Duration: 10/01/2008 to 09/30/2013

Administrative Advisor(s):

NIFA Reps:

Non-Technical Summary

Statement of Issues and Justification

Need: In 2006, consumers coped with dropping home prices for existing housing and large increases in energy prices. The unemployment rate remained fairly stable at around 4.7% in 2006. Credit card delinquencies were starting to creep back up from the recently lower levels. Inflation edged slightly higher but was expected to moderate in 2007 (Strauss & Engel, 2007).

Continuing a decade long trend, the rate of personal saving of American households is declining. In June 2007, personal saving as a percentage of disposable personal income was 0.6 percent (Bureau of Economic Analysis, 2007). Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.

Families that lack adequate savings can find it difficult, if not impossible, to achieve and maintain long-term financial stability. Without a financial cushion, families have little protection against the adverse effects of income loss due to unemployment, long-term illness, or disability or death of a primary income earner (Schuchardt, 2002). Insufficient savings can also have adverse consequences for the community. Home or business ownership, important elements in the economic viability of local communities, are difficult to achieve without savings (Schaeffer, 2002). In times of economic downturn, loan default or bankruptcy become more likely among those who have not been savers, shifting the burden of economic loss to the community.

In response to these pressing concerns for the future well-being of American families, this project was developed with a goal to better understand the complexities of savings behavior. What are specific barriers and encouragements for saving? What motivates different types of people to save? How do socialization, personality characteristics, environmental factors, knowledge, and demographic realities impact savings behavior?

The research focus fits within the broader land-grant communitys educational and research priorities. USDAs Cooperative State Research, Education, and Extension Service (CSREES) includes financial security as one of its system-wide educational initiatives. The stated goal is for people to acquire the knowledge, skills, and motivation to build financial security. Programs focus on behavioral change, starting with achieving financial self-sufficiency, then stability. The ultimate goal, financial security, is the cornerstone of prosperous communities, nurturing neighborhoods, and strong families. (http://www.csrees.usda.gov/financialsecurity.cfm)

Furthermore, this study relates directly to Community Vitality, a national research priority of the Agricultural Experiment Station Committee on Organization and Policy. Financially secure families are better able to contribute to their local economy by owning homes, starting businesses, and avoiding bankruptcy. In this respect, family financial security is a cornerstone of community economic viability.

Importance: The negative savings rate raises critical issues for U.S. households. First, there are concerns about the inability of the Social Security trust fund to pay promised benefits for future retirees. Second, employers continue to shift greater responsibility for funding retirement and health care to individual households. Third, inadequate savings leaves families extremely vulnerable to economic set-backs such as illness, disability, death of a primary wage-earner, and unemployment. Therefore, it is extremely important that families save for their later years in order to have adequate resources to meet needs and achieve their desired quality of life.

The renewal of this project will support scholarship addressing this critical issue of minimal savings in specific segments of the U.S. population - low and moderate income households. While much research describes overall savings behavior of U.S. individuals and households, little is known about what motivates the decision to save. Why is it that some people, regardless of income level, current asset accumulation, education background, and other factors, are avid savers and others are challenged to set aside any money for tomorrow?

This project is also important for its potential disciplinary contributions. Specific disciplines have approached the study of savings behavior through their respective theoretical lenses. Sociological studies of money management have centered on demographic characteristics such as age, gender, family composition, and social class (Lea, Tarpy, & Webley, 1987; Livingstone & Lunt, 1993 Mullainathan & Thaler, 2000), ignoring economic or social-psychological aspects of saving. Economists have focused on observed behaviors, ignoring or minimally addressing internal motivations for savings. These disciplinary blinders have made it difficult to gain a comprehensive understanding of the multiple factors affecting savings behavior. Consequently, there is a need for interdisciplinary research that recognizes that saving is an economic decision made within an existing social context, influenced by life-cycle demands and the psychological characteristics of the saver (Gutter, Wang, & Way, 2007). This study attempts such an interdisciplinary approach, examining economic, psychological, and socio-cultural factors that influence saving.


Technical Feasibility: The focus of NC1013s preliminary research was to develop an instrument to measure savings behavior that included psychological as well as economic factors that could influence savings behavior. A pilot study was conducted in 2006 during the first term of NC1013s project. The mail survey data collection instrument was tested with a small convenience sample of participants. Subsequently, the research team concluded that the length of the instrument and associated data collection costs for a national random-sample design was prohibitive. Our approach needed to be more incremental.

First, we streamlined our conceptual model to include only those economic and psychological factors that were conceptually distinct and were highly salient to our outcome variable of savings behavior. Second, we agreed to begin with a focus on a particular segment of the population  low and moderate income people  for whom the lack of savings renders them particularly vulnerable to economic crises. Third, we added additional factors to the model, such as socialization, environment and resource considerations, that are particularly salient for low and moderate income household economic behavior.

It is important to note that we are currently in negotiation with a highly probable funder to underwrite this population-focused study. While regional representation and some randomization will be pursued, this generally will constitute a convenience sample as the population is the customer base of a large financial service provider. The teams long-range goal is to pursue funding for a national random sample in order to be able to speak generally about the U.S. population savings behavior.

Critical Multi-State Approach: This research can best be conducted as a multi-state project. Economies and family realities differ from state to state, from region to region, and from rural to urban. Therefore, to design a useful research study, multiple perspectives and expertise-bases must be considered. A multi-state, multi-disciplinary team greatly increases the likelihood of an effective study design. Ultimately, the involvement of researchers and Extension educators in many states fosters development of nationwide partnerships for research dissemination and the development of educational programs that promote savings behavior.

Potential Impact: This project represents the first known attempt to examine the combined effects of economic, psychological, and cultural factors on savings behavior in the United States. Including all these measures in one study will provide us with a more comprehensive understanding of savings behavior than has previously existed. There is a need for interdisciplinary research that recognizes that saving is an economic decision made within an existing social context, influenced by life-cycle demands and the psychological characteristics of the potential saver.

This more comprehensive understanding of savings behavior will be a strong base from which to develop, implement, and evaluate educational initiatives designed to increase financial literacy and promote savings behavior. Educational programs delivered through the land-grant systems Cooperative Extension Service mainly focus on the development of important financial management skills. Rarely do those programs address underlying psychological factors which could be contributing much to the lack of savings behavior. Understanding which of those critical factors are salient to changing savings behaviors could lead to enhanced effectiveness of our educational initiatives.

Additionally, study results can be used to recommend public policy initiatives and suggest new or enhanced financial products and services for consumers. Finally, findings that contribute to a more comprehensive understanding of how psychological and economic factors combine to influence savings behavior will fill a major gap in the savings behavior research literature.

Related, Current and Previous Work

Existing theories of saving largely focus on middle and upper income households (Beverly, 1997). These theories are typically classified in four categories: neoclassical economic, psychological and sociological, behavioral, and institutional. A brief explanation is provided for each theory while noting the features of the theory that are more applicable to upper income households.

Economic Theories
Neoclassical economic theories of saving assume that individuals are rational beings who seek to maximize pleasure and minimize pain. Utility is assumed to be a function of consumption. It is assumed that individuals must make choices between current and future consumption. The two most well-known neoclassical economic ideas are the life cycle hypothesis (Ando & Modigliani, 1963) and the permanent income hypothesis (Friedman, 1957). These two theories assume that households are primarily concerned about long-term consumption. If current income is reduced below average expected lifetime income, households will decrease their savings, and borrow to finance consumption. The saving or borrowing to finance consumption is usually linked to the life cycle stages (such as younger, midlife, and older households). Saving for retirement is believed to be a primary motive. The permanent income hypothesis focuses on permanent and transitory income instead of current income and resources over the lifetime. Friedman (1957) claimed that households were more likely to respond to changes in permanent income instead of transitory income. Empirical analysis based on this theory would need to identify both permanent and transitory income.

From these theoretical perspectives, individuals who are at mid life (in their 40s, 50s, and 60s) will be more likely to save than those who are younger or older. Also, full-time, year round employees are more likely to have access to employer-sponsored pension plans. Although the life cycle and permanent income theories imply that saving is inversely related to wealth, Beverly (1997) challenges that notion and suggests that wealth may be either positively or negatively related to saving for low to moderate income households.
Behavioral economic theories of saving such as the theory proposed by Shefrin and Thaler (1988) are modifications of the life cycle hypothesis of saving. These approaches suggest that individuals create their own incentives and constraints. For example, people are able to exert self-control to limit current consumption. Furthermore, they are assumed to adopt rules of thumb to simplify their economic behavior. However, they might fail to regulate their economic behavior because of conflicting goals, poor monitoring, or resource depletion.

Institutional theories of saving contend that household saving is affected by the institutional process by which saving occurs. An example would be purchasing a home to receive the tax deduction for mortgage interest or saving in a retirement plan sponsored by an employer.

Psychological and sociological theories of saving assume that saving may be affected by changes in tastes and preferences and by the effect of stimuli and conditions. These theories allow for the effect of family members, peers, motivation for saving, and past savings experience on savings behavior. Further, Katona (1951, 1975) an economic psychologist, proposed that savings behavior was influenced by both the ability to save and the willingness to save. He observed that people might be motivated to save although they were financially unable to save while others who were able to save might not be motivated to save.

Psychological Factors
In addition to economic approaches, psychological factors such as self-control, impulsivity, perfectionism, and materialism have been found to influence other consumer actions and may also be important in savings behaviors.
Self-control: Psychologists often use the terms self-control and self-regulation interchangeably. The terms refer to the individuals capacity to alter his own states and responses. Recent psychological studies have described self-regulation as a limited resource available to individuals. For consumer behavior, self-control represents the capacity to resist temptations, especially those relevant to expenditures that are likely to be regretted in the future (Baumeister, 2002).

Impulsivity: Impulse buying and compulsive buying have been linked to different types of failures in self-regulation. In a series of studies, Vohs and Faber (2002) found a negative relationship between self-control and impulse buying. That is, participants with depleted self-regulatory resources were willing to pay more for goods and to actually spend more money and buy a larger number of goods impulsively as compared with others. In one of the few studies directly relating psychological variables to savings, Romal and Kaplan (1995) found a significant association between scores on a self-control scale and personal savings.

Impulsivity is the personality trait of acting in an uncontrolled a versus controlled manner. People at the control end are cautious and sensible; they postpone immediate gratification. Impulsive people on the other hand are spontaneous, reckless, and careless. They tend to be less future oriented and therefore tend more toward instant gratification. Those who are more impulsive are likely to spend more and have a harder time saving. Prior research has shown that more impulsive people engage more in impulse buying behavior (Youn & Faber, 2002).

Perfectionism: Perfectionism refers to the desire to set and achieve high standards for oneself. Perfectionism has been found to be a characteristic of compulsive buyers (Faber, 2000; OGuinn & Faber, 1989). Perfectionism may be related to a failure to save. People may set unattainable goals, and, when unable to meet them, give up or spend money in an effort to soothe themselves.
Materialism: Materialism refers to the beliefs held by individuals about the importance of material goods in their lives. Richins and Dawson (1992) attempted to measure the extent to which individuals believe that acquiring possessions is necessary to live a successful life. Family structure appeared to influence material values. Rindfleisch, Burroughs, and Denton (1997) found that young adults who had grown up in disrupted households were more likely to be materialistic than those from intact families. Since materialism can affect savings behavior, this variable may help explain differences in savings by household or family composition.

Self-efficacy: Self-efficacy refers to the belief that an individual can accomplish goals and succeed at the behaviors they attempt (Bandura, 1977; Sherer, Maddus, Mercandente, Prentice-Dunn, Jacobs, & Rogers, 1982). People avoid tasks that they feel are beyond their abilities (Bandura, 1977). This construct has been shown to be important in both the initiation and maintenance of behavioral change (Bandura 1992). Self-efficacy is likely to also be important in explaining peoples willingness to engage in savings behaviors. Individuals may want to save, but fail to do so because they believe they will not be successful in this effort.

Knowledge and Skills: In addition to psychological traits, an individuals knowledge and skills related to financial management, particularly for those with limited disposable income, may be an important factor in whether or not her/she saves. Beverly (1997) suggested that low and moderate income households with less financial knowledge and understanding will have lower saving rates.

Money Attitudes: People perceive money differently. Researchers have examined money attitudes and financial behaviors. Yamauchi and Templer (1982) developed a psychometric Money Attitude Scale (MAS) that measured five factors related to the attitudes individuals hold towards money: power/prestige, retention time, distrust,quality, and anxiety. Several researchers have conducted studies using this scale (Englelberg, & Sioberg, 2006; Gresham & Fontetot, 1989, Medina, Saegert, & Gresham, 1996, Roberts & Sepulveda, 1999, Tokunaga, 1993; Yang & Lester, 2002). Consumers' levels of trust and anxiety are factors in the types of financial investments they are willing to use and the amount of risk they are willing to embrace.

Linking Economic Theories and Psychological Factors

Time Preference: Time preference (the opportunity cost of trading present for future utility) may represent a bridge between the economic concept of utility maximization and psychological constructs measuring impulsiveness or impatience. Frederick, Loewenstein and Odonaghue (2002) estimated individual rates of time preference and confirmed the ability of time preference to explain preference for durable goods that enhance future welfare, choice of a healthy diet, educational attainment involving a conscious reduction in present utility to increase future well being. Research by Finke, Huston and Weaver (2003) confirmed the relative importance of time preference as a predictor of household net worth. The time preference factor explained less variation in net worth than household income; however time preference was stronger than all demographic characteristics, such as race, as a predictor of wealth.
Low income individuals tend to have lower life expectancies; therefore, they may believe there is less need to save for retirement. The time preference of low income households might differ from upper income households because low income households are unable to trust the promise of future rewards. However, Beverly (1997) also argued that because of their limited resources, low income households may be more patient than upper income households. Feelings of helplessness (perceived lack of control) might explain why low income households have lower saving rates.

In general, the aforementioned theories appear to better describe the behavior of upper income households than of low and moderate income households. The life cycle hypothesis and the permanent income theory assume that individuals can project what will happen in the future and that they are able to behave rationally and exhibit self-control. If individuals have low or moderate earnings or irregular employment, it is more difficult for them to manage financially. Low and moderate incomes also limit opportunities for people to increase their human capital. Increased human capital would allow them to expand their future earnings, thus enabling them to save or increase savings.

Family Level Influences Related to Savings Behavior
Socialization related to savings behavior might be low or non-existent for low income households if they did not observe saving behavior in their families of origin or by peers (Feld, 1981, 1982; Fischer, 1982; Marsden, 1990). Moreover, there may be few incentives for low income households to save because interest rates for small amounts of savings could be low and saving options may be limited.

Community, Culture and Race Influences Related to Savings Behavior
Beverly (1997) indicated that the characteristics of a neighborhood such as access to financial institutions or concerns for safety might influence the savings behavior of low income households. A 2006 study using the 2004 Survey of Consumer Finances found that education, income, and having contact with more financial institutions were usually influential in the likelihood of ownership of home, investment, and retirement assets for both Black and white families (DeVaney, Anong & Yang, 2006).

Savings behavior could also be influenced by cultural norms. Savings could involve a different pattern of asset accumulation such as shared resources for extended families. For example, in the Hmong culture, resources within the clan, a large extended family network, are available to clan members for asset purchases (Koltyk, 1998).

In summary, the willingness to save of low and moderate households is likely to be influenced by several factors or the interaction of factors and these relationships may be more complicated than for upper income households.

A search of CRIS indicated that no other research project specifically examines the savings behavior of low and moderate income households. There are four projects at different stages that examine retirement savings. The projects are focused on specific groups such as residents of Nebraska, farm women, and recipients of child support. This proposal would not duplicate any of these studies that are underway. (See Retirement planning: Macro-environmental and life situation factors D. Sharpe, PI; Well-being of women in analysis of savings, off-farm investment, and tax-deferred retirement accounts of farm households A. Mishra & M. Morehart, PIs; Enhancing human society: Child support, family savings and health care access and quality M. Arends-Juenning, A. Beller, A. Lyons, P. McNamara, & U. Neelankantan, PIs.)

Objectives

1. To examine a subjective measure of savings behavior by low and moderate income households
   
2. To examine objective measures of savings behavior by low and moderate income households
   
3. To evaluate the impact of socialization factors, financial knowledge, environment, resources, psychological factors and demographics on the objective measures of savings behavior by low and moderate income households
   
4. To examine interactions among factors that are expected to influence subjective and objective savings behavior by low and moderate income households
   

Methods

Brief description of methods 1. During the annual meeting of the research team in July 2007, the current model of savings behavior was reviewed and adapted to include measures of socialization, financial knowledge, the environment, and resources in addition to the measures of psychological and economic factors that were already components of the model. 2. A preliminary version of the survey was pilot tested in 2006 with a small sample of respondents. Because a convenience sample was used, the results were not used to test the model. Instead the results provided evidence of the clarity and consistency of questions. The results led to a shortening of the survey and clarification of several questions. 3. After seeking funding from several sources during 2006, the team concluded that a change in focus to a survey of low and moderate income households (instead of a sample of all households) would provide the most useful outcome. Identifying this new target audience resulted in a tentative agreement with an institution to fund the research. 4. A subcommittee will meet with the potential funding institution during September 2007 to develop plans to sample about 2,000 of the institutions clients who represent low to moderate income households. The sample will represent several geographic areas in the United States. The sample will include respondents from rural, urban, and metropolitan areas. 5. Data will be collected using a mail survey using guidelines established by Dillman (1978, 1991). The proposed statistical methods include descriptive analysis, factor analysis, structural equation modeling, and multivariate regression. 6. Findings of the study will be used to guide development of educational programs and public policy recommendations related to savings behavior of low and moderate income households.

Characteristics of population and sample This study will focus on low to moderate income working households. Saving to achieve goals and handle large expenses or emergencies is believed to be more challenging for these households than for upper income households. Also, it is expected that low and moderate households are more vulnerable to job loss and other income interruptions than upper income families.

The sample would consist of at least 2,000 households. With this sample size, the results are expected to lie within two standard deviations of the mean response. The standard census designations will be observed: counties with more than 50,000 population are considered metropolitan, counties with between 50,000 and 2,500 population are considered urban, and counties with less than 2,500 population are considered rural. The research team will work collaboratively with the funding institution to identify the sample of clients.

Data collection The Research Committee will contract with an independent data collection agency (such as the University of Wisconsin Survey Research Center) to sample, collect, and clean the data for the project. An outside data collection agency is preferred to ensure that the instrument is administered uniformly and to increase efficiency in administration and data collection. Mail surveys are less biased than telephone surveys (with declining response rates and inappropriate for longer surveys) or interview surveys (very costly and difficult to control interviewer bias). Using a mail survey allows respondents to answer questions at times they find convenient, to have time to think about their answers privately, and to refer to their personal financial records before answering questions.

It is anticipated that the data collection agency will undertake the following activities: a. Collaborate with the research committee and the funding institution to identify the sample. b. Mail the survey following guidelines suggested by Dillman (1978, 1991). The survey center would mail the survey, a letter, and an envelope to each address that was identified as being part of the sample. One week later, a survey thank you and reminder postcard would be sent to each contacted respondent. After an additional week, the survey center would mail a second copy of the survey, a cover letter, and instructions for survey completion. If a monetary incentive is used, the incentive would be sent with a thank you and notification of receipt of the completed survey. c. Offer suggestions for further refinement of the instrument before administering. The psychological scales have been previously tested in psychological research. Other guidelines that will be followed include putting questions in a logical sequence, using the proper format for answering, having an easily read layout with clear and concise statements, and not going beyond what is reasonable to expect for people to respond. d. Conduct initial data cleaning/coding. Care will be taken to chronicle what is done.

Data Analysis: The committee as a whole will be involved in data analyses. Descriptive analysis will be used to examine the socialization factors, financial knowledge, environment, resources, demographic characteristics, and measures of savings behavior of the sample. Factor analysis will be used to examine the scales of the psychological constructs. Regression analysis and structural equation modeling will be used to examine the relationship among all of the factors in the model and the subjective and objective measures of savings behavior.

Survey Instrument Measures Development of the survey instrument has been a collaborative effort of members of the research team. Major components of the model are: socialization factors, financial knowledge, environment, resources, psychological scales, demographic and economic factors, and measures of savings behavior. a. Socialization includes questions about the influence of parents or guardians, whether parents or guardians were savers, having a savings account during childhood, exposure to sources of information, the amount of effort in seeking information, and attitudes toward money. b. Financial knowledge measures include understanding of the time value of money, saving for emergency, inflation, investment growth, and level of comfort in managing finances. c. Environment includes a list of events that might have occurred during the past two years such as: needing emergency repairs, being late in paying bills, costly medical expenses, unemployment, natural disaster, vandalism or terrorism, major life changes such as birth, death or divorce, and an increase in the cost of housing. d. Resources include current job status, job security, spouse or partners job status and job security, likelihood of obtaining funds from a variety of sources for an emergency, insurance coverage, home ownership, and business ownership. e. Psychological measures include: scales for self-control, perfectionism, impulsivity, materialism, and self-efficacy. f. Economic measures include goal setting, having written plans, risk tolerance, time horizon, income, debt, and assets. g. Demographic factors include age and marital status of respondent, sex, education, race, health, household size, and religion.

Hypotheses It is expected that respondents who save or who save relatively more, as compared to those who do not save or who save relatively less, 1. will have more socialization in regard to saving behavior 2. will have higher levels of financial knowledge 3. will have higher levels of income and wealth 4. will have a lower rate of time preference 5. will have lower levels of debt 6. will be at mid-life 7. will have full-time employment 8. will be white 9. will have fewer family members to support financially

Regarding psychological variables, it is expected that respondents who save or who save relatively more, as compared to those who do not save or who save relatively less, 1. will have more self-control 2. will have a higher level of perfectionism 3. will have low impulsivity 4. will have a higher level of self-efficacy 5. will have a lower level of materialism

Measurement of Progress and Results

Outputs

• Analyzed survey results; manuscripts, outreach publications
• A theoretical model that indicates which factors (socialization, financial knowledge, environment, resources, psychological and economic factors) are related to subjective and objective measures of saving.
• Recommendations for developing educational programs or materials to assist low and moderate income households to increase the likelihood of saving or the amount of savings.
• Recommendations for policies related to increasing savings of low and moderate income households

Outcomes or Projected Impacts

• Understanding of savings behavior in low and moderate income households
• Understanding of specific factors that contribute to ability and/or willingness in low and moderate income households to save
• Improved educational programming to empower low and moderate income households to start saving or increase their savings

Milestones

(2008): Obtain funding for targeted sample data collection Collect data

(2009): Analyze data Write/publish manuscripts and outreach publications Submit proposals for presentations

(2010): Obtain funding for national sample Collect data from national sample

(2011): Analyze data Write/publish manuscripts and outreach publications Submit proposals for presentations

(2012): Write/publish manuscripts and outreach publications Submit proposals for presentations

Projected Participation

View Appendix E: Participation

Outreach Plan

The results of the study will be made available through articles in appropriate journal articles and conference proceedings and through refereed and invited presentations at local, state, regional and national conferences. Along with the answers to the research questions, writings will focus on an explanation of the conceptual model, recommendations for educational curricula, and recommendations for future research. Because several team members hold Cooperative Extension appointments in their respective states, in-service workshops and related lay publications will also be developed and/or modified. This multi-faceted strategy will allow for a wide dissemination of research results and subsequent learning to diverse audiences across the country.

Organization/Governance

The Technical Committee follows a standard leadership structure and decision-making process. The chair convenes the monthly conference call meetings and the annual meeting. S/he is the primary contact for the administrative liaison and CSREES representative. The secretary records minutes of the conference call meetings and submits reports required by AES. Co-chairs of the research sub-committee give primary leadership and oversight to the research process, e.g. instrument development and liaison with the data collection agency and serve as co-principle investigators for any grant funding at their respective institutions, etc. Various members assume leadership for important tasks such as developing report drafts, meeting with funders, assembling data from members of the team, etc. A set of guidelines for data access, writing, and co-authorship is under construction.

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Attachments

Land Grant Participating States/Institutions

DE, GA, HI, IN, KS, MD, MN, MS, OH, PA, UT, VA

Non Land Grant Participating States/Institutions

California State University, California State University, Northridge, Emeritus Collaborator