As we emerge hesitantly from the darkest moments of the COVID crisis, there are many questions to ask. When it comes to money, one of the most pressing is: Why do we have a society in which so many people have little or no financial cushion? Why do 12 million people have no savings? Why do 9 million people have to borrow money to buy food or pay bills? Why is it that 46% of the adult population of the UK (approximately 24 million adults) does not feel confident in managing their finances?
These are not new questions but it has never been more obvious how financially fragile most people are, and how the poorest and most vulnerable sections of society are disproportionately affected by crises. This article looks at one strand of the problem – the lack of savings and awareness of long-term financial behaviour at the level of individuals. It attempts to identify the main reasons for this and proposes ways to address the problem. It does not look at the causes of income inequality, though these are, of course, relevant to the lack of savings. The ability to save is a function of income, but also of mindset. And it’s the mindset aspects that affect everybody, regardless of income levels.
While debt and indenture have been a feature of human existence for over three thousand years, there are some aspects of our relationship with money that have changed quite significantly over the last 70 years. But we will start with what hasn’t changed.
What hasn’t changed?
Like all living creatures, we exist because we evolved ways to stay alive. The evolutionary process works by selecting for adaptations that increase chances of survival. The main function of the brain is not as a rational thinking organ, but as a survival tool which tries to keep us away from danger and threats. And while, for most of us, physical dangers have decreased dramatically over the past millennia, our brains have not changed at all. They are still hyper focused on keeping us alive in the present. For almost all of human existence, the danger of getting something wrong in the present was far more important than getting something wrong in the future. It’s the lion in front of you right now that you have to worry about. And although we have the capacity for abstract thought and we can imagine our futures, this is only a recently evolved capability. Most of our behaviour is anchored in processes that are much older. This connection to ancient response mechanisms leads to two behavioural traits: things that affect how we feel now can become overwhelmingly important; and, our relationship with our future selves is not generally articulated or understood except through the mechanisms of religion or other belief systems. We evolved to live and survive in the present and our future depended on it; in that sense our long-term interests were aligned with our short-term interests. Staying alive in the long term meant staying alive in the short-term. But now our present lives are far more secure and our future lives don’t depend so much on staying alive in the present. Our future lives, and the quality thereof, depend on making decisions today that will only affect us in 20 or 30 years’ time. In many ways, our future no longer depends on satisfying our short-term interests. Our environment has changed but our systems for understanding and navigating the world – our core survival systems – haven’t changed and can now actually undermine our long term interests.
What has changed in the last 5000 years?
Domestication of plants and animals is estimated to have started about 12,000-15,000 years ago. Before then, humans were nomadic foragers eking out a precarious existence and very much focused on staying alive in the present. With the advent of crop cycles life became organised around different and longer periods of time. But even then, each year was very much like the last. The concept that the future might be very different and you needed to prepare for it was alien. Religion explained how the world worked and what happened in the next life. Focus on the present and children, family and community would support you in your later years, if you had any. In many ways, life was simply seen as a preparation for what happened afterwards.
The industrial revolution started the process of non-gradual societal change, and the rate of change has been accelerating ever since then. Technology has given us changes unthinkable 300 years ago. Compared to then, in industrialised nations we live lives of staggering complexity. We are caught between trying to squeeze ever more into ever shorter segments of time, while also needing to plan for ever more complex future scenarios. When it comes to finances, part of the problem is that as a society we have remained mostly silent on the issue of money and our relationship with it. In the absence of informed debate and guidance at the societal level, people have been left to translate messages from the media and family into rules for life. So, as well as the changes in the financial system, we need to look at how those messages have changed over the last 70 years.
What has changed in the past 70 years?
- Of all the factors, credit is the one that has had most impact on our finances. Easy access to unsecured credit has been driven by technology and relentless innovation in ways to finance consumption at all levels. At the same time the consumer finance industry has exploited every human weakness to persuade people that credit – and usually expensive credit – is a painless way for them to buy things they cannot afford. Through messages like ‘Have it now and pay when you like’ people quickly find themselves trapped in a debt cycle that makes it impossible for them to build any savings. With providers like Clearpay offering to break a £20 purchase into 4 equal instalments, the underlying message is that you never need to save money to buy things because you can simply do it on credit. We have moved from a society where you could only buy things with money you had saved, to one where everything can be purchased on credit, sometimes with credit being made available at the point of sale. With the cost of credit bundled with the cost of the good or service being bought, and sometimes tied to time-limited discounts or loyalty offers, the opportunities for consumer detriment are many and varied 1. The financially excluded and people that struggle with impulse control are particularly vulnerable to financial harm. While for businesses access to credit has been the cornerstone of driving economic activity for over 500 hundred years, at the level of the individual there is little understanding of what constitutes good debt vs. bad debt.
- Electronic money. As numerous studies have shown, paying for something with cash is neurologically different than paying for it electronically. The absence of a micro-loss moment means people spend more than they would with cash. The link between the pain of paying and the pleasure of buying has been broken. This has reached a new level of disassociation with the advent of contactless payment and electronic wallets.
- Frictionless shopping. 30 years ago, if you wanted to buy most items you needed to go to a shop. The advent of online shopping has removed the physical and temporal distance between us and our purchases. In addition, our spending was limited to the contents of the shops we could visit and the times available for us to go shopping. Now that limit is removed and we have access to everything all the time.
- Social media. Humans are hierarchical social animals and we are hard wired to compare ourselves to others. Continuously. This used to be limited to what we could physically see – our neighbours and close friends – and people in magazines. Now we are potentially aware of everything that everybody we know – and those we follow – has and what they are up to. These carefully curated snapshots of other peoples’ lives trigger our social comparison urges and we feel pressure to maintain our status. Subconsciously we are threatened and our response mechanisms drive us to remedy that now, rather than in the future.
- Messaging. The messages from the media and marketers are that buying things will make you happy, attractive, successful and rich. And, to a certain extent, this message has always been the case as good salespeople developed well-honed techniques of persuasion and influence. But this messaging is now relentless and the focus on extrinsic measures of success has not driven increases in levels of happiness across society, only debt. There is almost no messaging around the positive aspects of living within your means, educating yourself financially and focusing on intrinsic ways to achieve wellbeing. Other than the recent drive to promote financial literacy in schools, there is no leadership at the governmental or institutional level. Saving is almost always seen in the context of saving money on a purchase, not for a purchase. Our society has no role models of people that practice positive financial behaviours. Instead we are told that ‘we can have it now and pay when we like’. Even the language around money is inherently polarizing and plays into the view that we are not responsible for our behaviour. We are tagged as spenders or savers. And while neither spending nor saving are themselves bad, it is where the extremes of behaviour are found. Our society does not have a word that covers people who save first and spend later. We have replaced societal values of thrift and preparing for the future, with those of immediacy and entitlement.
- Life is more complex and our economic security is more dependent on good decision making. The nature of employment has changed in many areas and not just in the divide between blue-collar and white-collar jobs. Employment is less secure and the path of working for a company for 40 years and then retiring on a fixed pension is no longer open to most people. As a result, our economic lives are more precarious. On top of that, the financial system and the decisions we have to make are more complex. Physical access to bank managers has disappeared, along with bank managers. The consumer finance industry offers us a plethora of financing options for everything we might want, and the financial services industry continues to baffle us with new savings and investment vehicles and schemes. Making good decisions that support our future selves is more important than ever, even if for no other reason than we are living longer (life expectancy has increased by 14 years since 1950). The penalties of focusing on today are greater than ever before. Yet we live in a world where half of the UK adult population have numeracy skills that are no better than those of a primary school child 2. Worse still, number skills across the UK appear to be deteriorating over time. At the very time when numeracy skills are needed to help people manage their finances, we are losing the capacity to understand the simplest financial concepts. Instead, what is emerging is a learned helplessness that results from the failure to engage with complexity.
- Lack of appropriate education. For many years the common mantra has been that financial education gives people knowledge, which in turn results in positive action to improve their personal finances – such as starting to save 3. But while financial education may improve our knowledge and understanding, on its own it cannot offset ingrained behavioural biases, compete with the culture of immediacy, and the pressure from consumer finance marketing. We often know what we should do – we know we should eat healthier, exercise more, save more – but doing something about it depends a lot on our psychological make-up and our ingrained habits. In addition, even if we know what we should do, we often don’t know how to go about it. We need effective advice, not just good advice. The success of ‘Couch to 5k’ is because it gives everybody a clear personal roadmap for achieving the goal of running 5k. And Parkruns have helped people to see that exercise is for everybody, not just elite athletes.
As humans we are hardwired for instant gratification and immediate response to danger, yet we live in a world where our future wellbeing is increasingly dependent on our ability to make considered, long-term decisions that almost always involve short-term sacrifice. The penalties for financial illiteracy are life-changing, even for those with wealth. Our culture tells us that our self-worth is dependent on what we have and promotes consumption as the route to solving all problems. We are under constant assault from targeted advertising and messages designed to trigger our fears and reactivity. There is no promotion of positive financial behaviours and no clear guidance from governments of how to achieve financial wellbeing. Instead, this gap has been filled by a consumer finance industry that claims to be enabling us but has a strong financial incentive to exploit weaknesses in human behaviour. Spending has become frictionless while saving is hidden and investment is beset with examples of predatory pricing, underperformance and outright fraud. The link between mental health and poor financial decision making is well documented as is our understanding that poor financial wellbeing leads to mental health issues. But these are seen as problems with the financial system rather than underlying features of it. We all need protection from predatory financial practices not just the vulnerable. And we all need guidance on achieving financial wellbeing because it’s not something we evolved to do naturally.
How do we address these issues?
The first thing to recognise is that there are multiple areas to address and that they all form part of our broader culture. Life in meritocratic capitalist societies is hard and we are in constant competition with others. Success requires enormous amounts of support early in life and deep into adulthood, and this support is expensive in terms of money, time and expertise. So, if we want to change society we need to understand that change needs to take place at multiple levels. The current pandemic gives us a really useful example of how this can be achieved. In effect, the way we work, live and interact has been completely changed over 90 days in ways unimaginable even 6 months ago. How did this happen? To get us to change, the government stepped in (eventually) to deliver a clear message that was then backed up and reinforced by state and private institutions. Rules were changed and consistent messages were delivered across all the media platforms.
Broadly speaking, individuals are influenced by three levels of messaging: governmental, institutional and local (families, friends, peers). Driving societal change requires consistent messaging across all three levels. Change at the individual level is dependent on seeing these behaviours manifested across society and in our own social circles. If the government says ‘stay at home’ and everybody we know is doing that, then we will also do it. If the government says ‘you should save more’ but everybody we know has £6k of credit card debt, then the message is pointless. The added complication with changing money related behaviours is our societal taboo about how to discuss it. To change behaviour is hard, we have seen this with smoking and healthy eating, but we also know it can be done. It requires the message to be clear and consistent, and reinforced across all three levels of communication, with education and mechanisms that support the desired behaviour and discourage the undesirable behaviour.
We need to recognise that although we have the capacity to make rational decisions that support our long-term wellbeing, that’s not how we act most of the time. Most of our behaviour is subconscious and driven by short-term considerations. We need to help people navigate complex decision making through a combination of education and choice architecture. And to change this at a societal level, we need to add messaging.
What could this look like?
A Government that is serious about making changes needs to be explicit about the trade-offs and inherent conflicts of interest that exist. If we want people to save more, they will have to spend less. These changes in consumption patterns are evident in every recession and we cannot pretend that this time it will be otherwise. If we want people to manage their money better and pay less in overdraft fees and penalties, that will have a direct effect on the profitability of the consumer finance industry. It will also impact the pricing of all financial services and products. End of free banking anyone? If we look at the guidance from the Governments’ own behavioural insights team, behaviour or activities we want to encourage need to be made Easy, Attractive, Social and Timely (EAST). Conversely, activities to be discouraged will need to be made difficult, unglamorous, anti-social and irrelevant. In order to change people’s behaviours, particularly when you want to stop them doing things they enjoy, you need to do both parts, but mostly the latter. When it comes to financial wellbeing, Governments have done the first part patchily (there have been some successes in pension enrolment), but never really addressed the second part. The best example of changing negative behaviours through friction is the campaign against smoking. Success was driven by removing easy access to cigarettes, taxing them heavily and the banning of smoking in public places. Prior to that, making people aware of the risks had almost no effect. Top down messaging from government around making good choices, such as it is, is pointless without developing the choice architecture that supports those choices and discourages bad choices. And, in addition to messages around making good financial choices, the topic of money needs to be discussed far more broadly. There is a culture of shame and guilt around money that prevents people from seeking help. All the good work done by MAPS and debt charities is addressing the symptoms rather than the underlying problem.
It should be compulsory for all organisations and institutions to provide financial wellbeing education for all employees, particularly new entrants to the workforce. This education should give employees the tools for understanding how to make decisions that support their long-term wellbeing, not just information on the company pension scheme. This includes giving people an understanding of how they make decisions about money as well guidance on and how to take control of their financial outcomes. Showing an individual how they can save and invest is far more impactful than telling them that they need to save more. Supporting employee financial wellbeing is massively beneficial for the employee and employer. But often this is seen as a box ticking exercise to be squeezed in at lunchtime or as part of a wellbeing morning. Over a 40 year timeframe, the difference in financial outcomes between somebody who has managed to invest £100 per month in an investment ISA and somebody who has spent the same amount servicing credit card debt is life changing. We owe it to job starters to show them how to build a secure future.
Financial services institutions also have a broader role to play. According to 2018 research from the Money and Pensions Service, product providers in retail banking ‘do not systematically evaluate the impact that their products and services have on customers’ financial capability, nor are individual teams or roles typically made accountable for this.’4 Supporting financial wellbeing for customers should be placed above all other metrics. Institutions involved in consumer finance should be required to contribute towards community based financial education including in schools. This levy should be seen as an explicit recognition that access to credit has the potential to wreck lives and that providers of consumer finance should be responsible for education and supporting those whose lives are impacted by unmanageable debt.
Schools should teach financial wellbeing, not just financial literacy. This means a focus on how to make good financial decisions, not just abstract budgeting and saving. This should not be just an exercise in numeracy and we need to recognise the limits of teaching concepts that cannot be immediately put into practice. We also need to recognise the importance of the home environment in shaping attitudes and behaviours. Along with the other areas of support that they provide for parents, schools should offer guidance for parents on how to raise financially capable children. This concept is completely missing in society, yet every other aspect of raising children is openly discussed in numerous forums. Most attitudes and behaviours are set in the home environment and research has shown that a lot of money patterns are fixed by the age of 7. If we want the next generation to be more financially capable, we need parents to be aware of the behaviours they should be modelling. All behaviour is information and children take that information and turn it into rules for life.
There are many factors that contribute to the dire financial situations that many people find themselves in. At the highest levels of our society, there is a lack of informed policy and discussion on this topic that recognizes that personal credit is both an enabler of financial flexibility and also a cause of much financial hardship. There is a lack of understanding about how we develop our relationship with money and hence, how this can be improved. Policy makers have made the mistake of thinking that because money is managed with numbers, we can turn money discussions into numerical discussions. Teaching people to be good with money needs a far more comprehensive approach than that which has been attempted so far and anything less will have little or no effect. The economic and life outcome benefits of education are well documented and it is exactly the same with supporting financial wellbeing. We are living in a society where existing inequalities are being inexorably widened and these forces will not reverse themselves without a more comprehensive understanding and approach. We owe it to all members of our society, as well as to the better functioning of society itself to improve financial wellbeing.