What’s the first thing that comes to mind when you think of financial security? Chances are good that it’s something like long-term savings: a 401(k), down payment for a house, or college fund for the kids. But for a lot of Americans, financial security looks more like short-term savings: a safety net in case of small emergencies. Because until they have a cushion for life’s up and downs, long-term savings simply isn’t on the table.
When someone is in the beginning stages of building financial security, and doesn’t have an emergency fund yet, it’s easy to get thrown off track. Imagine a person who’s doing all the right things: paying their bills on time, building up their credit, and budgeting for their monthly expenses. But then something happens; a broken down car or hours at work getting cut. The Brookings Institution found that hourly workers ‘ income can fluctuate up to 5 percent on a monthly basis. They noted that “for someone living paycheck to paycheck, trying to make ends meet, 5 percent is enough to tip you over the edge.”
Suddenly this person has a new financial crisis to contend with, when managing normal expenses was precarious to begin with. Money is tighter than usual this month, so what’s more important — putting gas in the car to get to work? Or making the minimum payment on the credit card? If the credit card payment gets missed, that gets reported to the credit bureaus. But if there’s no gas in the car, they can’t get to work to make money.
Though something like a car breakdown or lost shift might seem minor, it can have a disproportionate effect on someone’s life if they have no way to cope. It’s a financial shock, and it has the potential to undermine all of someone’s hard work and progress. It’s like The Game of Life. It’s your turn, and you’re hopeful — but something bad comes up, so you have to go back to the beginning.
If financial shocks are what hold people back, then building a buffer against them can help people get ahead. That’s what Sendhil Mullainathan and Eldar Shafir suggest in their book Scarcity: The New Science of Having Less and How It Defines Our Lives. This lines up with research coming out of the Financial Health Network, as well. They’ve found that an integral component to improving financial wellness is being on track for good short-term savings; in other words, having enough savings to cover emergencies.
People know this intuitively, and it shows in the way they think about saving money. In a recent survey of Even members, we asked almost a thousand people what they’re saving for: immediate use (a cushion for bills), near-term use (car breakdown), or long-term use (retirement or down payment). We used a scale of 1 to 100 — with 1 being immediate use, 50 for near-term use, and 100 for long-term use — and asked people to tell us where they fell within that spectrum.
The average answer among the 940 respondents was 39. Given that “near term use” was scored at 50, and the average answer was below that, this is a strong indicator that people are focused on saving money to use for bills, or to protect their financial health in case of an emergency. Even more telling is the fact that people responding to this survey had a wide variety of job titles and income levels. Of almost a thousand people, very few of them were putting money towards long-term savings.
People are focused on saving money for emergencies, because they know emergencies can throw them off track. But this is easier said than done. Saving money is hard for a lot of people. It’s not because they aren’t trying — it’s because when they’re already struggling to make ends meet, saving is just another item on their to-do list.
Mullainathan and Shafir explain this in Scarcity, as well. When a person doesn’t have enough money, their brain transitions into a mindset of scarcity. In this mode of thinking, people make decisions and shuffle priorities in an altered way. Take someone who’s run out of gas and not been able to make it to work before. They’re probably worried about that happening again — even if they have gas in their tank. So they’re more likely to take a spare $20 and put it in the gas tank instead of into their savings account.
And even when people can get a few bucks put away, they have to spend it almost immediately. The Financial Diaries calls this “high-frequency saving.” People save, then withdraw; they save, then withdraw. As one of our members told us, his priority is “just dealing with everyday situations. Life has its ups and downs, and you gotta pay bills, so it’s hard to save.” Without a better way to put more money away, more reliably, it’s too difficult to build up the large savings cushion needed to move forward.
Based on all their research, Mullainathan and Shafir have a suggestion for how to circumvent this difficulty: Companies should create financial products that help build savings slack. If people have a way to absorb small shocks on their own — instead of using money meant for bills, or resorting to predatory payday loans — they can build more stable financial lives for themselves. And if someone’s financial life is more stable, they can start thinking about long-term things like contributing to their 401(k) plans.
This kind of stability also is the foundation of financial stability according to the Aspen Institute. It’s also one of the ways the Financial Health Network defines financial health. The less someone is struggling to save or plan, the closer they are to financial wellness, which means their finance-related stress is likely to be lower as well¹.
Even has built a product that does exactly what Mullainathan and Shafir recommend. Our app gives employees a way to build their own financial wellness — and reduce their financial stress — starting with creating their short-term savings cushion. With Even, employers can give their workers the exact type of benefit experts recommend for saving more money, and increasing financial stability.
This is something businesses should take note of, because employees experiencing financial stress can be costly. It’s why companies like Walmart have invested in providing Even to hundreds of thousands of employees. To learn how your company can do the same, visit us at Even.com or send us an email: firstname.lastname@example.org.
¹ U.S. Financial Health Pulse 2018 Baseline Results, Center for Financial Services Innovation, Page 55
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