Saving money can be challenging, and consumers often have trouble saving for long-term goals like retirement or college education. In addition, they may have difficulty saving for emergencies that may arise in the short-term.
However, a recent field study conducted with users of a financial technology company, Acorns found that the way savings contributions are framed can help people regularly contribute to a savings account. The study focused on how temporal reframing can increase participation in a recurring deposit program.
The Study
In the study, new users of the Acorns app were given the opportunity to set up a recurring deposit program, with deposits offered in terms of daily, weekly, or monthly amounts. The study found that users were more likely to enroll in the program when deposits were framed in a more granular way. Specifically, the probability of enrolling was greater for daily over weekly, over monthly framing of the same total amounts.
The study drew on related literatures that suggest that financially equivalent sums of money can be presented in formats with different psychological associations. For example, when workers near retirement, they have the option to cash out their savings in a lump sum or purchase an annuity and receive an equivalent amount, spread out monthly for life.
Consumers are more sensitive to changes in wealth when income is expressed in a monthly framing compared to a lump sum framing. This leads to an "illusion of wealth," whereby lump sums seem more adequate than an equivalent monthly income at lower wealth levels.
Additionally, temporally reframing the cost of a product into more granular amounts increases purchase intent in laboratory settings. This general preference for less aggregate framing over more aggregate framing extended from days to larger units such as weeks and months. However, this finding reverses with larger monetary amounts.
Overall, the study suggests that framing savings in a more granular way can encourage continued saving behavior and help close the participation gap between lower and higher income individuals in savings programs. It also highlights the importance of temporal reframing and framing savings contributions in less “painful” ways.
By framing savings contributions in more granular formats, people may be more willing to make a present-day sacrifice for future gains. Small, daily contributions can add up and make saving more manageable and less psychologically painful.
The Importance of Temporal Framing For Savings Contributions
The results of this study suggest that framing monetary contributions in a more granular manner may increase participation in a recurring deposit program. By making savings contributions seem less psychologically painful, consumers may be more willing to make a present-day sacrifice for future gains.
Framing savings contributions in a more granular way may also help people overcome the tension between present and future selves that often hinders future-oriented behavior. This is because when consumers perceive that lump sums afford greater spending power than equivalent amounts framed in more granular ways, parting with such lump sums should be more psychologically painful than giving up an equivalent amount of money spread out over time in a smaller, more granular format (i.e., a “$5/day” framing).
Implications for Financial Institutions
The findings of this study have implications for financial institutions that want to encourage savings behaviors. By understanding the psychology of how consumers perceive savings contributions, financial institutions can better design programs that encourage savings behaviors.
For example, financial institutions can consider offering savings contributions in daily or weekly amounts rather than monthly amounts. Additionally, they can provide tools that help consumers visualize how small daily or weekly contributions can add up over time. By doing so, financial institutions can help consumers feel less overwhelmed by the idea of saving and more motivated to take action.
Conclusion
If you're looking to save more money, consider using temporal reframing to make savings contributions seem less psychologically painful. By breaking down contributions into smaller, more manageable amounts, you may be more willing to make a present-day sacrifice for future gains.
Overall, the study demonstrates the importance of how savings contributions are framed, and how temporal reframing can help increase participation in savings programs. By understanding the psychology of how consumers perceive savings contributions, financial institutions can better design programs that encourage savings behaviors.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.