The cost-of-living crisis has made it more important than ever to budget carefully. In his last article, Jonathan Hollow reviewed progress banks have made in offering budgeting tools that their customers can choose to use. Now, he asks whether they can and should go further. And he has a “modest proposal” for Chancellor Rishi Sunak to consider.
Politicians get into all sorts of trouble when they tell voters to learn how to budget. And when times are bad, they get into even more trouble, as Lee Anderson MP recently discovered. He told Times Radio, “There are generations of people there who simply haven’t got the skills to budget properly and go shopping and do a proper weekly shop, like we did back in the day.”
Soon, people were pointing out that on top of his MP’s salary, he has claimed more than £200,000 a year in expenses, so he probably didn’t need to be as careful as ordinary people about costs. And so maybe wasn’t the best person to lecture them.
But it’s a sign of the sheer urgency of the times that politicians are now talking about this subject. The lack of budgeting skills among the general population is a perennial problem, and one that requires a long-term view and a bold approach. Given that the scope of a “Dormant Assets Scheme” is undergoing a rethink, which will unlock billions from unused accounts, perhaps now is a very good time for Chancellor Rishi Sunak to think big about budgeting tools for beginners.
Do people really need help budgeting?
This is a question that was asked again and again when I worked at the Money and Pensions Service. People with the smallest incomes are frequently very good at budgeting. They have to be. The biggest confusion with the budgeting debate is when it is offered as a solution to poverty. It clearly isn’t. The best solution to poverty is money.
Does that mean, however, that the UK doesn’t have a budgeting problem? No, it certainly does have one. The 2016 Financial Capability Survey found that four in ten UK adults said they didn’t have a household budgeting approach that worked well. For the 12.7m adults in the lower middle income groups, this rose to five out of every ten. That’s tens of millions of people who said they either don’t budget at all, or feel they could do it much better. (These figures are a little long in the tooth now, but they change very slowly. I’m very confident that the 2021 survey, whose data is sadly still behind closed doors, will paint a similar picture.)
My take on the budgeting challenge for the UK is that it significantly affects people who are at the lower end of “middle” incomes, who are just about getting by, but for a variety of complex reasons, bump in and out of overdrafts or short-term loans — without ever quite getting on top of what’s going on. (In fact, that’s an accurate description of me in the early part of my working life.) The challenges faced by these millions of people are indeed a big issue at the heart of the nation’s financial wellbeing.
Because budgeting is the beating heart of a healthy financial life. Only if you spend less than you earn, will you be able to save for your future, and create some buffer against financial emergencies. Charles Dickens put it memorably in David Copperfield:
“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Enough of the lectures!
The other question often asked about budgeting that I came across in my former job was “Don’t people already know they need to budget?” And I think that by and large the answer to this is “Yes, but we don’t always do what we know we need to do.” And here’s where I will follow the analogy with pension auto-enrolment, to create space for my modest proposal.
For decades UK politicians and financial leaders lectured the general population about the fact that the state pension would not be enough for their retirement. They needed to save more, and invest it in the stock market. Simply put, this lecturing was a grand failure.
So the debate moved on: as to whether, as in Australia, saving for your retirement should be made compulsory. In the end, a remarkable half-way house was found. And it’s been a great success.
Auto-enrolment — a nudge with an opt-out
The UK’s programme of “auto-enrolment”, which began in 2012, has completely changed the retirement saving landscape in the UK. Working people are now enrolled into pensions savings automatically by their employer. The employee contributes at least 5%, and the employer at least 3%.
But the employee can choose to opt out.
Before the programme began, the big debate was how many would choose to opt out, and many suspected most people would. The answer is: far fewer than anyone ever believed.
The results, as the House of Commons Library recently described them, have been transformational:
“The rollout … from 2012 onwards has led to a tenfold increase in total membership of defined contribution occupational schemes, from 2.1 million in 2011 to 21 million in 2019. Actively contributing membership rose from a low point of 0.9 million active members in 2011 to 10.6 million members in 2019.”
There are still plenty of problems to be addressed. The self-employed are not included. An 8% contribution, while much better than nothing, is still probably not enough. The labyrinthine complexity of the pensions system, the rollercoaster nature of the stock market, the asymmetry of information between consumer and provider – all these are still considerable problems for savers to overcome. In fact, so huge that Robin Powell and I have written a whole book to help consumers navigate them, which will be forthcoming from Bloomsbury in the autumn.
But I’m not going to get lost in those issues now. The big picture from pensions auto-enrolment is that a grand nudge with an opt-out worked. So why can’t we try to address the budgeting issue in a similar way, through our banks?
Ryan’s journey
Imagine Ryan, who’s 20. He’s had a bank account for a few years, but he’s never had a regular wage – until now. So his employer asks for his bank account details for their first BACS salary payment. Ryan lives with his mum and dad, and doesn’t have too many outgoings right now. But although he doesn’t know it, his first salary payment is going to transition him into financial adulthood. This is how.
- The employer, when setting up the bank details, ticks a box that automatically flags to Ryan’s bank that this is a “first salary payment”.
- He receives a welcome pack from the Money and Pensions Service.
- It explains how he is going to be auto-enrolled to help him budget.
- It explains that each month, set percentages of his salary will now go into three bank accounts set up in his name. The percentages will be based on national averages, so he may need to tweak them.
- It explains why there are now three accounts, and how best to use them.
- It explains that he can opt out completely, or fine-tune the approach by changing the percentages going into each.
- It also highlights sources of financial information and guidance, and includes some helpful spending tips.
- His employer also offers a 1-hour zoom-based training session at work which explains the auto-enrolment approach and answers any questions he has.
- Ryan’s bank has by now created the three accounts in his name. As well as having account numbers, they have highly visible names. One is called Ryan’s Everyday Spending. One is called Ryan’s Bills. And the third is called Ryan’s Savings. He receives three brightly branded spending cards, with the names writ large on each one, and even some punchy top tips for each account.
- Any regular bills payments are moved automatically by his bank to be paid from his Bills account. But if any of these monthly payments would take the total going out each month over the amount automatically coming in, the bank does not transfer that mandate. It writes to Ryan to let him know of any mandates it left behind, and why, including the overspend they would create. It tells him that if he tweaks the amount going into his bills amount by X%, all his bills can be covered.
- By default though, when Ryan’s first BACS payment hits his bank, 60% of his net salary goes into Everyday spending, 30% goes into Bills, and 10% goes into Savings.
- All the guidance and support is all aimed at helping Ryan to use these accounts for their three named purposes, and to encourage him to track the headline figures in each account. This will help him to keep his spending and saving on track.
In essence, it gives him a budget with three headline figures at any one time.
And that’s my modest proposal.
Ryan now has three prominent financial jam jars for the key components of his financial life. He knows why they’ve been set up, and he can choose to get rid of them completely … or he can now learn to get better and better at using them in the way that they were intended.
Of course, it would be better if this were not needed, and Ryan chose to learn how to budget on his own. Just as it would have been better if auto-enrolment for pensions were not needed. But it was, and I believe this is too.
You cannot be serious!
Just as when auto-enrolment was first proposed, the objections to this approach are legion, and the nay-sayers always start with the upper hand. But we know that auto-enrolment worked, and I don’t see why this approach couldn’t be made to work too.
- “You’ll sow financial chaos by applying a common rule!” Well, this objection was raised to auto-enrolment too. By automatically taking a slice of people’s salary at source, two problems were created. The first was that people would get less net salary than they expected to, and the second was that nobody could say how much it was “right” for people to save. But in both cases, a one-size fits all solution, with opt-out, has been much better than the preceding problems.
- “Ryan will end up with 30 or more dormant accounts as he changes banks and employers over a lifetime!” No, he won’t. Technology can solve that. It’s a simple matter of the banking system knowing, through connected metadata, that his salary goes into one bank account. Rules can be established that will stop the system spawning unwanted accounts every time Ryan changes job. In fact, with some careful thought, I suspect that the combination of legislation and technology required to put this proposal in place could help the banks to tidy up the millions of dormant accounts that bug them, leading to some handy cost savings.
- “What about everyone who is already working?” Two approaches could be taken to this. The first would be to treat this as a long-term game, and only apply it to people entering the workforce. The positive effects would ripple through the population, but only slowly. The other could be to auto-enrol people of later ages gradually and carefully, learning as you go. I don’t feel strongly about either. A pilot (see below) would tell us what is best to do.
- “More of the nanny state!” Well, you can’t argue with ethics and philosophy that take this angle, but I see this proposal as using the cheap benefits of technology to help solve deep-rooted societal problems, without compulsion.
- “Think about the expense for the banks/employers!” That would need careful analysis. For example, with the banks: first there is consideration of the profitability of the banks generally, and how much this would cost them. Why are our banks so profitable, and what do they do with their profits? Second, there is the question of how much banks spend supporting customers who get into bad financial habits, and how much this nudge would shave off those costs.
I certainly believe that this type of approach could only be rolled out after a large pilot in which every aspect of it was tested: the technology connections, the user journey, the naming of the accounts, the training sessions, the colours of the cards … it would all need to sing in harmony and prove that it truly benefited consumers, before committing the financial services system to substantial expense, and the Government to legislation.
Such a pilot would be costly. But if this system worked (as I believe it, or something very like it, would) the UK would leapfrog from a country whose citizens have, on average, very middle-ranking financial capability, to a world leader … all by using consumer psychology and smart technology. The pilot could be paid for out of the Dormant Assets Scheme, which recycles money from dormant bank accounts. And this Dormant Assets Scheme was recently under consultation for expansion.
Auto-enrolment into a budgeting system would certainly not solve all the financial capability problems people experience in the UK. But it would establish a fundamental bridgehead to solving a key issue that affects tens of millions of people.
What do you think of my modest proposal, Mr Sunak?
JONATHAN HOLLOW worked for the UK Government’s Money and Pensions Service and is a writer and commentator on consumer education and protection.
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