Many of us are aware of the usefulness of “rainy day” savings—what we set aside for emergencies and other unforeseen expenses that creep up on us all. Those savings are in addition to those we accumulate to accomplish larger goals we may have like buying a house or planning for retirement.
But understanding the importance of having access to any kind of savings, including emergency funds, is often not enough to lead people to actually save. There are a number of well-documented behavioral reasons for this. Present bias can cause us to favor spending in the present over saving for the future; then there is the hassle of dealing with unfamiliar or burdensome banking procedures that can impede beneficial financial decisions, even when the future rewards of saving are substantial.
With the need to increase savings very much in mind, and with support from the MetLife Foundation, ideas42 is using behavioral science to develop a variety of interventions to improve financial health in Chile.
Savings in Chile are particularly interesting. At first glance it may appear that a sizable portion of Chile’s population is already adept at saving money. A 2016 representative survey of Chileans found that 74% of households have been saving over the last year, a rate 14 percentage points higher than the Organization for Economic Co-operation and Development (OECD) average. But we also know that around half of all Chilean households face problems in covering expenses. Looking closer at the composition of their savings shows that while households saved, on average, nearly 10% of their incomes, 85% of all the savings are mandatory and specifically designated for retirement. Of course, long-term retirement investments are important, but they cannot be used to manage day-to-day financial needs. Moreover, the remaining 15% of the savings pool, which is not dedicated to retirement, comes primarily from the higher-income segments of the population—those less likely to struggle with expenses.
Short-term savings are incredibly important for lower-income populations as they are more likely to experience financial shocks, like temporary layoffs and unforeseen expenses, and they have greater uncertainty about their income. Easily accessible savings can help develop the capacity to deal with these shocks more effectively, as well as avoid hard-to-break cycles of over-indebtedness.
Today, low-income Chileans have access to financial services through CajaVecina, a correspondent bank for BancoEstado and the largest network of its kind in Chile. As the bank’s most extensive in-person channel, CajaVecina provides point-of-service devices to small shops throughout the country, in order to offer easy access to diverse financial services, including withdrawals, payment of services, transfers and deposits. As we have found in other savings contexts, however, simply having access to financial services does not guarantee that people will actually use them. Currently, only 12% of CajaVecina users utilize their savings accounts. In order to address this issue, we have partnered with CajaVecina with the aim of improving the short-term savings behavior of their users, 90% of whom have monthly incomes under $650.
We know that the barriers to saving worldwide are not only systemic, but also behavioral in nature. Thus, in the coming months, we will be interviewing CajaVecina users and analyzing transaction data to better understand what impedes their savings behavior and what can facilitate it. We hope to develop a series of projects geared toward increasing their savings, thereby strengthening their financial positions in both the short and long term.