The Financial Health Check

Posted in Projects

Helping People Build A Stronger Future

For many of us, saving money is a lot harder in practice than in theory. At the end of every month, after bills and the expenses of daily life, it can often seem like there’s very little left to put aside for a rainy day. In fact, only a minority of Americans – 40% according to a recent survey – have the funds in reserve to support themselves for a minimum of three months. While this endemic lack of saving can be seen in all sections of society, the consequences of not having a financial buffer most strongly affects those with low incomes, who often don’t have as much access to credit and traditional banking services.

In the event of unforeseen financial shocks like a medical emergency, car accident, or loss of employment, they’re often forced to cut back on other essentials, or take out high-interest loans that can trap them in debt cycles. Ongoing attempts to drive an increase in savings have resulted in the widespread use of ‘financial literacy’ and coaching programs as a means to increase financial capability. However, evaluations of these information-based training programs have shown mixed results when it comes to actually increasing savings rates. That shouldn’t come as a surprise – insights from behavioral science show that providing more information doesn’t always translate to taking action. With this in mind, ideas42 partnered with the Financial Literacy Center and the Social Security Administration to design and pilot-test a comprehensive, in-person “financial health check” (FHC) program as an alternative to traditional classroom-style training.

Previous research has demonstrated that common behavioral limitations such as forgetfulness and limited self-control play important roles in determining our financial behaviors. So rather than give clients a bevy of financial information and a list of steps to be completed after the coaching session, we encouraged recipients to take positive actions – such as signing up for automatic transfers and text message reminders – while still in the coaching session. We hypothesized that this would be a more effective way to deliver financial advice and could lead to increased savings rates. After a small, initial experiment with a credit union in the Pacific Northwest of the US, using a population of members who opted-in to the new program, we found that FHC recipients with no savings at the credit union had 21% more savings at the end of the study period than the control group.

Our results demonstrate the potential of the FHC as a supplement to traditional counseling programs, as well as the potential to develop an even more effective financial-coaching approach that incorporates behavioral enhancements into financial education programs around the world. Click here for a full brief from this project.