Would you rather - a cricket match, a new phone, or your future savings?

This week we delve into how youth think about money and savings. Can we cultivate an aspiration to save among young people?

Would you rather - a cricket match, a new phone, or your future savings?

In the 1960s, a Stanford University professor conducted an experiment with a group of children that would become known worldwide as the "Marshmallow Experiment." At its core, the experiment tested one simple thing - the ability to delay gratification. The children were given a choice: they could eat one marshmallow immediately or wait 15 minutes without eating the first marshmallow, and they would receive a second marshmallow as a reward. Surprisingly, only 33% of the children succeeded in resisting immediate consumption.

Today young people often find themselves surrounded by numerous temptations and faced with decisions between instant satisfaction and long-term rewards. The appeal of instant indulgence such as purchasing the latest smartphone, a cricket match, going on shopping sprees, signing up for new subscriptions, or frequent dining out easily overshadows the advantages of saving money for future goals.

This speaks to a larger trend among young people - a yearning for experiences that are authentic, exciting, and unique. They're willing to spend big bucks for something that can't be found on a screen or through a delivery app. In a survey by the social media platform Moj, they found that 77% of young Indians spend the most on mobile phones and apparel. Of which, Over 65% of young Indians use personal funds for such purchases, while 26% seek financial help from friends & family and 7% rely on loans.

The way young people negotiate this tension between satisfying immediate desires or thinking long-term plays a critical role in shaping their financial wellbeing. But what influences these decisions?

How do youth think about savings?

In his book Money Mindset, Vishal George talks about 'Money scripts', as a way of thinking about money. That we think about money in relation to our values, beliefs, and experiences. These money scripts can greatly impact a young person's financial decisions and behaviours, including their attitude towards saving. It is intriguing to ponder how these money scripts may be interconnected with the aspirations that young people hold for themselves in terms of achieving certain goals.

Looking at economic theories provides different perspectives on young people's savings behaviour. The Life-Cycle Hypothesis suggests that individuals plan their savings over a lifetime, with young people expected to save less. Such theories offer insights into saving behaviours, but real-world complexities, like parental influence and personal money-management skills, impact how young people save(Otto and Webley, 2016).

So, let us look at the existing research.

According to Webley and Nyhus (2006), saving is often seen as a form of delayed gratification, with young people viewing it as a way to achieve future consumption goals, gain financial independence, and cope with potential future economic constraints. However, saving can be challenging for young people, and their attitudes towards it vary greatly depending on factors such as self-efficacy, perceived difficulties with saving, and conscientiousness.

In their paper, "Saving, Selling, Earning, and Negotiating: How Adolescents Acquire Monetary Lump Sums and Who Considers Saving", Otto and Webley characterize the financial behaviour of adolescents as a balance between the desire for immediate gratification and future planning. They found that there is a significant correlation between age and the propensity to save, with younger children focusing more on negotiating with parents than older adolescents. Otto and Webley also discovered gender differences, with females more likely to save than males, but this does not seem to impact the actual amount saved. Interestingly, the researchers found that a young person's general saving tendency is influenced more by individual psychology than any particular source of income, suggesting that the propensity to accumulate wealth is more a matter of personal habit rather than economic circumstance. Additionally, they found that adolescents who exhibit a general tendency to save were more inclined to cut back on spending when confronted with an income constraint. This implies that forming a "saving habit" early in life can facilitate better financial management decisions.

Can we cultivate an aspiration to save?

Spending is easy and aspirational, but saving is not. This is because spending is often associated with immediate gratification, while saving requires delayed gratification.

In the book, Money Mindset explores the psychological factors that influence savings behaviour in young individuals. The author emphasizes the importance of not only talking to youth about money but also witnessing how to manage their money effectively. He suggests that exposing young people to social proof - saving behaviours from their parents, siblings, or other members of the community, can help foster curiosity, attention, and interest in financial matters.

Another way to encourage young adolescents and youth to save is by encouraging them to set goals and create incentives for saving, or by helping them to think about their future selves. However, it is not clear whether these methods are as effective for young people as they are for adults.

Such questions become particularly relevant as we observe the growing trend of an ageing population. In addition, It is worth noting that India's gross savings rate has declined from 36.9% of GDP in 2010-11 to 30.2% in 2021- 22. Additionally, approximately 60% of total savings are invested solely into non-financial assets such as gold or real estate.

While there has been some research on the cultural and contextual factors influencing savings, there is still much we don't know. Further investigation is needed to identify effective strategies for promoting savings in different contexts. A greater understanding of these factors could lead to more targeted and effective policies and interventions to promote financial stability and well-being.

Until we uncover more effective strategies for promoting savings habits, I'd like to leave you with this video that has the potential to sneakily encourage you to save for a more secure financial future.

For further insights, you can also refer:

  1. Book - Money Mindset
  2. Book - Psychology of Money