By Jennifer Tescher / Tilman Ehrbeck
Note: This post is one of NextBillion’s 12 most influential posts of 2018.
Paying the mortgage and other household utilities should be relatively straightforward, but for the Johnson family, it isn’t always that simple.
Sarah and Sam Johnson, one of the families profiled in 2017’s U.S. Financial Diaries, are a typical American couple residing in suburban Cincinnati, Ohio. They own a home and two cars, and are both employed full-time. The couple also takes on part-time jobs from time to time. Despite having consistent income, they struggle to make ends meet. While both Sarah and Sam have retirement savings plans through work, their multiple sources of income vary month-to-month, making it difficult to pay their bills on time. An even larger challenge is preparing for unplanned expenses—they have no cushion for home repairs or medical expenses. Like many Americans, the Johnson’s try to fix their situation by using credit cards—only to accumulate substantial debt, making their financial situation even more concerning.
The Johnsons represent the precarious state of today’s American families. While Sarah and Sam work full-time, saving is a tall task and one unexpected illness or life event could be catastrophic for the household’s finances.
WAGES UP, BUT STABILITY ELUSIVE
Current macroeconomic data does not completely capture the struggles of middle- or low-income Americans like the Johnsons. Unemployment is low, putting upward pressure on wages for the first time in decades, and all signs from corporate America point to a belief that one of the longest-running economic expansions in history will continue.
Meanwhile, 57 percent of the country—approximately 138 million Americans—are struggling to make ends meet, pay their bills, save for emergencies and plan for the future, according to CFSI’s Consumer Financial Health Study. Low-paying jobs with unpredictable and variable hours, the dismantling of the social safety net, and the transfer of risk onto individuals have collectively contributed to the precarious state of household finances. Perhaps no single metric has better captured this reality than the Federal Reserve’s finding that 44 percent of Americans would be unable to cover a $400 emergency expense without borrowing or selling something of value.
When people struggle financially, unexpected expenses can turn into financial crises, creating toxic stress that affects other aspects of their lives and society as a whole: They get sick, drop out of college, take on multiple jobs, and are so focused on the here and now that they can never get ahead. The American Dream doesn’t just feel out of reach; it feels dead.
NEW TOOLS FOR STAYING FINANCIALLY AFLOAT
The U.S. Financial Diaries have helped policymakers and practitioners better understand the real financial lives of Americans, bringing much-needed energy to solving the challenge. Innovators across Silicon Valley are launching businesses devoted to previously overlooked demographics, including economically vulnerable consumers. Companies like Even and PayActiv, which allow employees to access accrued wages, help people manage volatile incomes by smoothing their cash flow. Digit helps users build greater resilience by automatically transferring small increments of money to a savings account. EarnUp offers products that help people manage their bills and pay down debt. Through its app FreshEBT, Propel helps food stamps recipients to better budget their benefits, resulting in users getting an extra 3 million meals every month.
Incumbents are also realizing that the struggling American is in fact their customer. And they have come to appreciate that new ways to solve existing pain points reduce institutional risk and create new revenue opportunities. Big names such as Goldman Sachs have gotten into the act. The bank launched a new personal lending arm called Marcus, dubbed the “bank for Main Street,” to refinance the credit card debt of cash-strapped Millennials. In less than three years, the company has issued more than $3 billion worth of loans.
These innovations are promising, but they are not enough. When something as small as a flat tire or the flu can start a downward spiral toward financial ruin, that’s a national emergency. America is facing a financial health crisis, and addressing it requires a much larger, concerted effort.
REVIVING THE DREAM: A CROSS-SECTOR MISSION
We need a clear goal—to improve the financial health of Americans—and an ability to track progress against that goal over time. That is why CFSI has launched the U.S. Financial Health Pulse, to encourage a regular drumbeat of data about how Americans are faring financially to serve as a counterweight to the rosy picture painted by the macroeconomic trend lines. By creating integrated insights into households’ spending, saving, borrowing and budgeting habits, we can better understand the interconnections between finances, physical health and the future of work trends—everyday life areas that touch many different economic sectors.
Every sector has a role to play. Financial service providers can design high-quality products and services that improve the financial health of their customers. Consumer advocates, think tanks and other researchers can design remedies to address the financial status of overlooked populations. Policymakers and regulators can craft policies that support financial health and incentivize innovation to address these challenges through new tools.
Of course, we cannot expect the financial services industry alone to solve the problem. Leaders across healthcare, education, employment and housing must realize they are part of a larger “financial health ecosystem.” These leaders must come together through cross-sector partnerships to collectively invest in the financial health of the country.
The financial fragility of American households is better understood now than it has ever been, and the picture is downright scary. It’s not enough to understand it, we have to act.
Image via Pixabay.com.