Microsaving, the key to an economic downturn
How do you blow $10,000 a year? Easy. Just spend an unnecessary $27.38 a day.
If that sounds outrageous, then consider this. The average American spends over $3.00 a day on coffee and an additional $1.59 on alcohol, just to name a few of our unnecessary splurges.i
And if you think you can afford daily pleasures like these, you might change your mind when you do the math and realize that those simple creature comforts are costing you over $1,600.00 annually.
It’s enough to send a cold shiver through your budget, if you have one, but that’s the other thing. According to Christian Ruppe, CEO of Monotto, most people don’t.
Ruppe started Monotto as a quest to automate money management, so he knows more than a little about people’s spending and saving habits.
“Obviously, there is a group of people that create a budget and follow it very well,” says Ruppe. “As long as they stick to the budget, when unplanned expenses come up, they are fine.”
However, as Ruppe is quick to point out, most people don’t see the need.
“It’s similar to your physical wellbeing,” he says. “If you are willing to work out every day and have a great diet, we can all agree that you will be pretty healthy, but for the majority of people, it’s a lot to do.”
And it isn’t just the physical aspect of working out that keeps people on the couch. It’s the emotional and mental equations that occur in the brain as individual’s struggle with the idea of exercising.
“In the end, most people just really don’t understand why it’s necessary, until they step on the scale and see they’ve gained several pounds” says Ruppe, “And it’s the same with saving money. People don’t understand the need until faced with a crisis situation.”
Why A Crisis Underscores the Need to Save
Thanks to Ruppe’s extensive research into the human side of money management, he has come to understand the typical attitudes toward spending and saving.
“Most people look at their bank account balance and mentally determine how much they expect to go out and come in over the course of the near future.”
This mental calculation allows them to determine how much they can spend at any given moment, according to Ruppe. But what happens when the unthinkable occurs?
A survey conducted by Charles Schwab reveals that fifty-nine percent of Americans live paycheck to paycheck, and only thirty-eight percent have built up an emergency fund.ii When a major unexpected expense occurs, be it a surprise medical bill, car repair or household expense, there is no way to pay for it. This is when the need to save gets real for most people.
However, saving money is a little trickier than scare tactics and financial shocks. The Charles Schwab study also reveals that nearly 44 percent of respondents are buried under credit card debt,iii and for many, that means saving less, or nothing at all.
It all goes back to those mental gymnastics we talked about earlier. If someone knows they will be making a $100 payment on debt, they aren’t going to be thinking about tucking a $100 into a safety net.
So Ruppe developed RoboSave based on the mental attitudes most people have about spending and saving. RoboSave automates saving by tracking income and spending patterns, and then slyly moving funds that aren’t needed into savings.
According to Ruppe, RoboSave changes not just a person’s attitude about saving, but also the decisions they make based on the information available.
“If a savings program, like Monotto’s RoboSave, is taking out $5 every few days, when that individual looks at their checking account and sees that they have $80 instead of $100 or more, perhaps that person decides to spend only $10 or $15 dollars on their night out instead of $30 or $40,” says Ruppe.
“If we can beat them to the punch, before they spend it, their lifestyle doesn’t need to change. They are still making decisions in the same way. However, they are in a much better financial position and are much better prepared to handle unexpected situations that are going to come up.”
The key is RoboSave’s ability to adjust to the user’s financial patterns. As someone spends less, RoboSave quietly tucks away a few dollars more each period into savings. According to Ruppe’s investigative sleuthing into the psychology of money management, most people can stomach the idea of saving only a few dollars a day, even if it adds up to several hundred dollars by the end of the month. The process even has a name: microsaving.
Microsaving then becomes not only critical to prepare for an economic downturn, but also a way to continue saving when money is tight. Setting aside even $20 a week pays off over the course of a year, but also encourages a pattern of more responsible money management, and that’s the crucial point when the going gets tough.
ii “2019 Modern Wealth Survey.” Charles Schwab Corporation, 2019. Retrieved from: https://www.aboutschwab.com/modernwealth2019.
iii “2019 Modern Wealth Survey.” Charles Schwab Corporation, 2019. Retrieved from: https://www.aboutschwab.com/modernwealth2019.