How to Trick People Into Saving Money

The Atlantic:

Late last summer, Dawn Paquin started keeping her money on a prepaid debit card from Walmart instead of in a traditional checking account. The wages from her factory job—she works from 9 p.m. to 5 a.m., inspecting blades on industrial bread-slicing machines—now go directly onto the Visa-branded card, which she can use like a regular debit card, though unlike most debit cards, it is not linked to a checking or savings account. She made the switch after a $4 check she wrote to buy coffee for herself and a friend tipped her checking account below the required minimum and triggered $100 in overdraft fees.

This was before she got the factory gig, and she wasn’t working full-time. Paquin lives in Salem, Illinois, where, she told me recently, if you don’t have a college degree, your job choices are “fast food or factory.” Money was extremely tight. “I kind of had a bit of resentment about banks after that,” she said dryly.

…

Digit used research from Common Cents Lab, co-founded by Dan Ariely, a Duke University behavioral-economics professor, to design a feature encouraging users to pre-commit to saving a percentage of their tax refund. Common Cents has also worked with an app maker that helps food-stamp recipients budget more efficiently.

…

Richard Thaler, an economist at the University of Chicago and one of the field’s pioneers, told The Wall Street Journal in 2015 that saving for retirement is “a prototypical behavioral-economics problem” because it is “cognitively hard—figuring out how much to save—and requires self-control.” One solution is defined-contribution retirement plans, which set money aside automatically; a 401(k) is the most common form. Employees may choose to opt out, but they opt in by default—meaning the passive response is actually the better response. Some plans are even built to gradually escalate, again by default, the amount employees set aside for retirement savings. Admittedly, that’s not how all 401(k)s work—most automatic-saving plans still require some active decision making about, say, how much you contribute. Still, default plans like these are “probably behavioral economists’ greatest success story,” Thaler said.

Read the whole story: The Atlantic