Nevertheless, the move toward a cashless economy is an alarming trend that threatens to penalize poor people. A two-tiered cashless system system that leaves millions of Americans in its wake is inherently inequitable. It’s also unprofitable.
Mae Watson Grote | Founder and CEO | The Financial Clinic
This past August — 400 years after slaves first arrived to North America in the English colony of Virginia — The New York Times Magazine published a 96-page special edition centered on the history and continuing legacy of American slavery. Today, the enduring impact of of slavery is perhaps nowhere clearer than in the financial security field, evidenced by the persistent racial gap in income and wealth.
At The Financial Clinic, our vision is to leverage the experience and knowledge we’ve gained from working with people individually into poverty-alleviating solutions that not only measurably improve individual lives but also address systemic barriers, like the persistent racial wealth gap. As Trymaine Lee writes in the magazine, “Today’s racial wealth gap is perhaps the most glaring legacy of American slavery and the violent economic dispossession that followed.” And the gap is widening — in the past 50 years it’s more than tripled.
Interweaving social and economic history, the 1619 Project successfully demonstrates the central role that race has played in the development of American capitalism, and specifically, as Matthew Desmond writes, “a racist capitalism that ignores the fact that slavery didn’t just deny Black freedom but built white fortunes, originating the Black-white wealth gap that annually grows wider.” In his piece on the racial wealth gap, Trymaine Lee notes that even “though black people make up nearly 13 percent of the United States population, they hold less than 3 percent of the nation’s total wealth.”
From speculative banking practices that decimated the savings of Black Americans to exclusionary social programs, the 1619 Project excavates the origins of the widening racial wealth gap. The Civil War, Lee writes, was followed by a period of “economic terror and wealth-stripping,” in response to the North’s victory, during which freed slaves were denied the opportunity to build wealth through policy, law, and violence. During the New Deal, Black Americans were excluded from or discriminated against by many social programs. Created in 1934, the Federal Housing Administration, for instance, enacted a policy of redlining that furthered segregation and refused mortgages in Black neighborhoods. The long-term effects of these policies — including redlining, segregation, and discrimination — are still with us. During the recent subprime mortgage crisis, Black Americans were more likely to be “steered toward subprime loans.”
Here at the Clinic, the racial wealth gap is a stark reminder of slavery’s legacy, a reality that is apparent in our own financial coaching data. According to our Change Machine data — collected through the Clinic’s online platform delivery model for financial coaching — Black customers have a median asset balance of $400, which is 55 percent lower than the median asset balance of white customers ($900). Moreover, fewer Black customers own wealth-building assets; they’re 8 percent less likely to have savings accounts, 4 percent less likely to have employer retirement accounts, and 5 percent less likely to have IRAs. Our own Change Machine data show that racial wealth inequality plays a critical role in perpetuating generational disparities.
The 1619 Project is as powerful a reminder as any of the structural barriers to wealth-building faced by the people we serve. We couldn’t be more proud of the accomplishments of our work — $90 million back in our customers’ pockets is laudable — but the 1619 Project makes it clear that only by appreciating the deep-seated nature of systemic racism can we begin to close the wealth gap and create transformative change. We’re aiming to build on our early successes, from the material impact of our financial coaching services, validated by a rigorous study, to public policy victories like New York’s Refund529 law. Because the barriers are systemic, the solutions we propose must transcend the individual.
Drawing on the lessons we’ve learned and the values we’ve formed from successfully serving individuals, the Clinic advances field-wide practices and advocates for social policies that pursue racial equity:
First, can we please put financial “literacy” to rest? Any conversation about poverty that distinguishes between “needs” and “wants” in a household budget fails to appreciate the legacy of slavery. At the Clinic, we’ve been on the forefront of differentiating financial coaching — with its emphasis on people’s lived experiences and actual circumstances — from financial education. Just as the authors of “Credit Where It’s Due: Rethinking Financial Citizenship” point out, literacy tests have played a perverse role in excluding Black Americans from full political participation, so we should not let literacy tests do the same for financial participation.”
In practice, the Clinic’s work fully appreciates that the barriers people face to wealth-building are not typically about rote knowledge, but structural. In the wake of the recession, more and more have come to appreciate that the crisis on Wall Street, the housing bubble, and the Great Recession were not just a chain of events that occurred because some Americans couldn’t identify a compound interest formula. In fact, structural crises only exacerbated existing inequalities.
Second, we need to recognize and hold paramount that the people we serve are experts in their own lives. The Clinic actively promotes this idea by ensuring that our customers’ own financial goals are the driver on their path to greater financial security, not programmatic dictates on what a budget should look like, or the organization’s targets for lowering debt or increasing credit score. Moreover, the Clinic’s social enterprise, Change Machine’s life blood is a community of practice in which the experts are served by a community of experts.
The fact that the communities we serve have been able to consistently and continually make-ends-meet, despite poverty wages and gig jobs, is because they’ve earned an MBA in tough choices, trade-offs and hard decisions. Their expertise is the well from which solutions must be drawn for them to be effective.
Third, the pervasiveness of racism and discrimination makes it incumbent on our field to collaborate with other disciplines in addressing the roots of this issue. As Nikole Hannah-Jones — the investigative reporter who spearheaded the 1619 Project — told Ezra Klein in a recent interview, addressing poverty alone won’t bridge the racial wealth gap. The idea that class, income or assets-based policies alone can bridge the gap is a fallacy because it assumes that “the primary disadvantage that Black people face is income,” which, she says, “it is not.” Census data, she points out, show that poor white Americans have more wealth than middle-income Black Americans.
Indeed, our own Change Machine data bear this out too. Regardless of income, Black customers disproportionately lack wealth and assets. This is a lesson that we as financial coaching practitioners must acknowledge, and as such, it is incumbent on us to partner with our colleagues working in education, healthcare, and housing. The customers we serve face a myriad of challenges. Some may have chronic health problems; others face legal and immigration challenges. Others confront daily discrimination. Knowing this — and knowing that racism spans many aspects of life — the solutions we seek must be both ambitious and holistic.
The wealth gap evident in our own data and whose origins are described in the 1619 Project, is a grave indicator of the work to be done. The 1619 project is a reminder of the historical and economic legacy that leads to racial disparities in assets, income, and debt. As financial coaching practitioners, we recognize the barriers that continue to exist across racial lines, and see our work as part and parcel of a larger commitment to social justice — in the hopes of living up to our founding ideals.
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.