The state of Americans’ retirement savings is dire — one in four Americans have no retirement savings at all and even those who are saving aren’t saving enough.
Financial education is more important than ever, and more school districts across the country are beginning to add financial literacy courses to their curriculums. But these courses are not catching on as quickly as they should be. According to the U.S. Financial Literacy and Education Commission, only one-third of adults could answer at least four of five financial literacy questions about mortgages, interest rates, inflation, and risk. Why is it still so hard for people to think long-term about money?
Biologically speaking, humans aren’t wired to think decades into the future about our needs.
“For the vast majority of our history we lived in hunter-gatherer societies, where resources were plentiful and all you could take with you is what you could carry, so we’re not really hardwired to collect more than we need for the next day or week. The concept of delaying gratification and saving for the long, distant future is just not something we are wired to do.” — Brad Klontz, financial psychologist, author
Leveraging the power of artificial intelligence (AI) and digital tools, we can start to change that mindset. In fact, it’s already happening and has the potential to save the financial health of a country.
AI technology is poised to completely overhaul our finances, giving smart banking apps the ability to automate our budgeting, saving and investing. Machines can think deeper and differently than us, but it requires trust to work. Taking that first dive into a pool was scary. Your first bicycle ride was scary. Fear of the unknown is extremely common, but once we face our fears and realize that AI can help free us from financial anxiety, we can all relax a bit.
Every American deserves the right to put their finances on autopilot. While this ideology might seem odd to ordinary people, the top 1% have no problem handing their money over to expensive financial advisers: “here, you figure it out.” Meanwhile, they sit back and enjoy lofty returns. Now we have so many great apps and financial tools at our disposal that anyone, from retail workers to artists to digital nomads, can have the luxury of an automated financial life, where bills, saving and investing is handled for them.
How can AI fix our brains — and make us financially fit?
Remember when your mom kept reminding you to do your chores until you did them? This same principle works with “digital nudging,” which was used to help people save for their retirement. What’s a nudge? In the mid-1990s, Schlomo Benartzi and Nobel laureate Richard Thaler developed a program called “Save More Tomorrow” that sent informative emails to help people make smart decisions for retirement. Through the power of these nudges, Benartzi and Thaler were able to get employees to gradually increase their savings rate over time. As of 2017, it has positively affected over 15 million Americans.
Another example is from the Obama administration. More than 800,000 military service members were offered the chance to enroll in a savings program, as a part of an experiment. One group received emails with smart steps they could take toward saving. These included examples of how small contributions could lead to large balances in their accounts. The test group got no guidance or digital nudges. The group with the email nudges had the highest enrollment rate. Through the power of AI technology and machine learning, we can provide even better, more personalized and insightful nudges to millions more Americans, who can then make more prudent decisions around saving for retirement.
Artificial intelligence nudges may look different for different people, and can be as simple as a reminder to save an extra few hundred dollars if spending is low. They can also be suggestions to put money saved into a conservative brokerage account and watch your money grow. When people are shown how compound interest works 5, 10, and even 20 years down the line for instance, they’re more likely to take action and start saving. We just need that little nudge to do it. And with smart banking apps, you don’t have to do anything once you set the goals and agree to start saving. The app does that for you automatically, and even calculates how much to allocate and for how long, which eliminates headaches and stress.
While our brains might not be wired to think long term about savings, we’re certainly smart enough to learn and change as human beings. Financial literacy does not have to just be something we learn formally in schools. It can be learned by doing, and using technology tools that can accelerate the process so we can all live financially healthier lives.
Andy Taylor is chief executive of Douugh, a fintech startup that helps people manage and grow their money autonomously.