“I had to use my card. It was damn near $300. But that put me back, because that came out of my rent money. [I was able to make rent], but I had to pay a late fee, which was only $25, but that could have been used towards my cable bill, my Internet bill.”

—North Carolina State Fair Worker

Even as the economy recovers, unemployment decreases, and median income rises, millions of households in the United States continue to barely scrape by. For years, society has placed the responsibility for financial shortcoming on the individual: a character flaw. But behavioral science shows that it’s really a failing of the broader system: a design flaw.

In 2015, we launched the Common Cents Lab, supported by MetLife Foundation, to explore these system failures, and develop innovative and implementable solutions to measurably improve the financial well-being of low- to moderate-income households in the United States. Here’s what we’ve found.

The Deck Is Stacked

The current financial system and tools are not designed for the modern worker in modern society. Most mainstream financial products are built for long-term, salaried employees with regular income, predictable expenses, and plenty of free time. Consider:

  1. Most loan payments and household bills are due monthly, despite the fact that almost 70 percent of businesses pay their employees weekly or bi-weekly.
  2. The most successful retirement products are offered through employers, but more than 30 million full-time, year-round workers don’t work for an employer that offers one.
  3. Mortgages and other loans are often approved based on a prior month’s income, but the income of most 1099 contractors (like Uber and Lyft drivers, and freelancers) varies significantly month to month. A given paycheck can net up to 10 times more or less than the one before that, making a prior month’s income an unreliable predictor of yearly income and ability to repay.

These clear mismatches amplify existing psychological barriers that already prevent people from making optimal decisions. For example, humans have evolved to overvalue the present and procrastinate on decisions that benefit our future selves. This was helpful when our survival depended on focusing on the here and now, but less helpful now that we expect to live beyond our working years.

Nature vs. Nurture

As social animals relying on visual cues, we naturally spend our money on the visible, like cars and clothes, rather than the invisible, like savings balances. Understandably, these psychological impulses are hard to control, especially when the backdrop is a poorly designed financial system. This begs the question: Should we try to change the human or change the environment?

In the last few years, attention has slowly begun to shift away from attempting to fundamentally change human psychology toward changing the environment to account for the psychology. Researchers have successfully applied insights like generating better mental frameworks for budgeting, reducing the friction to sign up for benefits programs, and making the right behavior the easy choice.

This process has already demonstrated three ways in which we can guide behavior: 

1. Build better mental models.

When we receive a large sum of money, we sometimes fail to account for opportunity costs. Opportunity costs are what we give up whenever we make a decision. This means we may spend more than we intend to spend, because we don’t think of all other things we could do with that money instead.

Our team suspected this was happening for Supplemental Nutrition Assistance Program (SNAP) participants, who receive their benefit in one lump sum every month. We analyzed anonymous data for SNAP recipients and found out that on average, they spend 80 percent of their SNAP budget in the first nine days after receiving their benefit.

In partnership with Propel, an app that shows SNAP recipients their remaining balance, we were able to help families stretch their benefits two additional days simply by reframing their benefits as a weekly budget rather than a monthly one. This helped households better understand their available funds and encouraged considerations of trade-offs between food items—a clear way to tweak the environment to account for human psychology.

If this were rolled out to all SNAP recipients in the United States, it would result in an additional 92 million meals each month. But SNAP benefits are not the only subsidy delivered in a lump sum. In 2013-14, community colleges disbursed federal Pell Grants to 8.6 million low-income students. The majority of colleges dispense Pell Grants only once a term. These colleges could help students make better use of their funds by changing disbursement frequency and re-framing Pell Grant refunds into shorter timeframes. MDRC, a nonprofit education and policy research organization, is currently exploring this idea through its Aid Like A Paycheck program, where students receive funds in multiple disbursements to better match expenses.

2. Reduce friction costs.

Friction within a system has costs to financial well-being. Even small barriers to good decision-making can significantly demotivate people from completing an action. For example, many people desire to save a portion of their tax refund but find it difficult to do so once they actually receive the funds. Having the cash in hand creates a barrier to saving, because the temptation to spend is at its peak.

How can we reduce these barriers? We worked with a company that enables automatic savings and asked users what percentage of their tax refund they would like to save. Half of these users were asked at the time they received their refund and the remaining half before they received their refund. The group that pre-committed roughly doubled savings by making a decision ahead of the point of friction. This low-cost text intervention helped thousands of people save a portion of their tax-refund, totaling more than $1 million in savings.

The SNAP program provides another example of ways to reduce small barriers. Twenty five percent of eligible SNAP recipients do not apply. This equates to 13.4 million people who are qualified but not receiving benefits. While it’s easy to say these people don’t want the benefits, the reason is more likely the high friction costs of the application process, which requires an average of 6.1 hours to complete and 2.2 hours of travel time.

Based on our experience with tax savings, we hypothesize that by streamlining the application process for SNAP, we could significantly increase the number of qualified people receiving benefits.

3. Increase friction costs.

Ironically, some financial decisions benefit from increasing small barriers versus reducing them. Consider that in the United States, 68 million people are either unbanked or underbanked. Most of these households operate in the cash economy, which means that on payday, they are likely to cash their entire paycheck. Having the whole paycheck in one’s pocket makes it harder to think of financial trade-offs, such as choosing between brand-name food versus generic food, or a coffee at Starbucks versus coffee at home. It is also harder to say no to the social pressures of family members asking for a loan or kids asking for a treat.

We worked with the Latino Community Credit Union (LCCU) to increase the number of members depositing a portion of their paycheck into an account rather than cashing it entirely. LCCU asked members intending to cash a check to fill out a check cashing slip. On this slip, we suggested they deposit some of it into an account. About 10 percent of the check cashers decided to deposit an average of $167 because of this small change that introduced a point of friction. When fully scaled, this piece of paper could potentially increase deposits into accounts by more than $2 million each year.

The Future

In an age of constant distraction and temptation to spend, in which our technology makes it easier than ever to complete a purchase, and when many of us experience nontraditional or volatile income, it is no surprise that savings and responsible financial -making can suffer. Fortunately, behavioral science has shown that small details within our financial system can have an outsized impact on how we manage our money. By understanding human psychology, we no longer have to overcome it … we can leverage it. This will aid us in designing financial products and services that ultimately benefit us all.