How to start saving successfully in 2020
New year, new you. Looking to kick-start a positive savings habit in 2020? Forget freezing your leftovers and cutting back on coffee.
Meet the digital savings tools offering a fresh approach to saving; designed to help you reach your goals and form habits that stick.
Not all of us have a good relationship with saving money. In fact, 46% (12.6 million) of UK households have either no savings at all or less than £1,500 in savings, according to The Money Charity. Collectively we are saving less and borrowing more, to the point where it’s putting a serious strain on our financial health.
We all know that we should be saving for the future where we can, but are less clear about how to save or precisely what we want to achieve by doing it. As with many New Year’s resolutions, it can be tough to find the motivation to start and many of us are put off by the assumption that a major lifestyle change is required to make saving worthwhile.
For too long the savings market has been dominated by uninspiring offerings from the big banks, which fail to meet savers’ primary needs or to encourage effective savings behaviour. Low interest rates and a lack of product differentiation have left many consumers feeling apathetic about saving and struggling to set money aside.
This is precisely why alternative providers are developing new tools - to change attitudes towards saving and provide you with the motivation to reach your personal savings goals, whatever they may be.
The Power of Automation
A common problem for many people is that they forget to save or don’t put aside money at a logical time e.g. payday. A popular piece of advice is to “pay yourself first”, whereby you transfer money into savings every time you get paid, rather than waiting to see what’s left at the end of the month. However, it can be difficult to calculate how much to save upfront, particularly for people with uncertain or irregular incomings and outgoings.
Automated savings apps such as Plum and Chip, enable you to save without having to consciously engage with the subject on a regular basis. Users can create automatic rules to set aside money on their behalf; thus removing the need to repeatedly make the sensible (and often painful) decision to transfer funds into a savings pot for the future, at the expense of rewarding yourself today.
Automated round-ups can be used in conjunction with other features... to drive more effective holistic savings behaviour...
Plum currently has around 650k UK customers and is looking to reach 2m by the end of 2020 across its iOS, Facebook Messenger, and new Android platforms. It connects directly to your bank account via open banking and uses AI and transaction data to calculate exactly how much you can “afford” to save once bills, rent, daily spending and any other necessary financial commitments have been accounted for.
Every few days, money is transferred automatically from the connected account to an easy-access savings fund, so that by the end of the first month you have a pot that’s been created for you, without you having to think at all. This “little and often” approach to saving challenges the popular idea that we must set aside a big chunk of money on a monthly basis in order to achieve our savings goals.
For those looking to customise their habits further, Plum’s ‘Savings Brain’ functionality allows you to set rules around how the app saves for you or pause automatic saving at any time. Instantly adjust how much or how little is set aside by selecting a ‘mood’ - from ‘Shy’ (50% less) to ‘Beast mode’ (75% more). Plum will pre-warn you of an upcoming payment and provides the option to cancel it before the money is taken.
Another increasingly popular automation-based service is round-ups, whereby purchases are rounded up to the nearest pound and the change is automatically diverted into a separate savings pot. Starling and Revolut are just two examples of digital challengers giving users the option to activate this feature for everyday transactions. In fact, it has proven such a hit with customers that many of the big banks, including Halifax and Lloyds, now offer their own ‘Save the Change’ feature.
By identifying a goal to work towards... it’s proven that you’ll be more motivated to save...
Bunq, which launched in the UK earlier this year, has an in-app ‘Auto Save’ feature with configurable settings including the ability to save from multiple accounts and adjust the default rounding i.e. the next £1, £2 or £5. This allows users to adapt their behaviour depending on their goals and capacity to save.
Using round-ups alone is unlikely to lead to a substantial savings fund and doesn’t do much to help people reach more ambitious goals. However, automated round-ups can be used in conjunction with other features, such as goals and pots, to drive more effective holistic savings behaviour and boost the amount of money set aside.
Savings Goals and Pots
What do you actually want to achieve by saving? By identifying a goal to work towards, however ambitious, it’s proven that you’ll be more motivated to save than if you’re just setting aside money for a generic ‘rainy day’.
Monzo and N26, amongst others, offer the option for customers to set up multiple pots within their main account which can be used for saving. This conveniently allows you to manage your money all in one place, whilst keeping savings separate from day-to-day spending to help you resist temptation.
To help bring saving to life, pots can be personalised to reflect specific savings goals. Starling users can add a picture to their goal and set up a target amount to work towards. Chip goes one step further by recommending a date by which the goal can feasibly be achieved, calculated based on the user’s AI-powered automatic saving habits.
[The] use of gamification... is reframing saving as an aspirational activity rather than a chore.
Monzo enables customers to open interest or non-interest bearing pots depending on how much they want to deposit. Pots can also be locked, meaning that access to the money is restricted until a specified date in the future. This adds a layer of positive friction to drive more effective savings behaviour as it prevents you from withdrawing and spending money that’s been set aside for a specific savings goal.
To further boost the effectiveness of pots, providers including Dozens and Monzo offer customers the opportunity to set up personalised savings rules via automation platform IFTTT (If This Then That). Users can build their own automations called Applets, whereby one action triggers another, and create rules which connect digital banking apps with other everyday apps such as FitBit and Uber. Create a rule that transfers £5 to a Monzo savings pot every time you hit your FitBit step goal for the day, for example. Or set up the ‘Uber savings tax rule’, which triggers a transfer into a Dozens savings account every time you take an Uber.
This use of gamification, whereby engaging and participatory elements are introduced to help people to save, is reframing saving as an aspirational activity rather than a chore.
The Marketplace Model
Another option for accessing alternative savings products is via digital marketplaces, which tend to offer a wider choice of products from providers that you may not have considered before.
Raisin, which recently saw its most successful quarter-to-date since its launch in 2018, is a fintech savings platform which enables customers to open accounts with providers from across Europe. It has established partnerships with a range of UK challenger banks and European banks to offer competitive fixed-term and notice savings products through its online marketplace.
Monzo has created an in-app savings marketplace, which offers customers a number of easy-access and fixed products from different providers, including fast-growing digital bank OakNorth. This proposition meets demand for ease and convenience, as all products are accessible digitally via the Monzo app, which enables you to manage your money all in one place.
That said, be aware that the practical accessibility of the marketplace model can come at the cost of receiving less competitive interest rates. OakNorth rates on personal savings products, for example, are higher if you open an account with them directly rather than going via Monzo.
The choice of savings products available to customers is growing steadily and we can expect to see new challenger propositions gain traction with customers as demand for digital-first and needs-based solutions grows rapidly.
Actively setting aside money for tomorrow that could be spent today takes willpower and a certain amount of sacrifice. However, don’t let this put you off. See how an automated tool or goals-based approach to saving can help you overcome the temptation to spend and establish an efficient approach to saving that really works.
For further info about how the savings market is evolving to better meet customer needs and more examples of the most innovative new savings propositions, check out my report on The Evolution of the UK Savings Market.