A recently published report, The Cycle of Savings: What We Gain When We Understand Savings as a Dynamic Process, from the Aspen Institute Financial Security Program is bringing much-needed rethinking to how savings are understood by financial security and savings experts. While savings has historically evoked a fixed or growing amount of money in a final destination, the reality is that the practice of savings, especially by low- and middle-income households, very much includes using those savings and then rebuilding them, time and again.

We spoke with the paper’s lead author Sheida Isabel Elmi, Research Program Manager, and colleague Sohrab Kohli, Senior Manager and Markets Lead at the Aspen Institute Financial Security Program (FSP) to learn more about the report’s key insights. BlackRock’s Emergency Savings Initiative industry expert Commonwealth is part of the FSP’s Consumer Insights Collaborative (CIC) and contributed to the report.

What was the insight that led to writing this report?

Households across the income spectrum recognize the importance of saving and want to save but are not always in the position to do so, nor equipped with the right tools to support these efforts. Members in our Consumer Insights Collaborative (CIC) provide financial empowerment services and solutions to low- and moderate-income (LMI) households across the U.S.

The CIC members found that the traditional model of saving — which defines successful savings as a savings balance that is consistently growing — does not reflect the lived financial realities of LMI consumers. Nor does it account for the many benefits that engaging in a different pattern of building and, importantly, using shorter-term savings, bring to their financial well-being. It was this insight that led the group to explore the topic of savings together.

CIC members found that many households engage in the cycle of savings — the ongoing act of building, using, and replenishing savings — over the course of the year. This cycle allows people to protect themselves against the immediate economic impacts of a pandemic, for example, meet known shorter-term needs, and invest in family well-being and economic mobility. This type of savings is therefore distinct from long-term savings intended to grow consistently over longer-time horizons, such as saving for retirement during one’s working years.

Is the cycle of savings the same as emergency savings? How are different approaches necessary to support these savings?

The cycle of savings encompasses emergency savings, but it goes beyond savings intended to weather unanticipated hardship to include savings amassed for short- and medium-term goals as well. These savings are meant to be spent towards a specific goal or to address an unexpected need, and then replenished as individuals are once again able to contribute to them. A growing body of research finds that liquid savings are the biggest predictor of financial health and well-being, making this a critical way to support people’s financial security.

The same principles and processes that support having resources on hand for emergencies, such as automaticity and accessibility, also support the broader cycle of savings. Providing savings options with tailored automaticity — mechanisms that allow people to easily control, modify, or stop automatic saving as needed, or which are automatically responsive to fluctuating cash flows — supports individuals without consistent income, who may not otherwise be able to participate in automatic savings platforms.

Immediate access to funds is often a key component in a person’s willingness to engage with a formal savings account or product. This is especially important for low- and moderate-income individuals who may not have wiggle room between income and expenses or access to affordable credit, leaving liquid savings as the safest and cheapest option when financial needs or opportunities arise. By engaging in the cycle of savings, individuals are able to manage their day-to-day financial needs, build resilience, and stay on track for their longer-term goals.

The report notes that the success of shorter-term savings is less about looking at savings balances but rather seeing success in other ways. What are some of those alternative success metrics and why are they important?

The cycle of savings is dynamic, meaning that a person could be anywhere in the process of building up, drawing down, or replenishing savings when a point-in-time metric such as savings balance is measured. Savings totals alone are thus not a useful measure of shorter-term savings success, because it misses the dynamic nature of the cycle of savings. Because of this, CIC members have worked to find additional ways to measure savings as a flow variable, as well as downstream impacts of successfully engaging in the cycle of savings, to better illustrate how their programs help people save and be resilient.

Some alternative success metrics that can create a more holistic picture of these savings include:

• Displaying consistency in savings behavior within the household’s ability to earn and save. The frequency of savings deposits may differ based on a person’s income and expenses, but savers are able to make deposits to their accounts over time when their cashflow allows.
• Using savings to maintain resilience, avoid material hardship, and to move forward on goals. This measure explores whether individuals are using their saved funds to address a need or when a savings goal is met. In either case, the goal of savings has been achieved.
• Avoiding expensive forms of debt. This measure examines whether individuals turn to expensive forms of borrowing or non-loan products (late fees, overdraft fees, deferred credit card balances) when funds are needed.
• Not tapping into long-term savings to weather a financial shock. Another success metric for healthy ongoing saving behavior is avoiding hardship withdrawal or otherwise tapping into money meant for retirement or other long-term uses. This metric won’t be relevant for all households, given that 29 percent of workers, disproportionately LMI, Black, Hispanic, and female, do not have access to a workplace retirement savings plan.

Many of the barriers to saving by individuals are mentioned in the report. What’s an area of opportunity for providers and employers to remove some of those barriers as they look to the future of savings and helping their end users?

There is a tremendous opportunity for financial institutions and other financial health providers to leverage the insights and evidence in this report. Based on consumer-focused research, we believe that successful short-and medium-term savings programs and products will facilitate automatic savings, provide immediate access to funds, incorporate smart rewards and incentives, and offer customization. Very importantly, they should also be widely accessible and affordable.

We encourage providers to develop savings programs and products with a human-centered approach that recognizes an individual’s financial reality. By meaningfully engaging with and listening to end-users, providers can avoid design decisions that lead to unintended or even harmful outcomes. For example, a common pitfall among providers is imposing rigid restrictions on savings withdrawals. However, most consumers want and need fast access to their savings when emergencies arise. Without immediate access to one’s savings, alternatives can be very costly (involving fines, fees, or high annual percentage rate credit) and consequential, such as the disruption of utilities or postponement of needed medical care. More savings products should allow end-users to control and customize their saving experience, particularly the withdrawal phase, to meet their specific needs.

Additionally, there is a clear case that employers play an important role in building worker financial security, and there is a distinct opportunity for employers to facilitate and contribute to short-term savings. Examples of existing models include split direct deposit, matched savings accounts, and savings vehicles attached to retirement plans. We hope to see continued investment in such workplace programs and further innovation by solution providers.

BlackRock’s Emergency Savings Initiative

BlackRock announced a $50 million commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis. UPS, Uber, Mastercard, Etsy, Brightside, Arizona State University, and Acorns have joined BlackRock’s Emergency Savings Initiative to help their employees, customers, gig workers, and college students take the essential first step toward long-term financial well-being.