Study confirms power of emotional engagement in getting people to increase their savings
From a purely rational perspective, financial advisors should be able to motivate their clients to save more with facts and figures; in cities where households are living on the edge, that’s obviously important. But according to a new study, significant change requires a different kind of conversation.
In The Sentimental Savings Study published earlier this month in the Journal of Financial Planning, researchers sought to improve the savings habits of subjects using two different approaches.
“Traditional financial education programs have focused on financial literacy (i.e., financial knowledge) and have failed to bring about significant behavior change,” the authors wrote. “This study sought to examine the effectiveness of a financial psychology-based session designed to increase personal savings.”
The researchers gathered a sample of 102 subjects in the US, then split them randomly into two groups. One group was subject to financial education (FE) sessions, wherein a PhD candidate in personal financial planning delivered a scripted 27-slide PowerPoint presentation that explained the financial planning process, the importance of savings, statistics on the lack of emergency and retirement preparedness among American households, and the time value of money, among other things.
In contrast, those subject to sentimental savings (SS) attended sessions with a licensed psychologist. Each participant was asked to bring a sentimental item or picture of the item to the session. Aside from viewing a 40-slide PowerPoint presentation, participants were led through several exercises where they recalled how and where they received their sentimental item, identified what feelings and values they have attached to the item, listed their top savings goals, and determine how similar feelings and values linked to their item can be applied to further motivate them to save.
“Participants who received the session that utilized a sentimental item from their own lives increased their savings rate almost three times more than the participants who received standard financial education about saving money,” the researchers said.
They also reported that unlike those who underwent FE sessions, participants that went through the SS condition demonstrated significant increases in their financial health immediately following the session.
The FE group were better off in some respects. Following up with the participants three weeks after their sessions, the researchers found that those in the SS group experienced a significant decrease in confidence in their ability to save more in the future. In contrast, the FE group participants who were revisited in three weeks were more likely to say that they can set aside even more money as time passes.
“In addition, participants in the FE condition reported a significant decrease in financial stress from post-session to the three-week follow up,” the researchers said. “However, the goal of the experiment was to increase savings behaviour, and the fact that the FE group showed less of an increase in savings behaviour and also experienced less financial stress might be a bad thing.”