> Posted by Eric Zuehlke, Web and Communications Director, CFI
“I took today off because the stress is too high. I was going to borrow $200 from a friend and it fell through. I truly need it. I want to cry and can’t. I need it before the month is out. I had it and lent it to my family and I’m catching hell getting it back.”
— Tammy, age 60, U.S. Financial Diaries participant
According to the U.S. Census Bureau, the U.S. supplemental poverty rate is 15.5 percent, meaning that 48.7 million Americans live below the poverty line.¹ While poorer households face higher difficulties to make ends meet, households across the lower and middle-income spectrum in the U.S. struggle with income volatility, unplanned expenses, and finding ways to save and invest. But they also use creative ways to manage their budgets and money.
The U.S. Financial Diaries project, a joint initiative of NYU Wagner’s Financial Access Initiative (FAI) and The Center for Financial Services Innovation (CFSI), collected data from 200 low and moderate-income households across the U.S. in both urban and rural areas for a year. It asked how they spend their money, what financial services they use, and how they manage their money on a day-to-day basis. Considering that over 30 million low-income families in the U.S. lack access to traditional banking and financial services, the study can help policymakers and financial services providers better address and meet the needs of lower-income Americans.
What did they find?
- The use of informal tools – outside of banks or other institutions — is common and contributes to financial well-being. These tools aren’t seen as a last resort to use only when desperate. Rather, they are often preferred to institutions, and families use them in combination with formal tools such as bank accounts. Savings groups, loans among family and friends, and “money guards” (a person who is relied upon to hold savings for another person) are common.
- Income varies from month to month and is outside the control of many households. The amount coming in varies along with the source of income and the timing. According to one of the project’s issue briefs: “Households regularly experience swings in their ability to cover basic expenses, pay down debt or save for the future. In this context, budgeting and planning become quite difficult. New financial services cannot increase household incomes. However, there is tremendous potential for high-quality financial services to help households achieve greater financial health and better manage income uncertainty.”
- Reflecting the precarious financial state of many American families, 77 percent of those in the study say that financial stability is more important than “moving up the income ladder.”
Much more data and analysis from the project is available on the USFD website, and I urge readers to check it out. The USFD diary features issue briefs on informal financial tools, how income uncertainty affects households, and the study’s methodology; charts and data; and a series of household profiles that each examine the financial life of one family in the study. Working papers and additional findings will be added over the coming weeks and months.
[1] Unlike the Official Poverty Rate, the Supplemental Poverty Rate takes into account the impact of different benefits and necessary expenses on the resources available to families, as well as geographic differences in housing costs.
Have you read?
300 Households for One Year – Results of the Kenya Financial Diaries
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January 18, 2015 at 3:16 pm
John Gitau
Thanks for sharing this post Eric. You have no idea how emotions provoking the findings are. They confirm that the poor share a thread wherever they are in globe. Similar economic circumstances, common behavioral patterns, same aspirations, struggles and desire to have a better tomorrow.
I suppose budgeting and planning for the poor is difficult because those terms relate to us who have assured incomes. It is perhaps a high time we got appropriate terms that define their versions of budgeting and planning. They do the same differently because their circumstances are different.
We need to accept and respect informal tools that the poor use as choice options and not necessarily derivatives of formal tools absence. Indeed, informal tools are complete as they are and do not need to be compared with formal tools as to determine which are better. Those who use formal tools find them convenient and useful because their definite incomes correspond with them. The poor use informal tools that correspond with the erratic nature of their incomes. Shaping formal tools to suit the poor’s financial circumstances may be a bit of hard work. Rather, it would be better to help them leverage their informal tools and financial mechanisms..
I like the sound of financial stability as that is an element shared by those with guaranteed incomes. However, while they are able to cultivate stability using investments that are safer, the poor have to fight at all times since even their choice investments for stability building are vulnerable to risks characteristic of their environment. For example, even when they invest in livestock, their environment is fraught with drought, theft, diseases and so forth.
Let me ask you Eric. With the revelations coming out across the world through financial diaries, do you think there is a need to appreciate a different version of financial inclusion for the poor? That is, rather than wanting them to come out to consume formal financial services tailor-made for those with assured incomes, we may need to acknowledge a different tier of financial inclusion. As we support them around their products, financial mechanisms and tools compatible with their financial dynamics, formal financial inclusion becomes the next level to be aspired to and which will flow naturally.