April 15 – Tax Day – is almost upon us, and the occasion generally elicits a wide range of emotions. For some who owe taxes, it’s a day filled with dread; but for those expecting to get a monetary return back from the government, they can’t file their taxes soon enough.
In this regard, many people treat tax returns almost like a bonus: as “extra” money that exists outside the boundaries of their normal expected monthly income. Indeed, many use a tax return to treat themselves to some kind of luxury that would typically be outside their budgetary constraints (like a TV or a nice dinner). But why not save it? According to the Internal Revenue Service, the average tax return this year is coming in at just under $2,000 – that would make a huge dent in setting up some initial savings.
The instinct to spend is most likely due to what is called the “windfall fallacy” – the idea that people are psychologically more inclined to spend money they receive “unexpectedly,” or outside their usual income. Because it feels like a gift, people spend it guilt-free. But a tax return isn’t an unexpected good fortune – it’s a return on the amount of money over-paid in taxes throughout the year. And in a world where more than half of Americans don’t even have $500 in savings, wanton spending may not be the best use of a tax return.
This savings crisis is not only a bad thing for personal finances, it’s also bad for the economy. In the event of an economic downturn, such as the Subprime Mortgage Crisis and Great Recession of a decade ago, a lack of savings can lead to mass defaults of loan payments, which can be a great shock to the economic system as a whole. So it’s more important than ever for people to look at this savings problem and find ways to remediate it.
We’ve identified the first step consumers can make – save your tax return instead of spending it! But what about after that? This year, companies are taking major steps to help consumers increase their savings and prepare for their financial future. With that in mind, here are some tips on what your company can build to help your users save more.
- Eliminate bank fees. The average American loses more than $300 per year on bank fees (according to Chime Bank's Bank Fee Finder Summary Report). That’s not an insignificant amount. Even so-called “free” checking accounts offered by banks are usually anything but free. According to a 2017 survey from Cornerstone Advisors, of the 1,555 people polled only one person reported that they didn't pay any checking account-related fees that year.
Luckily, it doesn’t have to be that way. As technology has disrupted financial services over the past decade or so, a new breed of fintechs and digital-only banks have arisen that offer fee-free accounts. In fact, fintechs offering truly free account services are causing banks to rethink their offerings, which is a win-win all around for consumers. By using cost-effective banking as a service platforms to offer fee-free bank accounts, companies can help users save over $300 a year in bank fees alone, which would be a great first step towards helping them build their savings.
- Cut down spending. This seems like an easy one, right? Yet it is so hard to do for many of us. Most people don’t have the time or inclination to track everything they spend money on in a monthly spreadsheet, analyze it and then put a plan into action. But technology can help in this regard once again.
That’s because there are offerings today that can help consumers actively understand their spending habits, not just audit them, which is the key in cutting down. Data analytics tools can identify where too much spending is occurring and offer suggestions to remedy the situation. So, for example, if a budgeting tool let’s a consumer know he or she is spending too much on coffee per month, a limit on spending for that item can be set – with the consumer’s assent – and any transactions over that limit could automatically be declined.
With new solutions in the market that put the data and controls required to build these kinds of experience into companies’ hands, companies have an opportunity to build products that can make managing your spending as automatic as today’s wealth management apps have made investing. By working to build cash flow management tools that help their users both understand and actively cut back their spending, companies can take some of the legwork out of managing one’s finances and help users save on autopilot.
- Earn more on existing cash. The average savings account offered by banks has a .08% annual percentage yield (APY), which isn’t very conducive to building up cash reserves, especially as we have noted that most Americans have very little in savings to begin with. However, with today’s rising rates environment making savings an attractive proposition and with new banking-as-a-service solutions making it easy to offer high-yield savings accounts, companies can start helping their users earn more on the cash they already have.
As users save, their savings start to earn for them, beginning a positive cycle that builds momentum on its own. For those users that are able to save past the initial ‘rainy day fund’ they need, companies can also look to offer customized risk-balanced investment portfolios that improve the yield that user can earn on their cash and help them grow their savings even faster.
Savings has been a problem for America essentially since the Great Depression. There have been many attempts by many different groups to help – but so far none have truly succeeded in closing the savings gap. But now innovative technology exists that can help consumers understand their financial behavior and spending patterns, make their cash grow and ultimately save more money than they ever thought possible.
So with tax day upon us and a refund check (hopefully) approaching, why not start saving smarter with this year’s tax return? Open up a high yield savings account, get rid of your bank fees, and pick your favorite app to help you manage your finances – you’ll find meeting that savings goal might not be as hard as it seems.
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