Payroll savings is making regular savings directly from your pay. Thanks to the salary-link you have with your employer, you can specify the amount you wish to save and it will be deducted directly from your wages on pay day.
Why is saving important?
Getting into a regular savings habit is more important than how much you put away – you’ll be surprised how quickly a few pounds each month builds up.
Building savings can help us save for our future goals or meet emergency expenses if they arise. You could use payroll savings to save up for a holiday, home deposit or unexpected expenses.
Developing a regular savings habit typically requires a change in behaviour. In the UK in particular, there has been a long standing preference for short-term consumption over long-term savings.
One of the most important things we can learn from BJ Fogg, a professor at Stanford University in California, is the role that a person’s motivation plays in behaviour.
Fogg’s research indicates that the best way to affect behaviour change is to identify moments when someone’s motivation to change is very high and then to offer them what he calls ‘hot triggers’ which give them the opportunity to enact a new behaviour.
But we also know that motivation occurs in waves. And, as Fogg likes to say, you can’t ‘hack’ motivation long-term - it naturally waxes and wanes over time. So it’s pointless expecting someone to change their behaviour at times when their motivation is low.
In terms of personal finance, there’s a consistent high point of motivation that provides a great opportunity for us to establish new habits. This is payday, which typically occurs monthly.
So the obvious ‘hot trigger’ is to make it as easy as possible for someone to make a savings contribution at the same time they get paid and when their motivation is highest.
The best time to put a bit of money aside is when you get paid because the money comes straight out of your pay - this is what makes payroll savings so effective.
You only need to set your savings once and then you can forget about it. Thanks to the ‘set and forget’ nature of its mechanism you won’t have to remember to make the payment and you won’t be tempted to skip a month.
The UK’s Money and Pensions Service, recently rebranded as MoneyHelper, have pioneered research into payroll savings and are one of the strongest exponents of its contribution to employee financial wellbeing.
Their ongoing research projects include enterprises (such as BT and Capita), credit unions (Leeds Credit Union) and startups (Level Financial Technology).
They have identified three different types of payroll savings:
Standalone: automated payments are made directly from an employee’s pay into a savings account.
Repay and save: automated payments are made directly from an employee’s pay into a savings account in addition to paying off a loan.
Linked to a workplace pension (sidecar): automated payments are made directly from an employee’s wages into a savings account, in addition to automated contributions into a workplace pension. When a cap set by the employee is reached on a sidecar savings account, any extra flows into the workplace pension, accessible at retirement.
About Level’s Payroll Savings feature
Level’s payroll savings feature is called PaySave.
It allows users to set up an interest-bearing deposit account and make monthly contributions that are deducted monthly from their salary.
The onboarding journey can be completed entirely via Level’s mobile or desktop web app. Data input and legal compliance are streamlined via backend integration with an employer’s payroll system.
The onboarding journey introduces the savings feature accompanied by messaging designed to encourage users to signup by reassuring them of the ease and speed of the process.
Users who choose to signup must progress through two registration screens (one for legal consent and one to confirm address details) at which point they are presented with the choice of either creating a Buffer Savings account or a Goal-based Savings account.
Level has also applied principles of behavioural design to optimise the long-term efficacy of PaySave.
We’ve learnt from our research partners, the Behavioural Insights Team as well as MoneyHelper, about the importance of visualising goals and the extent to which they drive inner motivation and reinforce commitment.
Therefore, users of Level’s Payroll Savings service are encouraged to upload a photo of the item or event they are saving for.
There is also the ‘goal gradient effect’, which means that as people get closer to achieving a reward they accelerate their progress towards their goal. People are more motivated by how much is left to reach their target rather than how far they have come.
So we also display users’ Savings in the form of a progress tracker on the Level home screen, to help them maintain motivation.