How do you encourage people to save? That’s a question sure to spark a debate. Researchers from the Stanford Graduate School of Business and Tilburg University in the Netherlands have an answer -- make them feel more powerful.
"When it comes to managing finances, it’s easy for people to feel overwhelmed and out of control," Stanford PhD student Emily Garbinsky and co-author, said in a prepared statement.
In a series of five experiments the researchers showed that feeling powerful, defined as having control over valuable resources is a pleasant state that individuals are motivated to maintain. In their paper, "Money in the Bank: Feeling Powerful Increases Saving," researchers explain that since money is the most coveted resource people have, they argue that individuals who feel powerful save money to secure their feelings of power. They found that if power were guaranteed to be secure for life, or if power could be leveraged through another source, such as knowledge, it not help fill the coffers. The impulse to save was observed only when saving money was considered a means toward maintaining power.
Is power the magic pill to get people to save?
For sure, money and power are intricately linked. "People feel powerless and helpless when they don’t have a savings or retirement account, live paycheck to paycheck or experience a financial crisis. You feel more confident, in control and powerful when you have a savings and/or retirement account – when you don’t have to worry about how you will pay for car repairs or a broken furnace,’ says Harrine Freeman, author of How to Get Out of Debt: Get an "A" Credit Rating for Free.
She says people who don’t save feel a temporary sense of power when they buy something they believe shows they are powerful such as, "a BMW, going on vacation to a Caribbean island or buying a designer item like Louis Vuitton."
If they can’t really afford such luxuries, they wind up in trouble, powerless, instead of powerful.
David Walters, a certified financial planner with Palisades Hudson Financial Group, gets the connection between power and control, which he thinks is an important factor when it comes to savings, but in his experience, the best way to get someone to increase their savings is to first show them the facts.
For example, "Show them how much they’ll need in retirement based on their income sources and current savings. Often there is a big gap between the two, and that’s when you can get down to the details of organizing your affairs and planning for what can be done to close the gap," he says.
Having a plan is key. "It’s about having an organized plan to get from point A to point B (a comfortable retirement)," he says. When you have a plan, you feel in control. "Taking control of your affairs gives you a sense of power over you own destiny."
Stephanie Genkin, a financial planner with TA Planners, agrees there is a link between power and savings, but not quite the way it’s presented by the researchers. "What I see often is that when I work with clients to increase their savings, whether it’s in a regular account, 401(k) or IRA, they report feeling more powerful (and happier) after hitting the $5,000 mark," says Genkin.
There’s also something to be said for setting short and long-term goals. "The more detailed you are, the better. Saving for the sake of saving is a losing proposition," says Genkin.
Some don’t get the power/savings link. "The idea that the key to encourage savings is to make people feel more ‘powerful’ is Keynesian claptrap from people in Washington and the academic think tanks," says attorney David Reischer.
Sometimes too, power is not enough. "There are many successful movie stars, musicians, professional athletes that are ‘powerful’ that end up bankrupt because of bad financial decisions, like spending more money than they make and not saving. They end up in massive debt which leads to bankruptcy," says Steve Repak, author of Dollars & Sense: Basic Training For Your Money.
One thing you’re not likely to find disagreement about, is the need to save. ‘Everyone sees the value of saving," says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling.
Knowing and doing are two different things though. Says Cunningham, "How do we get the average person, who may be financially frozen, the one who is tired of trying, to move from the state of inertia to one of power? No one wants financial education until they need it, and by then it’s too late. Can we convince people that knowledge is power?"