Problem

When Americans receive a tax refund, it is an incredible opportunity to put aside money to save because that money is typically not already allocated to other expenses. How can we get Americans to save more of their tax refund rather than spend it?

Research

People are likely to make better long-term decisions if they pre-commit before they have to face the consequences of that decision. We predicted that using a commitment device, which allows people to commit to saving before they even received their tax refund, would increase the amount of saving.

With the support of the MetLife Foundation, we partnered with Digit, a financial technology company which works to encourage saving. In the control condition, we sent a message to users asking what percentage of their tax refund they would like to save. This message was sent once Digit detected that they received a tax refund in their checking account. In our treatment condition, we sent the same message, but before the user received their tax refund. In both cases, Digit automatically saved the self-reported percentage when the funds were deposited into the users’ checking account.

Results

Among all people that texted back (including those who did not want to save anything), individuals in the treatment condition who were asked about the percentage they would like to save before the money was received saved 15% of their tax refund on average compared to 10% of those who were asked after the refund hit their account (control condition). Among the users that saved more than 0%, the treatment group saved 27% compared to 17% in the control group.

Why it matters

Commitment devices are a great way to make use of present bias for our own advantage. A commitment device is particularly useful for ensuring individuals to think about long-term savings. If you can pre-commit to saving later on and make the implementation process automatic, you’re far more likely to actually end up saving than if you decide when the money is in your hands.

Note: This project was possible through the Common Cents Lab initiative, supported by MetLife Foundation

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