by George Hofheimer, chief research + innovation officer at Filene Research Institute
The old proverb goes, “A chain is only as strong as its weakest link.” Consider a chain that links consumers’ current financial status and well‐being with their ideal situations. Where is the stress point? We need look no further than consumers themselves. There is abundant research that shows people make poor decisions when it comes to finances: they buy motorcycles with money they should be saving for retirement; they buy stocks high and sell them low in a panic; they buy the three story Colonial when their income calls for the two-bedroom Ranch.
Credit unions stand at the ready, with advice and products that could be the basis for a sound financial future for their members. But many members simply do not take the proffered help.
The problem must be financial literacy, right? Only partly. Picture a member and an MSF having a conversation about a loan. The member thinks, “I need to buy a car or else I can’t get to work.” The credit union representative’s response includes words like “annual percentage yield,” “debt ratio,” “credit score,” and “payment protection.” They might as well be having two separate conversations. The member who doesn’t know can’t well improve. But the second barrier is even more important: having the financial capability to implement strategies that will achieve the desired results. This includes all the important steps that come after basic knowledge: making decisions, putting a plan into place, and evaluating and adjusting appropriately.
Here are three key insights that emerged from the colloquium:
- Americans are having trouble making ends meet. No surprise there, but it has wreaked havoc on important levels of family stability: 58% of Americans haven’t even tried to figure out how much they need for retirement; 51% have no rainy-day fund; and 58% are setting aside nothing for their children’s education, according to Filene Fellow and GWU professor Annamaria Lusardi.
- The easiest financial decision to make is no decision at all, which is why so many people get into money trouble. They’re overwhelmed by options, so they shut down. An escape hatch for members’ positive behavior change is recommended by virtually all financial experts: automate, automate, automate. Setting up electronic loan and utility payments, savings investments, and even charitable contributions ensures that these commitments transpire regularly and seamlessly. Why does this work? Because once you’ve made the decision once, it’s out of sight and out of mind, says Today Show financial editor Jean Chatzky. Credit unions that help members make automation drop-dead easy are doing them a favor.
- Credit unions that want their members to move from mere literacy to capability should examine their initiatives under the following five lenses, says Piyush Tantia, executive director of ideas42 at Harvard:
- Are you trying to create an intention when the problem is failure to follow through?
- Are people paying attention to the information you’re giving them?
- Do you think people understand the product terms?
- How are you presenting options? Could that affect how people choose?
- How easy/hard is it to do something, e.g., sign up for an account, make a deposit?
Sometimes strengthening the chain is as simple as asking these questions.