Envelopes, Jars and Tagging: On financial management behavioural psychology
Tuesday, August 18th, 2009Last week I took some time out of my day to talk with Nick Southgate (Grey) and Victoria Murray (IPA) about Behavioural Economics. Specifically we talked about choice architecture and how this reflects my day-job. I could, and did, talk about default setting on transactional forms, page hierarchy, button sizes, pupil dilation and all sorts of strategies experience designers deploy to assist (and, let’s be frank, hoodwink) our users. Whilst I’ve got a good grasp of the behavioural side, the economics does continue to confound me.
I’m not great with money, but I like organising things. I can’t remember when it was that I got a copy of MS Money, probably around 2002, but it co-incided with my increasingly web-based life. At that time NatWest’s site was an HTML-skinned translation of their internal systems and as such was largely designed by bankers for bankers and consequently a grind to use. Time-outs, slow, paginated statements and nothing that could really pass for analysis or interrogation existed. To this end I’d download as much data as I could and import it into Money. Putting aside the usual Microsoft prejudices, this was actually software that worked. It allowed me to flip to and from accounts, associate spending to categories, identify trends, budget, calculate interest and so-on and so forth.
The strongest element of this management for me was the assignment of categories. Before this point I kept this kind of stuff in my head: “I’ve taken about £50 out in cash this month”, “about £100 in groceries this month”, “£1000 of my savings is allocated for my bike/laptop/holiday” and so on.
If it turned out that I wanted a laptop costing £1200 and I had £700 in savings and £600 in my current account I could technically afford that laptop, but I wouldn’t buy it because, in my head, I only had £700 in the allocated savings account.
This was (it appeared) no different to putting coins in a piggybank – easy to deposit, hard to extract. Or allocating three cookie jars for deposit bits of your pay to rent, bills and food. If the food jar is empty, you tell yourself you can’t raid the bills jar – even though there’s money in there to feed you… This is a common strategy, it’s called bracketing (Soman & Cheema) or Envelope System (ostensibly ‘invented’ in The Great Depression)
Banks, largely, don’t let you do this online at-source. Well, they do if you count opening up different accounts. When my wife and I moved into our first owner-occupied place this year we started a process of bracketing by consolidating and creating accounts to deal with joint savings, personal day-to-day spending, personal savings and day-to-day expenses – not to mention investments and shares. This is clumsy and annoying. It means some are tax efficient, low-access accounts, some are distinctly not. What happens – even with MS Money to keep track – is that money that could be earning better interest doesn’t move in to the savings accounts until we have time to do it or – as happened recently – current accounts approach overdraft because nominally-protected savings haven’t been used to prop-up unusual spending patterns.
[Aside: I once heard a colleague talking about a sweep account where all his current account surplus was swept into his savings at the end of every month. A superb nudge, why don't all banks offer this?]
This strategy has been shown to be used by gamblers too. Winnings go in to a different coat pocket than their stake money, taking from the winnings pocket is a physical objection that increases the level of consideration to give the gambler a fighting chance of keeping their habit under control.
I’d assumed that I was doing this in MS Money too, allocating money to ‘cash’, ‘rent’ etc. surely, the same thing? A virtual cookie jar right? Nope. As Chris Peterson so rightly puts it, this is not the same. It’s ex post facto. I’m allocating the monies having already spent them, analysing and tracking my behaviour rather than using strategies of bracketing and assignment to modify that behaviour. Ok, so there’s some overlap; by knowing I’ve a budget of £100 cash per month, seeing I’ve spent £70 is helpful to reign in the next trip to the ATM but it’s still essentially a mental barrier. It’s diagnostic, not preventative.
So, on to the solution (and hat-tip once again to Chris though the answer did rather suggest itself). My online bank should allow me to allocate jars/envelopes/brackets. I could see my total account balance as allocated to my identified needs: a balance of £5000? £100o for the mortgage, £1500 for this month’s bills, £1000 for the holiday savings. So, I’ve got £1500 to play with this month? Well, last month you spent £400 on day-to day costs … so that’s more like £1100. Not quite enough for that MacBook Pro yet…
Each of these brackets could be intelligent, based on that post-analysis of your spending. They could be temporal, expiring once a time limit is reached, or rule-driven based on the achieving a financial goal. How strict these brackets are can be user-defined, do you allow one bracket to take from another under given conditions? Perhaps after asking you, ‘are you sure’? The equivalent of hiding the alarm clock on the other side of the room to make it harder to hit the snooze. This is information architecture, it’s choice architecture. It’s the taxnomic organisation of your finances and no bank is doing it in-house.
Sure, you can, of course, sign-up to online services such as Mvelopes promising this kind of functionality but who wants to do that? Why complicate the experience? I wouldn’t sign-up to Google Mail and then find a third party to manage my folders and mail rules. So, instead of blithering on about Mint et. al to financial clients and pointing out analysis capability they’re missing out on delivering, perhaps we can identify some territory that they could actually own … that is if they have the agility & appetite to do so.








