> Posted by Elisabeth Rhyne

I wrote a blog post on the Huffington Post a couple of weeks ago, just thinking out loud about something which suddenly seems absolutely central to financial inclusion: money management. How do people keep track of their finances? Will people new to formal financial services be inclined to use a bank account as a money management tool? How do financially excluded people manage their money?

I was hoping to start a conversation. I even sent the post to several colleagues experts in this area. But what I got was yawns and silence.

Almost. I did get 2 comments, both from a U.S. perspective. “SirVantes137” said that the best way to help poor people with money management, including himself, was to pay them better so they would have something to manage. “Samantha is Soo Savory” referred me to powerwallet, an online money management tool, which looks pretty interesting, and very relevant to the question.

But the conversation among financial inclusion folks failed to take off, so I’m trying again. Come on, people, think about this. It’s important!

We like to say that the poor are “expert money managers,” drawing on evidence from the Financial Diaries and Portfolios of the Poor that they lead complex financial lives with multiple transactions. We also assert that competence in money management is a hallmark of a financially capable person.

If this is true, why don’t we know more about how money management works?

Competent money management consists of at least two functions: keeping track and making decisions. The first function supports the other. You need to know how much money you have before you decide how much to spend. Increased ability to keep track of one’s financial situation should improve financial decision-making, even if other factors remain unchanged (like propensity to yield to temptation or social pressure). But is this effect big or small?

I assume that most people whose financial lives play out in the informal sector keep track of their financial situation in their heads, without a formal system, while most people in high income countries who grew up with bank accounts use their bank statement as a key tool for keeping track, at least of short and medium term status. There are lots of financial education materials for teaching people to keep track more systematically, even simple systems like different wallets for family and business cash flows. Powerwallet is a souped-up version of one of these systems.

Traditionally, most of these systems suffer from being one step removed from the actual money flows. You have to write down the financial transaction independently of the transaction. This extra step, though simple, is a huge disincentive to using a money management tool, because the tool only works if every transaction is faithfully recorded. With a bank account (and systems like powerwallet, which electronically reads your bank statement), the record is generated automatically when the transaction occurs.

But the bank account is only a good system if it consolidates all or most of a person’s cash flows. This works for me because all my payments, big and small ultimately flow through the bank account: my mortgage, tax and monthly credit card payments, in addition to ATM withdrawals and grocery store purchases. For people whose financial lives are straddling the formal and informal sector, a bank account may not offer such consolidation.

Understanding how people carry out their money management is pivotal to many aspects of financial inclusion, from deciding on policy objectives (Are bank accounts the best top line objective for financial inclusion?) to creating effective financial capability-building programs, to evaluating new products and delivery channels (Does mobile banking assist people with money management or make it harder?).

That’s why I’d really like to know what others think. Comments, please!

Image Credit: londonrelocationservices.com

Have you read?

Money Management: What’s a Bank Account For?

The Secret (Financial) Lives of Rural Residents – What Every Market Researcher Needs to Know

Financial Capability: Not Many Answers, but Lots of Great Questions