How to Make Savings Second Nature for Many

Savings Digest - Issue 1

Full magazine

Savings are made from the income we earn. Yet, committing to set aside some money for the future can be a difficult commitment. The natural reluctance to save, especially for the long term, stems from the very foundation of economic theory – that our needs are insatiable while resources are scarce.

However, the fact that some needs must be met today and others anticipated tomorrow creates the very need to set aside a portion of today’s providence for the purpose of tomorrow’s lack. To strike a balance between prioritising today’s evident needs and focusing on tomorrows anticipated needs is a challenging process mentally. Psychologists speak of the present need bias innate in every individual driving us all to prefer immediate gratification over future rewards. Our minds associate delayed benefits with increased uncertainty, which blunts the reward of the potential higher payoff. We see it as risky and presumptive in the present and uncertain.

If the odds of rational thought are stacked against savings, how then do others succeed where many fail? What helps some forego today’s satisfaction in anticipation of a more rewarding tomorrow? Research postulates that the difference comes from capacity-related factors like level of income, willingness-related factors, as well as structural factors like accessibility. In this article we have restricted ourselves to private savings and, even more particularly, the savings by individuals and households. But, it should be known that other sectors of the economy can save as well.

What then does research and data on NSSF members tell us about their saving behaviour?

The postulation that income levels determine one’s ability to save is validated. First and foremost, due to compulsion, individuals with higher salaries are forced to save more in absolute terms even though the percentage deduction is the same. Secondly, data shows that lower wage earners are more willing to collude with employers to avoid NSSF deductions than higher wage earners. Another indirect indicator that higher wage earners feel less deprived is the fact that up to UGX 1.3 trillion in balances is left unwithdrawn from the Fund by qualifying members, and most are higher wage earners. The third indicator is seen in the phenomenon of interest forfeiture that occurs when a qualifying member draws their benefit after the end of the financial year but before the declaration of interest. In this case, a member stands to lose the difference between the interest to be declared and the statutory rate of 2.5% applied for exiting members in the period July to September. Evidence shows that members with less balance (by deduction, low-wage earners) are less willing to delay claims until after the declaration. While income is not the only determinant of the decisions referenced here, it goes to show that higher earnings generally aid savings through increased saving tickets and more willingness and/or ability to delay gratification. 

The ease and accessibility of the saving product available to a customer has been observed to have an effect on customers’ saving behaviour. For example, some customers tend to save only when reminded; in-person reminders tend to have more immediate results than impersonal ones despite their higher cost disadvantage. The argument here is that the act of saving is already painful in itself; the least customers want is to be subjected to additional bothers like filling in forms, worrying about receipt of their savings, charges, travelling, or following complicated procedures. This convenience factor combined with the embedded social pressure are the main drivers of community-based saving mechanisms like merry-go-rounds, VSLAs, and SACCOS; these have demonstrated that even the poorest among us can save. While some systemic barriers are difficult to mitigate, NSSF voluntary programs now aim at making saving a subconscious decision; this is when we will satisfy ourselves to have finally made savings a way of life.

The trust that a saver has in the selected saving vehicle also helps reduce the risk perception associated with the saving decision. Some savers who choose NSSF have cited the fact that it is a government entity that has a close to 40-year legacy and is enshrined in the law of the land as one of their choice drivers. However, trust must be earned! Data of the Fund has shown that customers have tended to continue trusting the Fund even when they would have been expected to have concerns. Some customers find comfort in the fact that their mandatory savings have continued to be safe in spite of adverse speculations once in a while, and this has given them comfort that over the long term, the Fund may be one of the best to trust.

This article has addressed income as the capacity determinant of saving, convenience as the structural enabler, and trust as the psychological comforter, yet saving decisions can also depend on other factors, including the age and related shift in needs, education background – especially exposure to financial literacy, peer and cultural influences on savings behaviour, and consumption patterns, among others. The Fund, being one of the many players championing savings mobilisations, shares the burden of making savings an easy and rewarding endeavour; however, customers still hold sway. In the arena of voluntary savings, the customer must decide how much, when, where, for how long, and what to save for. This is why, despite what is known about the savings culture, there is more to learn. We therefore believe that Smartlife Flexi and the other voluntary saving programs will help us understand our customers even better.