NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

We constantly create stories about ourselves and our experiences to help us make sense of the world. These stories even help us manage our finances. They do so by permitting an intuitive and highly personal basis for classifying and interacting with our money. Various pots of money can be individualized and ranked through stories, based on the different moral qualities and mental states the stories evoke. Through these stories, pots of money become actors in one’s own life dramas.

Let’s take a look at three types of money stories, which often intertwine:

• Origin stories have to do with how the money was gotten. Money may have appeared in a regular drip or through a windfall; easily with a stroke of good fortune or through grinding hard work; through honest or crooked means. All these will likely conjure different feelings about how the money should be subsequently handled and spent. People often don’t like to mix these monies and lose track of these origins.

• Handling stories hinge not on how money was gotten but how it is being managed. Saved money can be sitting relatively idle (money under custody) or it may be working for you (money as investment). It may be concealed to discourage requests to share it, or it may be displayed publicly to build status and social capital. Saved money can represent reassurance through stable, transparent value accretion – or it can generate surprises, like when you break an unexpectedly full piggybank or earn riskier returns. All these choices translate into mental stories, which in turn heavily condition when and how the money is subsequently used.

• Destination stories have to do with how money is intended to be used in the future. Monies can relate to spending cycles that are immediate (pocket money), a matter of weeks (household expenses) or longer-term (education, wedding, retirement). They can be loose (entirely discretionary) or virtuous (for things of a certain level of importance). Monies can also be for personal, domestic or business use.

These stories can intertwine into fuller stories. For instance, the inheritance money which needs to be treated as an investment and which will be used to pay for the children’s college tuition. Or the fistfuls of rice that the wife sets aside every time she cooks, which she will eventually resell back to her husband in order to buy herself a dress that he would otherwise not pay for. When linked together, money stories become mini-novels that combine elements of duty, uncertainty, integrity, love and sacrifice.

By projecting emotions onto money, these stories let people put money management on autopilot. They help create a set of money management rules which you don’t have to think about too much, which feel intuitive and right, and which you are happy running with for a while. The emotions become the enforcers of those rules. By removing money choices from the purely rational, you avoid regularly questioning your prior decisions.

Thinking of money management in this way has powerful implications for financial product development. Products should, first and foremost, act as magnets not so much for money as for stories. The stories shouldn’t come with the products themselves (“this is a school fees account”), but with the monies that users deposit into them. Financial institutions should let this money retain and acquire new stories. Thus users will make the financial products their own.

But by and large, financial institutions haven’t leveraged the power of users’ stories, and this contributes to some of the challenges they’ve faced in serving low-income customers. For instance, liquidity is money that’s not very well-storied, which is why it is so vulnerable to impulse and misuse. Yet the general-purpose savings accounts banks tend to offer blend different types of monies and as such are story killers. This is why – just as they’ll take cash out of their pockets – many people empty their savings account as soon as they contain some money. Others avoid this temptation by using a savings account to only hold one type of (well-storied) money, mentally converting the product into something that uses these stories’ emotional pull to help them achieve their financial goals.

Financial service providers could make this easier for customers by designing products based around their money stories. Exactly how products would achieve this isn’t fully clear, but there are a number of possibilities. For instance, bank accounts could allow for separation of monies into discrete pots, within one big account. These pots might have playful names which invite association with different origins or destinations of money in subtle and imaginative ways. These pots might also have illiquidity features which support the feelings people have about the monies they choose to deposit into them.

We may not yet know how to translate people’s money stories into financial products, but it’s time to start experimenting. This will require a firm departure from the traditional financial education-led approach: define your goals, draw up a budget, set yourself some rules, now start saving. That approach was never based on low-income customers’ actual behaviors and needs – most don’t have concrete, well-defined goals beyond paying the next round of bills. But what they do have is different classes of monies with different emotional values expressed through stories – the sooner financial service providers recognize this, the better their products will be.