Segar
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Every now and then, a media story will propose another wild or surprising reason that millennials aren’t saving for retirement. We’ve been told that some young adults don’t believe civilization will exist by the time they’re ready to stop working, and that some are counting on a socialist future to save them from capitalism’s indifference.

Whatever the spin, the common underlying theme is that millennials feel doomed by the circumstances of their time, which is fair enough. The pressures of student loan debt, stagnant wages, and job insecurity have led young people to feel that buying a home or saving for retirement are not real options. Many young and middle-aged adults have accepted that they can’t expect the same kind of comfortable (and expensive) retirement that previous generations have financed for themselves, a problem that has economic implications for every generation.

In light of these realities, shaming millennials about their pathetic retirement savings or expensive lattes is slowly falling out of fashion. But it still happens. And Wendy De La Rosa, a PhD candidate at Stanford University’s Graduate School of Business, and a millennial herself, believes we should push back.

“We’ve moved into the world where the onus is always on the individual. We expect the individuals to be an expert in all things related to financial matters,” she says. However, she adds, “If you start to see the individual as a human, as an imperfect human being, and not expect the superhuman of the human, now you can start to create environments that meet people where they are.”

The three golden moments for saving 

De La Rosa is also the co-founder of Common Cents Lab, a research group that tests behavioral solutions for low and middle-income earners who need to better manage their money. (It’s part of the Center for Advanced Hindsight at Duke University, which is run by the famed behavioral economist Dan Ariely.)

Some of her work has tested ideas that build on the well-known and successfulSave More Tomorrow” concept, created by Nobel prize-winning behavioral economists Richard Thaler and Shlomo Benartzi more than 15 years ago.

“It says, look, fine. I know people aren’t going to save much for retirement today,” she explains. “But I can get them to enroll in something today where next time you get a raise in the future, then you’re going to increase your retirement allocation.”

In other words, rather than fight the well-documented tendency we have to see our future selves as more perfect and capable of saving than our present-day selves, the Save More Tomorrow idea works with it. Your future self gets to strut its superior self-discipline and commit now to an automatic increase tied to an event down the road.

According to De La Rosa, there are “three golden moments,” as she calls them, when people can easily harness this particular nudge.

First, there’s tax refund time. “In 2019, the average taxpayer got back about $2,700, which is meaningful, because 40% of Americans don’t have $400 to cover an emergency savings fund,” says De La Rosa, referring to a recent Federal Reserve survey. “For many families it’s the largest payout they ever get at one time.” She wants to help people save a large part of it.

Next is what she calls “Five Fridays.” The vast majority of Americans get paid on a weekly or biweekly basis, she points out, and “[t]here are months that just naturally have five Fridays in them, meaning that in those months you’re essentially going to get an extra paycheck. Meanwhile, the majority of your necessary expenses like rent or mortgage or loan payments are done on a monthly basis.”

The third opportunity? Anytime people get unexpected bonuses, raises, gifts, or inheritance money.

To test ideas around the first moment, a few years ago De La Rosa’s lab conducted a randomized control experiment with a company called Digit, an app that automatically saves money for its users. In one condition, they texted people when they received their tax refund. (Digit’s technology recognized when the tax refund arrived in someone’s checking account.) The message said something like: “Hey there! You just got your attached refund. What percentage would you like to save?” In another condition, Digit’s clients were texted early in the tax season, hopefully before they even filed their taxes. This time the message said something like: “You might get a tax refund. If you do, what percentage of it would you like to save?”

“Now that’s a question that’s much harder, right?” says De La Rosa. People don’t know if they’ll get a refund or how much it might be, but they may have an inkling based on the previous years’ returns.

Still, the lab saw a sizable difference in responses. On average, people who were contacted the day they got the refund said they wanted to save 17% of it. People who were asked how to allocate a future, hypothetical bounty were prepared to save 27% of the total, agreeing to let the app automatically move that portion over to a savings account when the time came.

Customers had the opportunity to back out of their pledge, but most didn’t. “What we found was that two months out after an experiment, 85% of the savings were still in the account,” says De La Rosa.

“I think this is the crux of how we’re to be able to help young people save for retirement,” she adds.

How your employer could leverage your birthday

De La Rosa’s team has also experimented with messaging around major life milestones to see whether reaching people at symbolic junctions can help them pay more attention to their financial situation.

Recently, they partnered with a company called Silver Nest, which she compares to a modern day Golden Girls: The platform matches seniors who own a home with other older adults who need affordable accommodation. Both parties gain from the arrangement, whether as an owner who earns an extra income, or a renter who pays less for housing. Both also benefit from the health-boosting companionship that comes from living with a housemate. But, says De La Rosa, “As you can imagine, asking an older adult to open up their home to a stranger is not an easy ask.”

The team ran several trials to see what kind of message might get more attention. In the main test, they ran two ads on Facebook, both of which were targeting 64-year-olds. In one condition, the ad said, “Hey, you’re getting older, are you ready for retirement? House sharing can help.” In the second condition, the message was: “Hey, you’re 64 turning 65. Are you ready for retirement? House sharing can help.”

Those people who were reminded that they were hitting a significant birthday were more likely to click through on the ad and ultimately sign up. All it took was that reminder that they were aging.

Again, the idea takes a “fault” and turns it into a tool. Aging milestones can be depicted as life-crisis points, says De La Rosa, “but what we did was sort of flip it on its head and say, because there’s this motivation to make a change, we can essentially nudge people into making what we think is a positive change by highlighting that this change is happening.”

Now, she believes, companies need to step up to use the same types of strategies. “We know every employer has their employees’ birthdays. It would be great if, yes, you got a party, but also maybe you got a reminder to increase your retirement allocation when you’re 39, turning 40, or about to turn 30.”

HR departments could ping employees with a reminder to increase their savings well ahead of every new year, too, she adds, because people associate January 1 with a fresh start.

By plugging into our natural biases, “every business, every store is getting faster, smarter, and better at getting us to spend our money,” De La Rosa points out, adding, “It’s only getting more treacherous.”

The institutions that want us to put more cash aside need to be just as wily and opportunistic.