January 12 Peer Learning Session:
The Hidden Financial Lives of Low-Income Americans with Jonathan Morduch
In January, 2016, the Connecticut Asset Building Collaborative hosted NYU professor of Public Policy and Economics, Jonathan Morduch, who spoke about his ground-breaking “financial diaries” research in the United States, in a talk entitled ‘The Hidden Financial Lives of Low-Income Americans.” Find the PowerPoint presentation here. Some years ago Jonathan had conducted research in developing countries – specifically Bangladesh, India and South Africa -- tracking in detail, through an innovative diaries methodology, the daily financial transactions of over 250 families. His work provided deep insight into the families’ financial lives and provided vital data for service providers looking to support such families in becoming more financially stable. Recognizing the value of such in-depth data about the financial lives of low-income people, often underserved by formal financial service providers, Citibank and the Ford Foundation provided funding for a similar project in the U.S., led by Jonathan, along with Rachel Schneider of The Center for Financial Services Innovation, and Daryl Collins of Bankable Frontier Associates. A team of researchers collected detailed data from 235 households over a period of a year. The data collection stage is now complete, and the results are being published as the analysis continues.
Jonathan started his presentation with some important context, in particular the rising inequality in income over the last four decades, which he connected to declining union power and rising automation and globalization. This has resulted in a decline in ‘middle skill’ jobs, such as manufacturing; jobs that provided a reliable, middle-class income. Today’s job market is characterized by relatively few high-skill (and high-pay) jobs, and a large number of low-skill, low-pay, and unreliable jobs. The financial lives that Jonathan and his colleagues uncovered through their research showed how this changed job market has led not simply to families struggling on low incomes, but perhaps more significantly, having to manage unreliable incomes, with ‘spikes and dips’ from month to month (see the graphic below describing the income flows of the Garza family). Families with “lumpy” income flows like the Garzas may have enough annual income to cover annual expenses, but don’t always have the money at hand when they need it. A key finding of the financial diaries research is that the poorer the family, the less reliable and predictable their income: the more “spikes and dips” they have to navigate.
The financial diaries research is directly relevant to those of us working in the asset building field. Most financial products that we promote and advocate for are designed to help families manage regular daily, weekly or monthly expenses while they put aside savings for the long term (education savings accounts, pensions, IDAs and so on). But, argues Jonathan, what families need before they can even contemplate long term saving is the ability to save for the short term – to put aside money for a few weeks or months – which they then have available to spend on those larger than normal expenses that arise, some predictable, such as home insurance, some unpredictable, such as repairing or replacing a furnace or a car. Many families use current accounts for these types of savings, but such accounts are usually too accessible to make saving easy – they do not have the right balance between structure and flexibility. As a result, people choose to save outside of banking services: the “bank of Mom” (giving money to their mother to hold), adjusting their tax withholding to ensure a sizeable refund at tax time, or saving in groups, particularly immigrant communities who continue to use traditional Rotating Savings and Credit Associations (RoSCAs). As we work to support low- and moderate-income families to build assets, we would do well to consider developing products that help them not only save for later, but also save for soon.
More information about the financial diaries research can be found at www.usfinancialdiaries.org, and at http://ssir.org/the_hidden_lives_of_americas_poor_and_middle_class. Jonathan is tweeting these days @jmorduch. Related work being done by the Pew Charitable Trusts & The Urban Institute can be found at