How Do Savings Contribute to Financial Health?

It’s almost a no-brainer that savings – money set aside or the habit of setting money aside – is an integral part of financial health. But how do savings contribute to financial health, and how do we know? 

As part of Itad’s Savings Learning Lab activities, we reviewed existing research literature on savings to see whether the evidence base supports the assertion that savings contributes to the critical dimensions of financial health, including smooth day-to-day finances, resilience, long-term goals and confidence.

What we found confirmed that savings – especially participation in savings groups -- contributes to financial health. This was not a surprise. The bigger takeaway was a shift in the way we think about savings and savings research. In this post we discuss two mental shifts that convinced us that it’s important to design research on savings using a financial health lens.

Mental shift #1 – Look beyond deposit amounts to how saving fits into financial health

Our review covered many studies of informal or quasi-formal savings groups of various types. These studies strongly concluded that being in a savings group helps people become financially healthier. The benefits, however, derived not just from amassing savings but also from other aspects of being in the group, such as maintaining the ability to borrow, gaining leadership experience through group participation, pursuing economic activities collectively and learning from peers. In fact, we would argue that savings group is not really the right label. These groups are actually financial health groups!  They respond to the holistic nature of financial lives, providing people with a flexible tool that can enlarge a person’s ability to manage their finances in a variety of circumstances.

By contrast, a number of the other savings studies – and sometimes the projects they studied – focused on a single activity and mode of saving, such as increasing balances in a particular savings account. Many studies simply query savings balances, and it is easy to see why. Not only is a savings balance an easily verified, objective indicator, but it is also clearly in the interests of financial service providers and program supporters to know whether a particular intervention – such as door-to-door collection or digitization – increases amounts saved. While valuable to financial institutions tracking their key performance indicators, these studies shed little light on financial health, leaving open the question of whether savers actually benefitted.

These observations took us to mental shift #1: We need to look beyond deposit amounts to understand how savings fit into people’s overall financial health.  Studies on savings should investigate the purpose of savings, such as putting aside money for old age or maintaining future access to credit. They should look at where increased savings come from, whether from simply shifting savings from one place to another, or from surpluses generated by reduced expenditure, or from some other source. With attention to questions like these, research on savings can shed greater light on whether and how savings activities benefit savers.

Mental shift #2 – We don’t know enough about the connection between savings and resilience

While many of the savings studies we found addressed elements of financial health, including day-to-day finances, long-term goals and confidence, few addressed resilience - the ability to meet financial shocks.  Those that did mention resilience focused primarily on day-to-day finances and food security. Many people who live on the lower edge of financial health end up skipping meals or reducing food quality when shocks arise, and several studies concluded that savings led to lower frequency of this type of risky behavior.  

However, in the research we reviewed, little attention was paid either to saving specifically for emergencies or to how people use savings during emergencies. An important area for further study, therefore, is to understand more about how people with and without emergency savings respond to shocks, including the type and frequency of risky behavior they are likely to adopt. We would also like to see researchers address the nature and frequency of shocks people encounter and how they cope. The COVID-19 pandemic has created a surge of interest in resilience, and we are encouraged that more research will emerge in the near future.

Let’s ask more meaningful questions

Our look at the savings literature convinced us that it’s important to design both savings programs and savings research more holistically, using a financial health lens.  In addition, the link between savings and resilience – how savings assists people who experience shocks or bad times – has been under-studied and needs greater focus. Placing this research in the context of individuals’ pursuit of financial health will help us to ask more meaningful questions and ultimately get more meaningful answers as to how savings benefit savers.

Watch the webinar recording on this topic!

The Role of Savings in Promoting Financial Health (16 Jun 2022)