Save now, pay later, a debt-rimental focus?


Managing money effectively is challenging for anyone. Contrary to conventional wisdom or, perhaps the prevailing, ideologically informed mental model those with less are often better at managing what money they have. To put it another way, the better off may be pretty bad at money management but have more room for manoeuvre - or ‘slack’ - than those with less.  

Everyone needs help but how do we develop genuinely inclusive products and services that attend to the specific contexts and needs of the more and less advantaged? We certainly need to do better than just say people need to be educated in ‘financial literacy’, whatever that might mean. A productive starting point might be the mental models that we have about money.

Money and mental models

Mental models are referred to in many different disciplines including UX, Human Computer Interaction, ‘social neuroscience’ and Computer Science. They refer to representations of certain phenomena based on individual or shared beliefs. Mental models may be inaccurate and are often ‘fuzzy’, based on ‘gist-based intuition’ and heuristic decision-making but they’re also really useful most of the time

Understanding mental models and designing accordingly is something that many people and organisations have been doing for some time. Mental accounting - the idea that we allocate money into individual ‘accounts’ and treat it differently depending on source or use - is a well known mental model.  An appreciation of this model has informed many different financial products and services including the “robo-saving app” Acorns and other similar products like Qapital, Moneybox, Squirrel, Chip and Plum, to name just a few. There is a huge amount of activity in this area but it’s not clear the extent to which these kinds of products and services are genuinely inclusive.

From asset accumulation...

In the international development context, savings vehicles are often assumed to be effective in supporting excluded groups like the unbanked. However, the evidence suggests that even when unbanked individuals are offered free bank and savings accounts and given assistance in opening the accounts, they’re often not used, at least partly because of the need for liquidity and easy access to cash.

Admittedly this is a specific population in a specific context but it’s instructive that interventions with greater long-run impact for this population employ features like lockboxes and commitment devices which restrict or penalise withdrawals from designated savings accounts. Despite the apparent specificity of the context this is clearly something that the inclusively minded, like Monzo, have been looking at for some time and offers a promising opportunity as seen in the recent partnership with the Money Advice Service and the Financial Capability Lab.

To debt decumulation…

Asset and wealth accumulation via controlled saving and better budgeting is clearly valuable. However, for many, particularly the less advantaged it may be that debt decumulation is a more relevant focus. Furthermore, we already have some idea of the mental models associated with debt-related behaviours, for example, people tend to allocate credit card repayment by matching the share of repayment on their credit cards to the share of balances on each card rather than focussing on interest rate.

Clearly asset accumulation and debt decumulation are not mutually exclusive but the latter is perhaps less of a focus for financial innovation than it might be. As such, this seems to be a real opportunity area for financial inclusion. Financial innovators might ask themselves both what effective debt decumulation interventions look like and how to develop products and services that effectively identify the relative importance of asset accumulation and debt decumulation for the user.

Mindset Reminders

  • Almost everyone struggle with money management but those on lower income have less room for error

  • Understanding and leveraging mental models around money may be a useful starting point for designing inclusive products and services

  • Asset accumulation is a valuable focus of financial innovation but debt decumulation may be an equally, if not more important focus for the least advantaged.

Chris Perry