In 2020, millions of families have seen existing financial obstacles compounded by the economic fallout of COVID-19 and have seen new challenges arise. As a result, building savings—key to financial security, accessing financial opportunities, and long-term wealth-building—is currently out of reach for many Americans. Commonwealth is developing strategies to increase households’ savable funds—funds that can be uncovered and used for savings—through a) creating slack in household budgets and b) better understanding and supporting mindsets, and associated experiences and product features, that enable savings behavior. In one interview during our research, a participant saw savable funds as “paying myself before I paid anyone else.” In our work to uncover savable funds, Commonwealth is currently exploring debt management (such that it is possible to save if/while holding debt), linking reduced fees and/or expenses to savings opportunities, and finding additional income.

Fintechs and financial institutions can see positive outcomes in their customers’ financial lives by using existing products and channels to facilitate access to or draw attention to savable funds, and making it easier for customers to convert these to saved funds. Through helping low- and moderate-income households achieve lasting financial security and opportunity, companies can see increased customer satisfaction and growth through referrals.

Fee and Expense Reduction

Despite working full time or having multiple jobs, stagnant wages and increasing wage inequality mean that low- and moderate-income households may have little to no money left in their household budget to put toward savings. As our consumer research and that of others reports, it is “more expensive to be poor than not poor.” Fee and expense reduction is one way to address this and increase savable funds for these households.

Low- and moderate-income Americans, especially Black, Latinx, and women-led households, lose thousands of dollars through fees, interest, and other unnecessary costs. Financially underserved consumers spent $189 billion in fees and interest on financial products in 2018, and payday borrowers spend an average of $520 in fees over the course of a year. 

Commonwealth examined options to increase funds at households’ disposal by eliminating or reducing one-time or recurring costs, fees, and expenses, and looked at bill payment behaviors as an area of opportunity. In January 2020, Commonwealth reported these findings in a blog post, More Slack: How Rethinking Bill Payments Could Improve Financial Security. 

Debt Management

Low- and moderate-income borrowers often face high interest rates as a result of historical inequities in the debt system and predatory financial products. Higher mortgage costs, for example, amount to an additional $765 million a year for Black and Latinx borrowers compared to white borrowers. Therefore, debt refinancing, consolidation, or forgiveness may be other forms of expense reduction which can have a significant impact on a household’s budget and result in savable funds.

For many people, paying off debt takes priority over increasing savings, and for many it is not considered possible to do both at the same time within a given budget. Not having emergency savings, however, frequently puts people at risk of needing to take on more debt to cover unexpected expenses. This vicious cycle impacts vulnerable populations the most and can take many months or years to recover from.

Income-driven debt repayment programs, consolidation, or other refinancing can lower debt payments by hundreds of dollars per month. By automatically linking savable funds created by debt reduction to quality savings products, the debt cycle can be disrupted. 

From Savable to Saved

At Commonwealth, we are working to understand how reduced fees and payments are perceived by end-users—including if they are initially thought of as savable funds—and how messaging or design features may amplify the potential for savings behavior. We know that understanding the mental model around saving—the journey from refinancing or not spending, to perceiving that a decreased expense frees up money to save, to actually saving—is key to impact in this area of work. Our early findings suggest that money that is not spent on unanticipated expenses, such as overdraft fees, is not typically viewed as “savable,” likely due to the negative context of the expense in combination with the amount potentially not being large enough to trigger a savings action.

Conclusion

Work to uncover sources of savings, or savable funds, offers opportunities to support more people in building savings—for emergencies, immediate security, or longer-term financial opportunities such as investing. Commonwealth is excited to continue to explore ways to illuminate savable funds and to design products and experiences that will make it easier to convert savable funds to savings. If you are interested in collaborating on this work with us, please contact Becca Smith at info@buildcommonwealth.org. 

This research would not have been possible without the generous support of MetLife Foundation.