“Financial health and well-being is about pursuing dreams and reducing stress. The products and tools individuals use daily and their choices and decisions either help or hinder them in their quest.” This excerpt from What’s It Worth? Strengthening the Financial Future of Families, Communities, and the Nation comes from the essay written by Jennifer Tescher and Rachel Schneider from the Center for Financial Services Innovation (CFSI).

CFSI defines financial health as the outcome that we enjoy when our daily systems – including our behaviors along with the products and services we use – help us build resilience and pursue opportunities. Several recent studies have found that amid our current economic environment, characterized by stagnant and volatile wages and increasing cost of living, Americans are seeking financial health, not wealth. Pew Charitable Trusts reports that 92 percent of Americans deem financial security to be more important to them than an increase in income, a preference that also emerged in the U.S. Financial Diaries research.

It is intuitive that saving is critical to being able to weather financial shocks and pursue financial aspirations; and CFSI’s Consumer Financial Health Study found that saving behaviors and attitudes are leading indicators of financial health. But we know American households across the income spectrum find it challenging to save regularly and accumulate balances for unexpected expenses and long-term goals. More than half of Americans do not have a planned saving habit, according to the Consumer Financial Health Study. The U.S. Financial Diaries teach us that while many households with limited resources do save, they also use those savings regularly to cover unexpected expenses and income dips, making it challenging to accrue savings over the long-term.
Tax time provides a prime opportunity to help families position themselves to be more resilient and to increase their ability to pursue their financial aspirations. For the average American household, the federal tax refund is the largest check received each year. However, taking advantage of this saving opportunity can be difficult, given the multitude of other ways families might spend their refunds (from buying goods, to paying bills, to paying off debt). While some of these alternatives – particularly paying bills and reducing debt burdens – may absolutely be the right thing to do for a household’s financial health, the financial services industry has an opportunity to help households evaluate how to best deploy their refunds, and then, importantly, follow through on those plans. A 2005 study found that, “while planning to save significantly increases the likelihood of actually saving some of the refund, 55 percent of respondents who said they planned to save their refund did not save any of it.”

Research suggests that seamless, automatic, and easy-to-adopt tools available at the point of tax filing can help families commit to and act against their plans to save. A study focused on the impact of encouraging saving at the time of tax filing found that, “families are more likely to save if they can commit to savings before funds are in-hand (and subject to spending temptations).” Other research highlights the potential that financial service providers have to enable or stimulate financially healthy behavior by making healthy options available and easy to opt into. A 2008 study on the impact of presentation and information on the take-up of financial incentives for retirement savings states, “a growing body of evidence shows that individuals respond not only to the pure economic incentives they face but also to the manner in which such incentives are presented and framed. Such behavior appears to be particularly relevant in analysis of saving choices.”

Tax preparers and financial service providers alike have an opportunity to encourage these behaviors and provide a voice – and avenue for action – to counteract all the voices encouraging families to spend their refunds. There are a number of ways tax professionals and service providers could play this role, including:

  • Provide an easy account opening process at the point of filing to help filers open a high-quality savings account and/or myRA;
  • Provide a seamless way to split refunds and direct deposit part of it into a savings account or myRA, or use Form 8888 as an existing mechanism to do so;
  • Help eligible filers take advantage of the Retirement Saver’s Credit;
  • Provide access to savings incentives programs (like individual development accounts, other matched savings programs, and/or prize-linked savings programs);
  • Leverage language and messaging that taps into consumers’ desires to achieve financial stability.

Technology is increasingly making it easy for consumers to do complicated things. The financial services industry has an opportunity to make sure this potential is extended into the tax realm to help consumers overcome obstacles and improve their financial health. Providers who do will differentiate themselves from their competitors and enjoy the customer acquisition, satisfaction, and loyalty that follows.