Pivoting in Crisis #6: The impact on savings culture

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30 March 2020

About pivoting in crisis

As the Covid-19 outbreak continues to spread behaviours are continuing to change. Just as the 2008 crash saw the birth of thousands of new businesses, Covid-19 will undoubtedly mean pivoting marketing strategies and ways of working. Several of the changes that coronavirus is causing will create new consumer needs. It is these changing needs that we are highlighting in this ongoing content series. In this piece we’ll look at how savings culture was changing before Covid-19 and some of the ways the outbreak may impact those changes.

No longer a nation of savers

Britain used to be a nation of savers. Our grandparents told our parents to “never buy what you can’t afford” and to “put a little something by for a rainy day”. And then our parents told us. The idea was that we in turn would tell our kids, and so on down the line.

But, somewhere along the way, these old ideas were undermined by a perfect storm of social, political and economic factors. These included the rise of consumerism, the widening availability of credit, loss of trust in banks and other financial institutions, short- and longer-term political and economic uncertainty, the continuing rise in house prices, the introduction of student loans, austerity and wage stagnation and historically low interest rates, among others. The net result of these factors was an unprecedented shift in mindset. The UK is now a nation of borrowers.

Our new thought-piece “Building a new culture of saving”, looked at the prevailing evidence to come up with some suggestions for how to create a society shift towards saving and away from borrowing. The report looks at seven key factors that characterise the current situation:

  1. The level of savings is in long term decline
  2. Efforts underway to encourage savings from both the public and private sectors
  3. The shift to a higher debt culture may be permanent
  4. Efforts are also underway to discourage excessive borrowing
  5. The financial industry has been in turmoil
  6. Innovative new approaches such as Open Banking have had partial success in creating a new environment of trust and transparency
  7. The industry is rightfully now asking how to reverse these long-term trends

The impact of coronavirus

And then, suddenly, the world changed. Our report was written prior to the outbreak of Covid-19. We recognise that the outbreak is creating profound changes in consumer behaviour across all areas of life, and this will more than likely include saving activity. Some of these changes may be temporary, while some may be permanent. We’ll be tracking these changes as the outbreak progresses but already some of the likely push and pull factors for future savings activity post-Covid are starting to become clear.

Money in and money out

The debt equation (or viewed from the other perspective, the savings equation), contrasts sources of income with routes of expenditure. When the second exceeds the first, we borrow. When the first exceeds the second we can save.

  • Money in: income from salaries and benefits, secured debt in the form of mortgages and secured loans, unsecured debt in the form of credit cards, unsecured loans, payday and doorstep lenders and other sources such as the bank of mum and dad, inheritances and other windfalls and side hustles.
  • Money out: non-discretionary spending such as rent, utilities, food and discretionary spending such as eating out, holidays, clothing and even higher education

The current lockdown is having differential effects for individuals as far as the debt equation is concerned. Some have already suffered layoffs (such as the staff at Cineworld), while others (such as staff at BA, Gatwick Airport and H&M) have the threat hanging over them(link) and the government has pledged to cover wages up to 80% to try to stave off layoffs (link).

Different types of savings

It is usual to sub-divide savings into different types based on the amounts of money involved and the uses for which they are intended. Pre-corona we had seen that the overall level of saving has declined over recent years, it also seems that the declines were being seen across the range from short-term to longer-term savings:

  1. Rainy Day Funds: Savings put by to deal with one-time, smaller, unforeseen expenditure e.g. car servicing, new boiler, etc.
  2. Emergency Funds: Savings built up to take account of profound changes in circumstances e.g. redundancy.
  3. Shorter-term Goals: Saving for specific goals that are 1-5 years out, such as a car purchase, a major holiday or the deposit for a home purchase.
  4. Longer-term Goals: Saving for non-specific goals that are 10+ years out, such as retirement.

Naturally, we’d hypothesize that people will be dipping into the first two of these and potentially taking a “savings holiday” from the last two.

Factors that might suppress savings activity

There are a number of aspects of the current situation that may make saving less feasible, less attractive or where the normal, regular savings activity that consumers had put in place are simply now not working as well. These include:

  • The current situation may be interpreted by some as showcasing the profound unknowability of the future and make some feel that long-term, goal-oriented saving is pointless if such efforts can be totally undermined by events outside their individual control.
  • Layoffs and salary reductions have already begun. Clearly those affected will be more concerned with day to day money management than longer-term savings activity.
  • The Bank of England cut interest rates to their lowest ever level (0.25%) on March 11th in an emergency move to shore up the economy (link) making the returns available to saver even less motivating.
  • So-called rounding-up apps/features work by rounding up purchases to the nearest round number and sweeping the excess amounts into a savings account. With people making so many fewer purchases, the sums saved via this mechanism are bound to have fallen significantly.

Factors that might drive greater savings activity

However, there also some aspects of the current situation that may, in theory at least, make saving more feasible and more appropriate as an activity. These include:

  • With consumers in lockdown, so many of the routes to discretionary spending are (temporarily) closed off to them. They are going out less (or hopefully not at all), eating out less, shopping for non-essentials less and commuting less. In theory at least, this leaves more in the pot at the end of the month to be saved.
  • The outbreak may have demonstrated to people the vital importance of having an emergency and/or rainy-day savings fund

Reasons why savings activity might not change much

And lastly, there may be some people whose savings activity is able to continue more or less uninterrupted, for example, if they have not been affected to salary loss or reduction and are inclined to allow previous regular savings mechanisms (such as deduction at source or standing orders) to continue.

Looking to the future

 Only just over one week into lockdown, it is still too early to say definitively how these competing drivers will net out, either on a societal level or for us as individuals. How we feel about our money, our lives and our longer-term goals “after” will depend on a subtle blend of factors: what we were aiming to achieve pre-outbreak, how our financial situation has changed because of the outbreak and harder to gauge variables such as the state of our individual and collective psyche.

As we said earlier, we’ll be tracking these changes as the outbreak progresses and will look to update the report in due course.

If you would like further insight and ideas on the savings world then you can download a copy of “Building a new culture of saving“.

What next?

As the story of the coronavirus outbreak continues to unfold, new challenges will emerge and these, more than likely, will also represent the need for brands to quickly pivot to support a society under pressure. We’ll be continuing to explore more impacts of the coronavirus outbreak so be sure to check back in from time to time.

This article was written by Nick Chiarelli, Head of Trends at Unlimited Group. 

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