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How behavioral science can help improve financial health

Mariel Beasley, Common Cents Lab Principal, joins Yahoo Finance to discuss ways behavioral science can be used to increase savings, improving financial health, and financial change amid the pandemic.

Video Transcript

ALEXIS CHRISTOFOROUS: In this week's "Funding Our Future" segment, we look at how behavioral science can be used to increase savings and improve our overall financial health. Joining me now is Mariel Beasley, principal at Common Sense Lab. Mariel, thanks so much for being here. So, first of all, tell us what you mean when you say behavioral science. And from that perspective, why are so many households struggling financially?

MARIEL BEASLEY: Yeah, so behavioral science is really sort of about trying to understand how the world around us is influencing our everyday decisions. And when we think about our financial well-being, so much of that is actually related to decisions we're making every day, right? Obviously, there's the larger macro things that might be playing into financial health and well-being, but it's a lot of decisions around spending and saving and purchasing and decisions about putting money towards our long-term well-being future goals.

And so all of these kind of come down to these very small decisions that we're making every day. And essentially, what we see is that the current world that we live in is constantly tempting us. And that makes it very difficult to make these longer term decisions. And that's what behavioral science is really trying to understand and look at and pull apart and figure out how to solve.

ALEXIS CHRISTOFOROUS: OK, so having said that-- thanks for the explainer-- what are some examples on how you and your team have been able to use behavioral science to improve our savings and our overall financial health?

MARIEL BEASLEY: Sure thing. So my team is the Common Sense Lab at Duke University. And we have actually worked directly with about over 100 different sort of organizations and partners that are dealing with folks' finan-- like, sort of financial worlds. So these can include banks and credit unions, fintech companies, employers, people who sort of touch people's everyday financial life. And we work with them to think about how could we make small changes in sort of product services the way that you are trying to encourage positive financial behaviors, how can we make some small changes in there, knowing what we know about how people make decisions, in order to get better outcomes.

So an example of a project that we actually fairly recently did in partnership with Virginia Credit Union and Mastercard as part of the BlackRock Emergency Savings Initiative was around credit card rewards. So, many, many households in the US have credit cards that have rewards. Now, a lot of times, these rewards-- and I think it's actually, on average, it's about $170 a year in credit card rewards. And on average, generally what happens is that these rewards just kind of get back sucked into our credit card statement. And we don't really notice it. We don't really do anything good with it. And they just kind of disappear and don't necessarily align to our goals.

So we worked directly with Virginia Credit Union to sort of redesign their rewards redemption portal to make it easier, more intuitive, and more attractive for people to actually put their cashback rewards directly into a savings account, rather than just sort of the normal default, which was to put it back into their statement. And what we found is that by doing this, this small change in the design of the redemption portal, it more than doubled the number of people who were redeeming their credit card rewards into savings.

And, you know, maybe that doesn't seem like a great way to build savings, maybe not a lot, but really, the research shows that even the smallest amount in a savings account reduces significantly the likelihood of basically being unable to pay bills. And we're talking about even $50 in an account, even $100 in an account. You know, it doesn't have to be this six months' worth of expenses, that any of this stuff really helps increase the likelihood that people can sort of handle some of these different expense shocks that people are incurring every month.

ALEXIS CHRISTOFOROUS: And speaking about some of these challenges, certainly the pandemic has been a huge one for so many people. How has this time sort of changed people's financial behavior, if at all?

MARIEL BEASLEY: Yeah, so we've seen a lot of changes in financial behavior from the pandemic. And some of that is around intention, right? So we've seen actually a big increase in people desiring to save more money. You know, emergencies are on the brain, right? So we see-- we actually in some of our partners, we saw a, you know, in some cases, a 15 time-- like, basically people were sort of 15 times more likely to start saving for an emergency with some of our partners after the pandemic basically started building.

And then, similarly, what we see is also a real difference in purchasing behavior as well, of course, right? So we did see an overall increase in the savings rate. Much of that was also driven by reduced spending. So we saw people's savings balances growing, largely because they weren't traveling, they weren't going out to eat, et cetera, and then paired with this increased desire to save because of the saliency of, I need to be protected in case there's another emergency or another sort of thing in the future that's going to disrupt my financial life.

And so, that's been really powerful for people's finances right now. And it'll be really interesting to see as the-- hopefully things eventually are able to go back to normal, how much of these habits stay sticky and how much change and kind of go back to the way we were, kind of overspending in other ways again. And so, from a personal perspective, I think it's a real opportunity for financial organizations to think about, wow, we have this increased motivation to build savings. Let's make sure that we're building better products and experiences to help sort of give a place for people to put that motivation and to actually put that savings on a regular, consistent way.

ALEXIS CHRISTOFOROUS: If you had to point to one thing, one actionable thing somebody can do right now to increase their overall financial health, what would that be?

MARIEL BEASLEY: Yeah, the first thing-- I mean, this is sort of a really basic tenet is to actually set up an automatic savings transfer that is timed with your payday. You know, a lot of times, we think, oh, we'll save what's left over at the end of the month. But we are all naturally tempted by the world around us. And a bank account, I kind of like to say that a bank account is a little bit like a box of popcorn in that we'll often eat to the bottom. Whatever's in there, we'll take it.

So having a transfer to an emergency savings or a savings sort of account or something that you're able to take money out of your paycheck immediately, put it into this account, don't see it, is a really effective way to build savings. Then you can use, but will automatically refill back up after every pay period. So that's sort of the number one thing is take time, put it in your calendar to actually set up this automatic transfer, and be aggressive on that transfer because the whole point of liquid savings is that you want to have money in that account, so that you can pull back when you need it.

ALEXIS CHRISTOFOROUS: Yeah, sound advice. Mariel Beasley, principal at Common Sense Lab, thanks so much for being with us today. And a reminder that Funding Our Future is an alliance of organizations dedicated to making a secure retirement possible for all Americans.