Independent Research and Policy Advocacy

The conundrum of short-term savings

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With a mission to empower the newly banked towards financial wellness, at Dvara Money, we provide a comprehensive wealth management service based on the principles of suitability and thoughtful curation. We leverage technology and deep customer insights to deliver focused personalised experiences at scale. As part of this blog series, we will share insights from the field and our experiences as we undertake our efforts to provide financial access to the newly banked.

Choice Paralysis

The phenomenon of choice paralysis is far too prevalent and far less acknowledged – by customers and providers alike. Choice paralysis or analysis paralysis occurs when a person becomes overwhelmed by the abundance of choices offered to her, and she ends up being ‘paralyzed’, and thus no course of action/decision is undertaken. The related concept of ‘paradox of choice’ has been propounded by psychologist Barry Schwartz in a book by the same name. He argues that contrary to the utilitarian or rational economic adage of higher choices leading to higher wellbeing (or ‘happiness’) for users, however, in reality, too many choices increase the anxiety and pressure in end users.  In a study asking users to taste jams, it was found that respondents reported higher satisfaction levels when faced with a limited set of options (Iyengar and Lepper, 2000)[1].

We observe that in financial services, the decision for a product uptake is often left with the user. The provider will disclose what is considered as relevant information and leave the decision making to the user. Taking an informed decision in these cases involves comparing products across various dimensions including – returns, risk, reputation, duration, ticket size and performance. While some users can efficiently measure across these dimensions, many are left with choice paralysis. There is a feeling of being overwhelmed by the number of choices, and due to the fear of making the wrong choice, the user ends up not choosing anything. We often see this manifesting with savings, specifically short-term savings. Not only the variety of savings instruments are numerous, but also the options within each instrument group pose an additional challenge to an individual wading their way through the sea of options – more so when he or she is a first-time investor.

Default instruments

We observed in the formal employment sector through external stimuli such as government-mandated provident fund contributions, salaried individuals do have avenues to build a corpus for their long-term goals such as retirement savings, children’s higher education, children’s marriage. However, their short-term savings positions are limited and are often less than 6 months of one’s expenses. Specifically, in the case of Provident Fund (PF), while it is a recommended low-risk long term investment instrument, it is not advisable to consider the PF investment as a buffer in case of emergencies because of the longer lock-in period and complex withdrawal process.

In discussion with some of our users – salaried individuals residing in urban areas working in formal employment, between the ages of 25 to 40 years – we found that almost 80% of the individuals we interacted with (260 in total) had less than 6 months of expenses in a liquid, easily withdrawable savings instruments[2]. These are individuals with a range of savings instruments choices available to them including bank accounts, fixed deposits, mutual funds, savings with the Post Office, chit funds and gold. Yet, it was not a question of access but usage and uptake. 16.5% of the users said they have no savings at all, no savings to tide over an emergency, leading to credit being used as an expensive substitute. We also acknowledge that the choice not to save and preference of some expenses also play a role in the low short-term savings; however, these are subjective choices beyond the scope of this blog.

Short term savings products that offer stable returns and unrestricted withdrawals are suitable for emergencies and foreseeable, planned expenses. Thus, these savings should not be subject to the volatilities seen in a stock market. By default, most consumers use their Savings Bank Account to park their short-term savings. However, the lack of physical and mental compartmentalisation of the funds results in the savings being consumed for other expenses. People tend to earmark funds for specific expenses or savings and tend to stick to the labels that they have attached themselves, knowing fully well that money is fungible and can adapt to any function[3]. Embedding the aspects of mental accounting as well as help in framing the choices to ensure the least cognitive overload, will have an instrumental role to play in designing a successful savings product for users.



[1] Iyengar, S. S., & Lepper, M. R. (2000). When choice is demotivating: Can one desire too much of a good thing?. Journal of personality and social psychology79(6), 995.

[2] In the engagements mentioned above, we share a form to help respondents know and gauge their Financial Wellbeing, through a few qualitative questions.

[3] Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral decision making, 12(3), 183-206.

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