It hardly bears repeating that there has been massive change in the factors that affect US household finances in the last 30 years: jobs, wages, benefits, education, technology, and financial products. We all know things are different. But we don’t know enough about how these changes are playing out in the financial lives of lower- and middle-income households. And while these Americans’ financial lives have already changed, the products, programs, and policies intended to help them are still catching up.
The new barriers to economic stability and upward mobility are not trivial. Recent data show that wages are stagnant for a wide swath of earners, annual income volatility has risen markedly since the 1970s, economic mobility varies widely, wealth inequality is increasing, and the middle class is shrinking. That’s in addition to the long-standing, deep inequalities of race and class that have stubbornly resisted efforts to abate them.
But those data illuminate only macro-level changes. Households don’t make financial decisions—or other important decisions that affect or are affected by finances—based on annual averages or national trends. Financial lives are made up of day-to-day choices.
We need a clearer picture of how these large-scale changes are filtering down to the household level and how households are dealing with them if we are to find better, more effective ways to address household needs. That’s what motivated the US Financial Diaries project and other recent research into the way American households are trying to manage through these new challenges.
For the US Financial Diaries project, we followed 235 lower- and middle-income working American households for a full year (with funding from the Citi Foundation, Ford Foundation, and Omidyar Network). We drew these households from four different locations around the United States (New York City, eastern Mississippi, greater Cincinnati, and south of San Francisco). We met with these families for a year, trying to record every dollar they earned, spent, borrowed, and saved. We tracked when they lent money, when they gave it away, and when they received gifts. We didn’t just collect figures. The field researchers got to know the households closely; they learned about their attitudes and aspirations, their history, and day-to-day lives. Some households were just below the poverty line, some well above it. Our sample was diverse. It included single mothers, grandparents, and traditional nuclear families; recent immigrants and families who have lived in the same town for generations; two-income (or more) families; students; blue- and white-collar workers; skilled and unskilled workers; and Hispanic, White, South Asian, and African American people. But it was not nationally representative. We aimed instead to understand the typical experiences of different kinds of working households.
At the same time, other researchers have collected complementary, nationally representative data: the Federal Reserve Board’s Survey of Household Economics and Decisionmaking (SHED) and Survey of Consumer Finances (SCF), Pew’s Survey of American Family Finances, and CFSI’s Consumer Financial Health Study. Other researchers have also revealed important, hidden parts of American society—people who are hard to see in nationally representative statistics and aren’t working. For instance, people living in extreme poverty in America—on $2 per day—are largely invisible. Fortunately, Kathy Edin of Johns Hopkins and Luke Schaefer of the University of Michigan identified 18 families from this group, and asked them to tell their stories and share how they fell so far through the safety net.
Incomes and Assets Matter. But So Do Cash Flows.
All of this research has led us to conclude that programs, polices, and products need to include a “third leg of the stool” that supports households and their aspirations. The War on Poverty initiated by the Johnson administration focused on income—raising the total amount that households took in. Beginning in the 1990’s, there was a growing recognition that higher incomes were not enough; assets mattered too. Even if households earned more, they were still highly vulnerable, and their upward mobility, particularly across generations, was permanently hampered without assets underpinning them. The US Financial Diaries show clearly that today cash flows matter just as much as income and assets. For many struggling households, the source of the problems they face isn’t whether they have “enough” money over the course of the year (they often do), but whether they have enough money on hand this month, even this week.
In a salaried job with regular paychecks, managing cash flow is mostly a question of budgeting and resisting the temptation to spend now. In fact, that’s what most financial advice and financial literacy curriculums focus on. This set of ideas underpins such policies as IRAs and Individual Development Accounts, which provide incentives for saving for the long term and come with withdrawal penalties to reinforce those incentives.
But what if a household’s income is 25 percent above or below the average nearly six months of the year? What if various members of your household are each working multiple jobs with minimal benefits and each with uncertain hours? What if 25 percent or even 50 percent of your annual income arrives in one lump sum in February? What if the financial choice you have to make isn’t which IRA offers the best investment choices, but which pawn shop offers a better deal when you need to generate the cash to pay your electric bill and keep the lights from going out? Or, when you do pick up extra hours at work and have a bit of extra cash, should you pay down the credit card balance or build up the rainy-day fund? What if you are saving a lot, but dealing with the consequences of volatile income and expenses means you are constantly having to dip into those savings?
These are just some of the issues we saw households facing in the US Financial Diaries project. They are issues that, based on our own and others’ research, are increasingly common for a wide swath of American families. And these issues are major barriers to households’ financial stability and upward mobility.
It’s clear that we need new products, programs, and policies designed for the actual financial lives and choices that American households face today. In this online series and accompanying webinars, we will be joined by leading researchers and practitioners to delve into what we know now about the challenges American households face and how innovative approaches can adapt—and in some cases, already are—to this new reality.
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Read more stories by Jonathan Morduch & Rachel Schneider.