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Financial freedom through early planning

The future is bleak for people in their 20s. High rents, low wages and a shrinking job market make the things this generation’s parents took for granted an impossibility; owning your own home, saving for a rainy day, taking early retirement.

What will life after work in the year 2057 be like?

When we spoke to recent retirees, we heard that the (unpaid) work they did now meant a lot to them. They weren’t working out of financial need - volunteering gave their lives meaning, and a final salary pension allowed them to live the life they want.

It’s a different story for people entering the workplace today. There’s no guarantee of a state pension, and people in their 20s are at the beginning of a very long working life. In 2057, 60- and 70-somethings won’t be working because it makes them happy, they’ll be working because they have to.

Conventional approaches to money will fail

There’s a lot of received wisdom about what to do with your money. When people follow the advice of their parents and peers, they’re likely to lose out. Reducing your spending by cutting out life’s little luxuries is a good start, but it’s only half the story, especially for this cash-strapped generation. And leaving your money in a savings account loses you money in the long term.

Start investing in your 20s - you’ll be grateful in your 60s

If you save small amounts by reducing your spending when you are young, and (crucially) invest that money in an investment account that pays a good rate of interest (4-7%), then the compound interest you accrue over 40 years will give you a passive income when you are ready to stop working. But most of us don’t get involved with investments - we think it’s too complicated, too risky.

Post-it note with text saying “turns a pot into an income”
It’s not just about savings, it’s about turning your savings into an income

Could we balance instant gratification and long term pay off?

Our goal is to give people a happier old age by getting them to rethink their approach to money at the point in their lives when they can take full advantage of compound interest.

To test this, we created a prototype of Level Up, a service to connect people who wanted to reduce their spending and increase their passive income with mentors who had successfully done this. We showed our prototype to four people in their early 20s. All were early career, renting or living with parents, earning more than £20,000 a year and degree educated.

Most people displayed ‘poor dad’ thinking

Through talking and trying out our product, we found that people in this group took a short-term view of their finances, and had little understanding of how banking and investments worked.

They would go about saving for a short term goal (such as holidays) and a mid-term goal (such as a deposit for a flat) in the same way; by diverting money from their paycheck into a savings account on payday.

They didn’t understand the concept of compound interest (as many don’t), and the explanation in our product did not help them. The idea of getting a passive income from interest earned on investments did make sense to our group, but was not something they felt they could get involved with.

People don’t know what state their finances are in

Our group tended to think of themselves as being in a good position with their money, but acknowledged that they did not know much about how money works or how to get the most from their salary.

I just think people kind of don’t get any financial education. Really I’ve never had anything you could do. My dad said you could put it in an ISA. I didn’t know anything, but I thought that on the basis that I could access that money, I thought I’d put it in this thing.

- F, female, 23

Um, so I don’t really have a comparison I suppose so I don’t whether to say they’re good or not. I’d say for me I’m pretty happy with it. I still live at home, I pay a bit of rent to my parents but don’t have to pay loads. I manage to save a bit every month. I’d say I’m pretty laid back about it and pretty happy.

- A, female, 23

To me, a salary is basically something to live off, make enough to get through the month. But further ahead I don’t think my salary really covers enough.

- F, male, 24

I wouldn’t say I’m particularly good at finances and that sort of thing. I just kind of. I do watch what’s coming in and out, but yeah I don’t have a really good strategy, I just move some across because I feel like I should.

- A, female, 23

People had an awareness of where they could make sacrifices

…no-one talked about doing anything further with the money they saved through reducing their spending

The people we spoke to were making, or knew they could make many small cuts in their expenditure, and most were doing so. However, this activity seemed to be an end in itself, and no-one talked about doing anything further with the money they saved through reducing their spending.

I do normally try and save a bit of money as well by making packed lunch.

- A, female, 23

I generally eat vegan or veggie when I cook for myself. It’s cheaper.

- F, male, 24

I don’t want a lifestyle that uses up my paycheck every month.

I don’t go for big nights out and spend a lot. The majority of my friends do that, buy big rounds at the bar, you could get up to a couple of hundred quid really quickly.

- F, female, 23

Meals out… buy cheaper clothes… there are definitely lots of areas where I could save money if I wanted to.

- A, female, 23

Don’t use the tube to get to work, it’s a 25 minute walk, good for you, healthy. Saving of £100 a month.

- F, male, 24

Nobody trusted themselves to not spend all the money in their current account

Immediately transferring money on payday out of a current account (where it is at risk of being spent) and into a savings account (where it can be held for short- and mid-term needs) was seen as a sensible tactic for managing finances.

I have my current account (graduate), interest free overdraft. I have a savings account. Usually when I get paid I dump it into my savings account then transfer back in. It’s really easy on the app.

- F, female, 23

Erm, hmm. Comes into my wages, I’ve got an app. I just transfer from my current account to my savings account. But I’m not very militant about it, I mean last month I just forgot.

- A, female, 23

Conventional savings accounts are understood

Most of the people we spoke to had, or were thinking about opening a savings account. Some had opened cash ISAs.

So I’ve just got two accounts, but they’re with the same bank. Actually I’ve got three, because I’ve got another one with another bank that my parents set up for me when I was a baby.

- A, female, 23

I’ve been thinking about opening a savings account for my interest and potentially make some interest.

I’ll probably go on Martin Lewis, the money saving expert man, and look at what’s the best one. I’ll see what I can do from there.

- S, female, 23

Everyone was saving, but not for the long term

They didn’t like savings products where you couldn’t withdraw your money

As well as using their savings account as a means to control their spending, most of the people we spoke to were saving for specific short-term goals, such as holidays. To them, a savings account is where you put money to keep it safe, but where it is also accessible when needed. They didn’t like savings products where you couldn’t withdraw your money.

I think we’ve got £180 for flights and accommodation plus food and drink when there. I’ll probably put away another £150.

- S, female, 23

I have thought about opening up an ISA with a higher level of interest that I can’t touch. But I don’t know if I’ll do that because I like the idea of being able to do something with it.

- F, female, 23

Even though I try to generally save that a month, whenever I book my holiday then in that month I won’t save that much. So some of it I’ll spend probably this year, it won’t all be saved super long term.

- A, female, 23

‘Rainy day’ saving is less common

Only one of our participants had a good appreciation of their mid- to long-term future, and was putting aside in a savings account for an unforeseen circumstance, and not for anything specific.

I don’t really think in my mind I’m saving it for a car or a flat than the idea that I might want to be more flexible in the future.

I want to be able to… if I want to quit my job because I hate it, I want to be able to do that.

If there’s a rainy day is there no way I can access [money tied up in investments]?

- F, female, 23

Everyone struggled to think about their future

Although the people we spoke to had, or were considering short- to mid-term saving goals, the future was something they found hard to visualise.

But I think now it feels so far away, I feel like I’d be nowhere near at the moment. So it’s the sort of thing that I haven’t really thought about a target, because the target is so far away. I’ll think about it more in a while when it’s maybe more achievable.

- A, female, 23

As I say I’m kind of aware that I should be saving in the long term sense. But it seems almost quite out of reach. I’m not going to have a car, for example. The money needed makes it something not particularly appealing.

- F, male, 24

I really don’t know. I’ve become less and less sure. I used to be quite confident, it was more like money. That’s partly why I want to maintain a lifestyle which is a bit separate from my income.

- F, female, 23

Investment is seen as risky, like betting on a horse race

When we introduced the topic of investment, everyone we spoke to felt it was risky…

When we introduced the topic of investment, everyone we spoke to felt it was risky in comparison to putting money in a savings account. Putting money into a savings account was seen as something that made them feel good about themselves, and investing was an activity that conflicted with the pride they took in their sensible choices.

I wouldn’t think about investing, I’d think about putting it in a savings account. Which is probably a fairly short sighted view. … like investment options.

I’m proud of my ability to save. I don’t want to put my money into something where I might not get it back.

Like investments are risky that might have big returns but might not.

- F, female, 23

There was skepticism and confusion around the numbers

We realised we needed to explain in much more detail how compound interest works. Even though our examples were based on real numbers, our group did not believe them. We learned that this concept was very hard for our group to understand, despite their high level of academic attainment.

I don’t know the mechanics of that, but it feels like a lot, from just earning interest from a savings account. That feels quite a long way away from being achievable.

I’d like more info on that. I’m not convinced by this passive income thing. It sounds too good to be true.

- F, female, 23

The idea of a finance mentor did not go down well

Our group identified with the content of our (fictional) mentor profiles, but did not respond well to the idea of being contacted by a mentor and checked up on. Everyone entered their emails and clicked the ‘Connect with’ button, but their goal was to get more information, and not to make contact with a mentor.

I’m not sure Marie’s giving me a tremendous amount of value. I get Marie might have been there and done that, but I want more info about how she’s done that.

- F, female, 23

I think it’s one thing having your mum hammering you about how much you’re saving. I’m not sure how I feel about having an actual person seeing whether I’m sticking to my goals. I think I’d prefer an automatic robot or something.

- S, female, 23

People wanted to know more about investment after trying the prototype

Level Up did not do a good job of explaining how compound interest works. However, despite not grasping the central concept, our group were still interested and wanted more information about making investments.

It’s not telling me where to invest that, or how. I have lots of questions now, where these numbers are coming from. What that is. How I do it, what’s the minimum that I have to do. If there’s a rainy day is there no way I can access it.

- F, female, 23

I think it’s a great idea because a lot of my friends are confused about bonds, isas, where to put your money initially, so I think this would be really handy. It’s a great plan.

- S, female, 23
Photo of a sketch about visualising the future and progressing towards a goal
Interesting ways to measure progress towards a goal, and giving people only the information they need to make something relevant to them

How we ran this experiment

Talking to experts

We talk to experts in the areas we’ve been looking to find out what they think the big challenges are. We then turn these challenges into positive “how might we?” questions which we try to answer as we carry out the experiment.

We’re lucky enough to work for a large organsiation with a lot of expertise in-house - we’re grateful to our colleagues who have given us their time and their knowledge. We’ve found that the Co-op name has opened doors for us, and external experts have also let us interview them.

From idea to software in 5 days

We tested this idea by building and testing a prototype in 5 working days. Our goal was not to test the effectiveness of the prototype, but to use it as a starting point for a conversation. Using the GV product design sprint framework, we were able to quickly test our assumptions and make something that felt real enough to try out on some potential users. The conversations we have with users as they interact with our prototype tell us if an idea is worth persuing or not.

One-to-one interviews with potential users

We only have a few days to organise interviews, which means we have to use the quickest way to find relevant people to talk to. We use social media and our professional and social networks to carry out highly targeted recruitment to find people who closely represent our target audience.

We observe and record our interviews, taking care to remove any details that would identify the participants. Everyone involved signs a participant agreement and we give vouchers to the people who take part as a thank-you for their time.

We use active listening techniques to get deeper insights into the reasons behind comments that people make. We have learnt a lot from experts in Co-op Digital such as Andrew Travers and James Boardwell that have helped us get the most from these interviews, thank you.

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Further reading

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