Technology Brings Behavioral Solutions to Americans' Financial Problems

This article originally appeared in the Washington Examiner.

Americans are not saving enough. This is problematic because there are limited options for people who run into short-term financial problems, and government-funded retirement programs are on an unsustainable path. While there may seem to be no hope to better prepare Americans for their future financial needs, the findings of behavioral economists hint at one way out of America's savings crisis.

Economists Sendhil Mullainathan of Harvard University and Eldar Shafir of Princeton University suggest that the psychological toll encountered by many Americans with poor credit and strained finances results in "tunnel vision." This makes it difficult for people worried about the present to make informed long-term financial decisions.

Better decision-making tools that are available through a variety of easily-accessible websites and apps draw on behavioral economics to provide the first step to overcoming Americans' financial woes that are often fueled by this tunnel vision. Steve Wendel from the company HelloWallet (a subsidiary of Morningstar, Inc.) says that there are ways to keep people both engaged with their finances and committed to their financial goals.

The key is to make saving habitual, personal, and simple. When people log on to the HelloWallet financial tool, they are asked whether they want to reduce their debt, build a budget, or start planning for retirement.

Users can then tailor their financial decisions to help them "pay for college," "buy a home" or "save for a rainy day." Other choices include "make me extra cash" and "track all of my bank accounts in one place." These personalized choices, although relatively simple, make saving a more interesting and tangible goal. Increased engagement makes users more prone to use the tool's savings features, and can help generate long-lasting behavioral change.

Another tool, Mint, offers an app that can automatically track all essential financials, including bank accounts, credit cards and any outstanding loans. Mint and the similar app HomeBudget allow individuals to see their broader financial picture and track their spending. Based on personal spending history, these two apps suggest starting budgets. If users then spend more on a category than they have allotted, they receive alerts that can nudge them to behave more responsibly.

Mvelopes is a service that lets users allocate their hard-earned money across various "envelopes" which represent different categories, such as food, entertainment and clothing. When money from one envelope runs out, users see that they have to sacrifice spending in other categories to stay on budget, which leads to less unnecessary spending.

Tools that help people visualize their finances can make complicated tasks such as budgeting, paying down loans and tracking spending much easier. They turn personal finance from an opaque and often stressful topic to an understandable, manageable part of everyday life, and this creates benefits for many Americans and the whole economy.

Such online platforms do have their limits. Yet their benefits show the powers of assistance, based in behavioral economics, in overcoming some of the financial challenges that many Americans cannot meet on their own. Larger financial service firms could emulate tools such as HelloWallet, Mint, HomeBudget, Mvelopes and others, harnessing technology to help consumers save for retirement and for rainy days. Americans need to realize that in order to be ready for the future they should take advantage of all the outside help that they can get.

Jared Meyer is a fellow at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter @JaredMeyer10. Alex Verkhivker is a contributor to Economics21. You can follow him on Twitter @averkh. 

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