New Study of Savings Habits

Can a savings program really foster savings habits? Yes!

Findings from a study on savings habit development in IDAs

C?zilia Loibl is an Assistant Professor at the Department of Consumer Sciences at The Ohio State University. For more information about C?zilia's other papers on the IDA program and savings behavior in general, please visit her publications page.

Savings habits are a topic covered in every financial education workshop, and play a particularly important role in Individual Development Account (IDA) programs. IDA participants have both the time and the structure to foster good savings behavior during financial education classes and meetings with case managers. I was interested in finding out whether we could, in fact, quantify the impact of the IDA program on savings habit development. We captured our findings in the study, Accounting for the Role of Habit in Regular Savings.

Background: For the purpose of this study, savings habits were defined as frequently practiced behaviors, done without a particular sense of awareness, with the goal of freeing up funds for saving or debt reduction. Automatically packing lunch for work, browsing supermarket shelves for discounted products and calling friends after 9 p.m. are thrifty money-saving behaviors that should be habitual for many people. Our "treatment" group consisted of current participants in the IDA program of the Assets Ohio network, a statewide IDA program managed by the Ohio CDC Association. The "treatment" group received a paper survey distributed to them by their case managers. The "comparison" group comprised low-income individuals of the general population who lived in counties served by the IDA network, but who were not savings program participants. We collected and analyzed survey data to:

  1. Validate the role of habit in regular saving
  2. Test whether participation in a savings program (i.e., an Individual Development Account program) facilitates habit formation
  3. Examine the role of habit in individual's perception of financial strain

The results showed that habit mattered for regular saving. Habit strength increased over time during program participation and savings habits reduced the stress of financially difficult situations.

Result #1: Habit influences savings
Habit emerged as a significant predictor of savings deposits, confirming its role as an independent factor in explaining saving.

Result #2: Savings program participation supports habit formation
Compared to non-participants, the savings habit of IDA program participants increased over time, peaked at 19-24 months, and then flattened. There was no difference in savings habit between non-participants and new enrollees, thus supporting successful habit formation during savings program participation.

Result #3: Habit eases financially stressful experiences
Results support the independent role of habit for reducing the perception of financial strain above the influence of household income and savings. This analysis parallels earlier findings on the influence of mental habits on self-esteem (Hilton and Devall 1997).

Admittedly, the idea that long-term savings may be achieved by habitualizing behavior is controversial in the world of behavioral economics. Behavioral economics favors commitment devices that reduce the behavioral component to a minimum – in other words, the less action required, the more successful the saver will be. Examples include auto-enrollment in retirement plans (Madrian and Shea 2001), the use of life-cycle investment funds, and employer-sponsored matched savings (Choi et al. 2006).

However, our analysis focuses on the financial behaviors in everyday life, the ideal scenario for building savings habits. Many of these decisions tend to occur frequently (packing a sack lunch, brewing your own coffee, parking in a cheaper parking lot), tend to affect small amounts of money in the "peanuts" range (Prelec and Loewenstein 1991; Markowitz 1952), and are targeted toward the greater goal of freeing up money for saving or debt reduction. These savings habits may funnel funding toward an institutionalized commitment mechanism (e.g. a checking account balance that is invested automatically) or develop independently, but both help achieve the greater goal of asset building for the purposes of short-term and long-term savings.

Loibl, C?zilia, David S. Kraybill, and Sara Wackler DeMay. 2011. Accounting for the role of habit in regular saving. Journal of Economic Psychology, Volume 32, Issue 4, August 2011, Pages 581-592. Accessible here:

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