A short press notice from Monday caught my eye. It featured another slightly spurious survey on the thorny subject of savings and investment. The analysis came from the Foresters Friendly Society and its obvious aim was to generate more interest in their ISA based products. But the bottom line conclusions from the report absolutely rang true to me.
The key, utterly unsurprising, observation was that even if most ordinary folk had the spare money to invest for the long term, they probably won’t – they’d rather spend it on a holiday. Dig around inside these kinds of studies and one finds a daunting combination of behaviour based issues – favouring short-term immediate gratification over long-term abstinence – and more mundane practical economics. In no particular order of importance I’d repeat my core analysis of the savings problem:
- The savings rate is low because most people simply cannot afford to save much at all. We under-estimate the incredibly high standard cost of living in a modern, highly taxed, expensive, consumerist society where repairing a car can cost a week or a month’s wages…where a new iPhone costs more than many people earn in a week or two…and where housing costs are egregious and growing more outrageous by the day, especially if you are renting.
- No amount of judicious tax subsidy will fundamentally alter the situation – ladelling out huge tax subsidies on to savings based wrappers is a prime example of misguided government thinking centred around incentives based policies
- Even if most people had more money to save, they probably wouldn’t use it invest in anything remotely ‘risky’ or at least risky in their frame of reference i.e the stockmarket or casino capitalism as its known to most people
- Any spare capital will be deployed to housing
- When it comes to retirement, my contention is that most people think that somehow or another the government will bail them out. Their rational side says this can’t be true (how will it be paid for?) but their more emotional side simply assumes that a decent society won’t let the pensioners of tomorrow starve. And of course they are right. Somehow or another the government will be forced to intervene – whether we think it creates a moral hazard or not.
Note from Foresters Friendly Society
“Short term saving is dominating Brit’s savings habits, with two in five (35%) prioritising saving for a rainy day fund over any other financial milestone, according to the latest sentiment research from Foresters Friendly Society.
The findings reveal that less than a third of consumers (29%) view saving to provide a retirement income as a priority, while around a quarter are prioritising saving for a holiday (26%). This long term saving gap is particularly significant amongst millennials (those aged between 18-34) who stand most to gain when thinking longer-term, where saving for retirement ranked even lower on their list of priorities with just 16% building up ‘nest eggs’ for their future.
This short-termism is reflected in their savings choices, highlighting a significant lack of understanding when it comes to deciding how best to achieve these financial goals. More than a third (34%) of UK adults use a standard savings account as their preferred way to save while 27% opt for cash ISAs and 15% just use their current accounts. In the current low interest environment, none of these vehicles is likely to deliver significant returns but shares based options, best suited to early saving, offering the potential for superior returns are not being embraced in significant numbers, with take-up of the Lifetime ISA at 9% and Stocks and shares at just 10%.
This attitude calls for improved education, amongst younger savers particularly, on the importance and benefits of saving early in order to avoid them hampering their future saving progress. Fewer than one in ten (9%), for example, are taking advantage of the benefits from the Lifetime ISA (LISA) which was developed specifically to help those under 40 years old achieve their long-term savings goals.
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