By: Simon Moore
May 9, 2014
Saving money is about more than a safe retirement or an emergency fund -- it can be a path leading out of poverty. But how do you save when you're barely making ends meet? Putting money into savings and investments seems like a luxury, because it only happens after meeting basic needs.
That's actually a misconception. In the first world, the question isn't usually whether you have the money to save, but whether you have the mindset to do so.
Mindset is one of the biggest barriers preventing people from saving. When putting food on the table is a struggle, the idea of putting money aside seems unfathomable. Savings accumulate slowly, offering little reward in the moment.
It turns out saving is as important for people near the poverty line as it is for those a safe distance away.
Research has shown that regular saving leads struggling American workers out of the bottom 20 percent and is a powerful indicator of upward mobility. The impact of savings accounts on low-income families demonstrates why saving matters for everyone, whether they make $18,000 or $180,000 a year.
But we humans, and especially people in poverty, are wired to focus on the present more than the future. Choosing not to spend demands discipline, careful planning, and regular sacrifice. For some, this could involve borrowing children's' clothes instead of buying them. For others, not eating out. Regardless of financial status, it demands discipline and self-control, and is a habit cultivated over time.
One way to change habits and mindset is to alter the incentives. Goal-based or individual development accounts (IDAs) have been extremely successful in getting less fortunate people to save. IDAs are structured so that for every dollar saved, people receive matching funds, which motivates people to stick with it by amplifying their sense of progress and reward.
The Corporation for Enterprise Development (CFED) conducted a five-year study which found that IDA participants deposited an average of $25.42 per month. Combined with the matched funds, they accumulated assets at rate of $75 per month, or $900 per year. If all of the 57 million Americans eligible for these accounts participated, it would represent more than $51 billion in annual savings.
CFED also found more than half of all program graduates who previously received public assistance no longer received assistance after completing the program. Program participants were also 35 percent more likely to own a home and are 84 percent more likely to own a business.
Furthermore, IDAs also have positive effects on self-esteem, hope for the future, future orientation, a sense of security and fiscal prudence. A team of researchers at Kansas University School of Social Welfare found that when savings accounts are started for children of low-income families (and financial education is included), students are more likely to attend college and graduate, thus improving their financial prospects for decades. Saving creates a virtuous cycle.
Not saving is a vicious one. EARN -- a nonprofit that offers goal-based savings accounts -- reports that 44 percent of Americans do not have enough of a financial cushion to withstand the smallest setback or emergency, such as a major healthcare bill, unemployment or even their car breaking down. And without savings, those setbacks push them into the arms of high-cost lenders, and further into debt.
Accessibility is also an obstacle. While companies like Simple, FutureAdvisor, mPesa, Lending Club and Kiva are democratizing access to financial services, there are still billions of people who remain "unbanked."
Many of them face significant friction before they can access a financial infrastructure most of us take for granted. Indeed, approximately 2.5 billion people do not have a formal account at a financial institution, according to the World Bank.
In the U.S., this is often because of cost and inconvenience. Banks will charge numerous and confusing fees, and require a minimum amount of money to open an account. In the developing world, depositing money may involve traveling long distances over difficult or dangerous terrain. This is why organizations like the Gates Foundation and the Omidyar Network are working to expand access to digital financial tools and services.
Mobile technology and the rise of online financial services have created greater saving and investment opportunities. Combined with incentive programs for people unfamiliar with saving, the two tools can serve as pipelines out of poverty.