Microsavings: Opening the Door for Individuals to Invest in Themselves
At the beginning of July, the Bureau of Economic Analysis released the latest report on personal savings in the United States. The personal savings rate, a calculation of individual savings in relation to disposable income, stood at 3.9 percent in May—indicating the percentage of money Americans manage to save after taxes. Compare this figure with the data from 10 years ago and you will find a similar, yet slightly higher, rate of 4.3 percent. Go back even further to contrast these statistics with those from 20 and 30 years ago when the personal savings rate was estimated at 7.6 percent and 11.3 percent, respectively, and you will see that the savings habits of Americans, while often in fluctuation, are on an overall downward trend from their peak in the mid-1970s. (See figures below.)
U.S. Personal Savings Rate
NOTE: Shaded areas indicate U.S. recessions.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
For Every Dollar Earned, What Did Americans Save?
In 1962, for every dollar earned, Americans saved 8.1 cents. In 1972 it was 8.2 cents for every dollar earned. In 1982 it was 11.3 cents; in 1992 it was 7.6 cents; in 2002 it was 4.3 cents; in 2012 it was 3.9 cents.
NOTE: Percentage in May of each year.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Low personal savings rates may be cause for concern because they indicate that consumption spending is high and individuals are less likely to be prepared for emergencies, loss of income and other unplanned circumstances. For low-income households, it may be assumed that the effects of low savings rates may be considerably detrimental. Improving savings rates can be a critical step forward in improving economic security.
Microsavings as a Step Forward
An expansion of microsavings initiatives may allow more individuals to save money in the United States. Microsavings is a form of microfinance where organizations and financial institutions encourage individuals to save money. Microsavings accounts are similar to traditional savings accounts, but are designed for small deposits. These accounts are often characterized by no minimum deposit amount, no service fees and flexible withdrawals. Encouraging a low-income household to save $1,000 a year may seem difficult, but asking them to save $20 a week may be more manageable. Microsavings initiatives acknowledge this and seek to give a savings platform to low-income households.
Obstacles to Formal Savings Accounts
Organizations and financial institutions investing in microsavings opportunities understand that there are several key barriers that may prohibit individuals from saving money. Proponents of microsavings accounts emphasize three key barriers to the use of more traditional bank savings accounts by low-income populations:
- The accounts may not be convenient (locations may not be easily accessible or the products are unappealing).
- The funds the individuals are able to deposit may be limited to small amounts and, therefore, the usefulness of the savings account may seem questionable.
- The documentation necessary for opening the accounts may seem intimidating.
Benefits of Microsavings Accounts
When organizations and financial institutions are able to overcome these obstacles, microsavings accounts may be able to offer numerous benefits. For the organization and financial institutions offering the accounts, proponents note that the accounts are fairly low-risk, requiring little to no upfront costs and no credit checks to enroll new account holders. Further, for organizations offering additional microfinance services, such as microloans, the savings accounts may assist in screening future applicants. If an individual has already developed a relationship with the organization through a microsavings account and has made consistent deposits, the organization may view the account holder as a more substantial candidate for a microloan. For the account holder, the benefits may be even more evident, including security of the funds, insurance in case of life’s uncertainties, convenience and the ability to access liquid assets for other investments.
Several best practices have emerged in recent years to help individuals, specifically those from low-income households, save liquid assets at an incremental level. Many of these models are manifesting in international locations among the world’s very poor, but may be relevant models for American organizations and financial institutions that aim to improve household savings and boost economic security.
In India, for example, Cashpor targets individuals below the poverty level and offers opportunities to open and contribute to microsavings accounts. Cashpor personnel meet one-on-one with new clients and enroll them into a savings account using the individual’s cell phone. The newly enrolled savings account holder may then make deposits into their account at any time using their cell phone. Deposits can also be made directly to Cashpor staff since they visit account holders on a regular basis. The ease of this enrollment process allows 250 new enrollees to open savings accounts each day.
A trend in branchless banking to boost microsavings has also been used in Sri Lanka, where the National Savings Bank sends mobile banking accounts to markets, festivals and schools—places where targeted savers are already spending their time. Personnel from the National Savings Bank also collect small amounts of money door-to-door for their account holders.
Another model has emerged in India where the National Bank for Agriculture and Rural Development has created self-help groups—joint savings accounts comprised of up to 20 individuals. These groups save money collectively, and individuals making regular contributions into the fund have access to loans from the savings account—thereby forging a connection between the traditional financial structures and an informal community model.
The United States
The movement toward microsavings is still developing considerably across the U.S. Until recently, a large amount of the small-savings programs have been built around saving toward specific goals, such as homeownership or education. These programs have been a powerful tool for spurring investments into the accrual of specific assets. However, a declining personal savings rate still persists. Today, traditional financial institutions have an opportunity to harness the power that microsavings presents to change the savings culture in the United States, to open the door for individuals to invest in themselves and to provide a considerable service to their clientele.