NEW YORK (MainStreet) — EARN's new Firefly Account is designed to reach the 44% of Americans who lack the savings to withstand small economic shocks. It is part of EARN's objective to empower 1 million Americans to save $1 billion by 2022.
But will a tool that does little more than provide expert advice and incentives for savers' contributions, realistically empower one million Americans to save?
In December 2013 EARN, a national nonprofit and one of the two largest providers of matched savings, launched the Firefly Account. The project marked the first time technology is being used to bring nonprofit, goal-based saving to scale. The Firefly Account is designed to support families on low incomes by helping them establish long-term saving habits. Through its online portal, the account offers the delivery of financial rewards and incentives. What's more, the Firefly Account is free to use and is offered without a profit motive.
"EARN's Firefly Account emulates the best of Silicon Valley start-ups by strategically using technology to solve seemingly intractable problems," said Ben Mangan, EARN's CEO. "In this case, EARN has learned from our first decade how to take our proven approach to build savings, and to do it for millions instead of thousands."
Is EARN working?
According to EARN, since 2002, its saving initiatives have helped 5,200 people save $6.2 million dollars. EARN savers make on average $18,000 a year. EARN's own statistics show that 83% of people continue to save after their programs end. EARN's saving schemes are therefore teaching lower-earning Americans how to save.
So what exactly are the Firefly Account's saving incentives?
Firefly offers eligible savers a $5 to $10 bonus when they save $20 or more for six consecutive months. Unlike EARN's other saving initiatives, Firefly transfers the money into online saving accounts, thus offering fluidity for emergency spending.
America's paltry saving habits
When the economy collapsed in 2008, the national U.S. savings rate rose sharply from near zero to almost 7%. Even at 7%, the figure is paltry compared to the likes of China, where 25% of disposable income is saved. By 2011, this figure had dropped to around 5%, when according to polls, 27% of Americans had no personal savings whatsoever.
The New York Times recently asked six financial experts their thoughts on why America can't seem to save money. Does it boil down to personal discipline and responsibility? Or do larger forces make it nigh impossible?
Tyler Cowen, an economics professor at George Mason and author of The Great Stagnation, says it's a combination of stagnant household income and the cost of new expenses, such as rising health care and new technology that is preventing people from saving in the U.S. On top of this, the U.S. has a higher culture of borrowing compared to other parts of the world.
"In terms of credit institutions, it's still relatively easy for poor people to borrow in the United States, compared with, say, Japan or Europe," Cowen told the Times. "Both the economic incentives and the cultural norms nudge these individuals in the same direction, namely toward more spending and less savings."
Cowen's concerns are reiterated by a recent report from the Joint Center for Housing Studies of Harvard University. Experts have cited paying more than 30% of your income on rent is unaffordable. While paying 50% of your income on rent means you face a "sever burden." The report states that the share of renters who pay 30% or more of their income on rent has risen sharply in the last decade.
Forgive me for sounding cynical, but with a record number of Americans not being able to afford their rent, let alone to save, how could $5 to $10 "bonuses" for saving at least $20 for six months, realistically help?
Roger Cullen, a financial analyst in Delaware, echoes my concerns that the Firefly Account scheme is unlikely to help low-income households save.
"The effective rate of interest is higher than that available elsewhere, but would it tempt poorer people to save?" Cullen asked me. "I'm not sure, as the target sector probably doesn't have any money left over at the end of the week. As I sit here in comfortable middle-age, it's easy to say that everyone should get into the habit of saving, but when I look back to early married life, I'm reminded that saving is a luxury."
Similar to President Barack Obama's new "starter" savings plan called MyRa, geared at helping low-income households save for retirement, it's a fine idea, but, as Dan Kadlec, an economics author says, "As with any personal savings account, you must be able to fund it for it to matter."
Then there is the question of whether everyday Americans have even heard of EARN's Firefly Account? When I asked Jim Rohrbach, a personal business trainer from Illinois whose main clientèle is financial advisors, his thoughts on the Firefly program, he had to admit he hadn't heard of it. Marc Bautis, a financial advisor and retirement coach in the greater New York area and one of Jim Rohrbach's clients, has heard of the Firefly scheme. Bautis is, however, pessimistic of its potential to help America's low-income households save.
"Since those savings and personal finance skills are not learned in our formal education system, I have found that most of our habits are picked up from our parents," Bautis told MainStreet. "I work on advising a lot of families -- parents and their grown up children. I have found that if the parents are good savers, then I usually see the same discipline and responsibility with their children in their finances. Similarly if parents do not have a lot saved for retirement, I usually see the same poor savings with their children. These trends usually hold true whether the parents or children are high, middle, or low income earners."
"I think the Firefly scheme will have minimal impact on improving the savings rate of Americans and think we would be better off teaching good financial habits through schools," the financial advisor continued.
EARN's own statistics might show that its initiatives are encouraging Americans to save. However, in order to reach the 44% of Americans who lack the savings to withstand small economic shocks, larger forces need to be looked at such as rising healthcare costs, stagnant income, unaffordable rent and the fact that financial literacy is not part of the U.S. school curriculum.
--Written by Gabrielle Pickard Whitehead for MainStreet