New Report: Low- and Moderate-Income Households Invent Ways to Manage Their Finances to Meet their Day-to-Day Needs

Contrary to the perception that less affluent households tend to neglect or mismanage their finances, a new report from the U.S. Financial Diaries (USFD) project finds that many families with tight budgets display surprisingly high levels of financial discipline and resourcefulness to meet daily needs, pay the bills, and even put money aside.

Many low- and moderate-income households do not use the formal banking sector to meet all of their day-to-day financial needs. However, some are accessing credit and accumulating savings by going outside the system in arrangements that provide them with the structure and the flexibility they need.

The USFD report, An Invisible Finance Sector: How Households Use Financial Tools of their Own Making shines a spotlight on the daily financial lives of 235 households above and below the poverty level; their strategies for financial survival; and the benefits, costs, and limits of these strategies. Highlights include:

Saving at home. Holding savings at home was common among USFD families: Nearly three quarters—73 percent—held at least $100 in cash on hand or in their homes during the study, even though most (90 percent) had a bank account. People save at home for a variety of reasons: to ensure that unexpected, urgent expenses can be paid; for convenience and control; or because they don’t trust banks or believe they will be hit with hidden fees.

Saving in a group. Nine percent of the households participated in savings groups, where participating members agree to contribute a set amount of money at a regular interval, and the money is pooled and distributed to members in rotation. People save in groups because of the commitment feature and the social support that the groups provide. A central element is trust. Of households participating in a savings groups, two-thirds were immigrants.

Protecting Savings. About 6 percent of USFD households used a money guard—a friend or family member who agrees to hold cash savings on behalf of someone else—to keep their funds secure. There are a number of reasons why people do this. Sometimes they want to make it harder to spend money by making their funds more difficult to access. Sometimes they believe that keeping money with someone else is safer than keeping it at home. In addition, undocumented workers may use a money guard because they can’t get (or think they can’t get) a bank account. Of those who used money guards, 73 percent also had a bank account.

Borrowing from informal networks. Loans from friends and families were the second most common form of credit used by USFD families. Two of every five households owed this kind of debt at some time during the study; nearly as many, 39 percent, were owed money by friends and family; and 23 percent had both borrowed and lent money.

Lessons for the Financial Sector

“Financial services providers can learn a great deal from this research, which provides insights into peoples’ behaviors,” says USFD co-investigator Rachel Schneider, a senior vice president with the Center for Financial Services Innovation. “People are looking for structured systems to help them save and flexible borrowing options.”

For example, savings groups offer a great opportunity for learning because the features that make them popular – regularity, commitment, and peer support – can be replicated with technology. A number of non-profits and start-ups are expanding access to and formalizing savings groups in the United States, but most Americans who could benefit from such groups don’t know about or don’t have access to them. Some features that make savings groups so successful worldwide can be delivered by traditional financial services providers, the researchers note. They also suggest that formal lending institutions could benefit from paying attention to informal saving and borrowing behavior. That could help identify new customers, segments and growth opportunities, they say.

The U.S. Financial Diaries (USFD) project collected detailed cash flow and financial data from more than 200 families over the course of a year. The data provide an unprecedented look at how low- and moderate-income families—in four regions and across 10 demographic profiles—manage their financial lives. USFD was designed and implemented by Jonathan Morduch of NYU-Wagner’s Financial Access Initiative, and Rachel Schneider of the Center for Financial Services Innovation. Morduch and Schneider are the principal investigators for the ongoing analysis of the data. For more information, please visit www.usfinancialdiaries.org. Leadership support for USFD is provided by the Ford Foundation and the Citi Foundation, with additional support and guidance from the Omidyar Network.