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For Low-Income Households Facing a Liquidity Crisis, $2 Trillion Won’t Cut It

Mae Watson Grote | Founder and Chief Executive Officer | The Financial Clinic

 

(And Other Things I Told the New York Fed at Last Month’s Community Advisory Group Meeting)

The week before last, I told the Federal Reserve Bank of New York that, much like Jerome Powell and the Federal Reserve have done with our financial systems:  Low-income American families need someone who’s got their back.

My point was that the same urgent policies enacted to stem the economic fallout from the COVID-19 pandemic — emergency measures meant to ensure businesses and markets that the American government has their backs — are just as necessary for the vast majority of American households that, even in a strong economy, live precariously, paycheck to paycheck.

As part of the Community Advisory Group, I and other nonprofit and community leaders advise the New York Fed on issues faced by communities across the second district (and so of course, the views expressed in this article are my own, and don’t reflect that of the New York Fed). It’s no surprise that our most recent discussion was devoted to the ongoing COVID-19 pandemic that continues to escalate across the United States and especially here in New York. The economic toll faced by low-income Americans will be — and has already been — unprecedented.

More than 22 million Americans are now out of work with unemployment filings at record highs. An economist with the St. Louis Fed has projected a potential 47 million could go unemployed this year. If the Fed can resort to unlimited bond-buying programs and trillion dollar market injections, why can’t we go to parallel lengths for low-income families?

Here at The Financial Clinic, the biggest lesson of the pandemic’s ongoing economic crisis is that margins have cliffs. If even in a tight labor market millions of Americans were financially insecure — especially disproportionately vulnerable groups like Black and Brown women — imagine how they fare now.

The deep asset poverty experienced by low-income Americans, coupled with an eviscerated social safety net, means we’re now confronting a future in which many Americans simply won’t recover. This is especially concerning for Black and Latino households, who are less likely to have saved for an emergency and who have a liquid asset poverty rate twice that of white households. These people — like so many of those we serve at the Clinic — have fallen over a cliff and are now in free fall.

Even recent catastrophes offer little guidance. During Hurricane Sandy — which hit poor households especially hard — there was an initial storm. However, once passed, we could begin to assess the destruction and human loss. Or with the Great Recession, as the labor market tightened, we could appreciate how deliberate policy decisions left communities of color out of a full economic recovery. In our current crisis, that assessment has yet to take place, and this free fall makes it hard to grapple with the long-term impact.

Meanwhile, the Clinic is directly responding to our customers who are now in dire financial straits. We’re launching free virtual, financial coaching and expanding Change Machine to further address the needs of those hit hardest by this catastrophe. What is already clear from this work is that families are scrambling. With household budgets in total shock, how will families make rent in the coming months?

The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act — which includes direct payments to American workers — is the largest in U.S. history, but it doesn’t go far enough. Low-and-middle-income households are facing a liquidity crisis. Countless are confronting a sudden loss of income while their essential expenses have stayed the same.

Across the last twenty years and over two recessions, rising rents continue to outpace incomes. What we’re now witnessing is the bottom fall out for already-cash-strapped workers. That means cash inflows — like the CARE Act’s $1,200 payments to low-income Americans — are essential, but even most people who live in the Fed’s second district have rent payments higher than $1,200. (In New York, for example, the median rent for a one-bedroom apartment is $2,850.)

The reality is that individuals on fixed or limited incomes lack the resources to take the necessary precautions required by this pandemic. Often they don’t have the ability to buy in bulk. Many live in food desserts — which studies show are disproportionately concentrated among poor, Black neighborhoods — and aren’t able to drive to multiple stores, only to be turned away because the shelves have been cleaned out. 

 So what else can be done to mitigate the pandemic’s economic impact on the most vulnerable among us?

In the weeks to come, the emphasis shouldn’t be on stimulus, but rather putting a total moratorium on all debt and essential payments and penalties: everything from student loans, mortgages and rents, and credit card debt to evictions and utility disconnections. Our focus must be on safety nets and social insurance.  Just as importantly, any cash payments must not count towards actual income that might otherwise disqualify them from essential benefits like SNAP or SSI.

While the future of this crisis remains unclear, we already know what so many low-income Americans need. They need, in other words, what our financial systems have already been assured: a strong safety net and a guarantee that we have their back.

Three Myths About Working Poor Households and How They Build FInancial Security

By Mae Watson Grote | Founder and CEO | The Financial Clinic

Based on remarks delivered to the Federal Reserve Bank of New York’s Community Advisory Group on 11/15/2017

We all know what happens when we assume. Yet, American society continues to place the burden of working poor people’s financial insecurity exclusively on their own shoulders.

The age-old “pull yourself up by your bootstraps” mentality–built on the belief that because economic and social mobility were achieved by some, they can be achieved by all–assumes that those who failed to achieve financial security made “bad choices” that caused their insecurity, or worse, that they must not be working hard enough.

Like all direct service practitioners, we know how entirely false this belief is. Our customers are hard-working and resourceful.  They navigate a world of enormous complexity, and their financial insecurity is most often caused by systemic policies and beliefs that build a seemingly insurmountable barrier to success.  

So let’s start by breaking down those assumptions, and busting these three popular myths:

Myth #1: Financial education, on its own, alleviates financial insecurity, and addresses systemic barriers and gaps in wealth building.  

There are gaps in Americans’ financial knowledge.  According to economists the vast majority of Americans, regardless of income level, do not have the requisite knowledge to handle their own finances.

However, year-in-year-out experience building relationships with our customers has demonstrated that they are incredibly savvy in their ability to stretch low, and often volatile, incomes to keep food on the table and roofs over their families’ heads.  So why do working poor people continue to suffer under the weight of financial insecurity? Because they face unique systemic barriers that higher income and wealth alleviate. For example, a sudden medical emergency may deplete a person’s savings, leaving them vulnerable to predatory financial institutions which ultimately force them even deeper into debt. Therefore, addressing gaps in financial education, alone, isn’t an effective approach to addressing financial insecurity.

Instead, we believe that building financial security, rather than focusing on knowledge for knowledge, should be the focus through financial coaching, which is built by goal-oriented steps that enforce an individual’s existing strengths for practical results.

A landmark national study commissioned and funded by the Consumer Financial Protection Bureau, An Evaluation of the Impacts and Implementation Approaches of Financial Coaching Programs, proved that financial coaching has a measurable difference in the financial security of working poor people. In the study, the Clinic’s financial coaching model saw participants–earning an average of $24,000/annually–gain an average $1,721 increase in savings, a $1,009 decrease in debt, a 33-point increase in credit score, along with decreased levels of financial stress, and increased satisfaction in financial states.

The Clinic’s approach starts and ends with the financial goal. Financial education alone does not determine or actualize a financial goal. In financial coaching, we use the goals as critical drivers for customer accomplishments.  They allow us to address the complete picture of an individual’s finances–including consistent savings, lowering cost of banking products and services, establishing a credit history or increasing a credit score, lowering debt, and enough year-round tax planning to have saved a portion of a refund for a financial goal to be met–while shining a spotlight on the systemic barriers to financial mobility.

Myth #2: There are bad financial goals.  

We believe that our mission to build financial security for working poor people is best accomplished by helping customers achieve their “forward-thinking, strengths based, and passionately-held” financial goals.  The most important driver to success is whether the financial goal answers these customer-defined criteria:

  • Is your goal rooted in a problem of your past, or does it reside in an opportunity in your future?
  • Does it leverage your strengths, including the intangibles?  
  • Are you passionate about it?  Would you move heaven and earth to make it happen?

It does not matter if the financial goal is thought of by a financial coach, or any other objective perspective, as “good” or positive for the customer.  Once our customers establish their “North Star,” we’ve discovered that the ability to accomplish all other areas of financial security is there.  

Take, for example, the story of one of our customers Alan Braverman (a pseudonym).  At the time he started meeting with his Clinic financial coach, Alan was unemployed, but receiving SNAP and SSI benefits.  He was also in danger of eviction so he was working with a homeless-prevention program on a relocation plan; additionally, he had child support arrears which caused a portion of his tax return to be seized.

Alan’s financial goal was to buy a plane ticket to his home state for a long-awaited visit with his extended family.  To someone on the outside looking in, it may seem like buying a plane ticket should be a secondary financial goal to paying down existing arrears.  However, when viewed through the lens of an actionable financial goal–one that it is “forward-thinking, strengths-based, and passionately-held”–a myriad of paths to financial security are illuminated.  Indeed, while Mr. Braverman was working to achieve his goal, he was also able to set up a budget to pay off his arrears while simultaneously saving a portion of his tax return towards his financial goal. In the end, after several months following his payment plan,  Mr. Braverman ended up overpaying for his arrears, and receiving a refund which he saved, getting him 75% of the way to his goal. By working towards his passionately held financial goal, Alan was able to build the habit of saving. This new habit and instilled confidence will serve him long after he reaches this first financial goal.  

Myth #3:  Working poor families should not, or cannot pay down debt and build savings concurrently.

While achieving financial goals is at the heart of the Clinic’s anti-poverty mission, the clearest indicator of progress is consistent savings and building assets.  More traditional financial planning and counseling models often take a traditional, rational economic approach, and thus stress the need to pay down existing debt before building savings.  Here at the Clinic, we know that assets can shore households against volatile income, give purpose and meaning to budgeting, and help keep people from taking on bad debt in difficult times.  

Our customers build confidence and have an improved outlook on the future when they begin to save.  Here is an example pulled directly from one of our coaches: Elena Meyers (pseudonym) is a single mom who first came to see us about a year ago. She had $104k of debt in the forms of collections, bills from her daughter’s school, personal loans, and credit cards, and felt she was being crushed under the weight of it all. She admitted that her debt, and lack of savings, was partially due to a habit of mindless spending. Along with causing her to amass debt, this mindset was keeping her from achieving her goals of establishing an emergency savings fund, purchasing a home, and paying for her young daughter’s education. Over the course of five coaching sessions, Elena was able to not only turn her monthly deficit into a $153 surplus, but also immediately start saving $25 a month while still paying down her debt.

If we are to truly build a more equitable American future, we must first start by addressing root causes of poverty, inequality, and insecurity, which must be done concurrently with debunking commonly held ideas about why people in poverty struggle to improve their financial wellness.  It’s critical that we as a society (1) fully understand the reality of working poor people and families struggling to make ends meet and (2) continue breaking our assumptions so we can identify solutions that actually work.

At the Clinic, we see the incredible impact our financial coaches have on our customers’ financial lives — they provide the necessary support to not only overcome a financial crisis, but also to gain a new confidence and develop the right habits for a lifetime of financial security. By removing our assumptions about the individuals, we see that working poor people nationwide are struggling against a system that creates more barriers to financial security than it removes. Our collective priority moving forward must be to meet those systemic problems head-on and influence lasting policy changes that will support the millions of families we cannot serve directly. We’ve already seen the difference here in New York through Refund529. I invite you to join us as we bring policy conversations national through our financial security ecosystems — what systemic barriers are you seeing in your community?  Together, we can create the financially secure nation we all deserve, no matter our income level.

Please share your stories of and suggestions about busting myths about low to moderate income households with us on Facebook and Twitter.