Ups and Downs in American Financial Lives Jonathan Morduch November, 2014

Leadership Jonathan Morduch, Professor of Public Policy and Economics, New York University Rachel Schneider, Senior Vice President, Insights and Analytics, Center for Financial Services innovation Principal Investigators The US financial diaries were created jointly by the NYU Financial Access Initiative, the Center for Financial Services Innovation, and Bankable Frontier Associates. Daryl Collins Director Nancy Castillo USFD Manager Timothy Ogden Managing Director PRELIMINARY DATA - DO NOT CITE

Sponsorship Leadership support for the project is provided by the Ford Foundation and the Citi Foundation, with additional support and guidance from the Omidyar Network. PRELIMINARY DATA - DO NOT CITE

Life-time ups and downs Age

Month-to-month ups and downs

Problem: We have annual data mostly

Life is lived day to day, month to month

High frequency economic and financial data – Interviews every 2-4 weeks over a year A view into hard-to-see strategies US Financial Diaries

PRELIMINARY DATA - DO NOT CITE

Empirical Progression IncomeAssets Cash flow

300,000 cash flows collected during the year. About 100 spending categories, 38 income types, 69 financial instruments. 460,000 answers to survey questions on health, financial literacy, time preference, organization, tax refunds, financial instruments, aspirations, income patterns 12

Garza Family Income, N. California 13

14 Turn to pawn shops, costly loans Garza Family Income

Lucia & Mateo Family, Queens NYElena Navarro, N. California

Sandra Young, Brooklyn NYJohnson Family, Ohio

Hossein Family, Queens NY Adrian Family, Mississippi

Rodriguez Family, N. CaliforniaRita Douglas, Ohio

Mike Smith, KentuckyLauren Walker, Mississippi

Few families have steady income Income Median - 25% + 25%

Spikes and dips: definition Median - 25% + 25% Spike Dip

Spikes and dips: 4 per year Average number of spikes during the year: 2 Average number of dips during the year: 2

How big? Average spike : 160% x median Average dip: 53% x median

4 per year on average Median - 25% +25%

Typical causes Work-hours rising and falling. Health problems Household membership: New children, adults. Children, adults leaving. Childcare and transportation needs. Lumpy gifts and benefits

Mismatch 39% of spending spikes align with an income spike 61% with no income spike 25% when income is below median Income Spending

Having little long-term saving does not imply reckless spending One implication…

Spikes and dips: 4 per year in the average USFD household Income Median Median x 75% Median x 125% Average Spike Median x 160% Average Dip Median x 53%

Spending > income: 97% of households had at least one month with excess spending Overdrafts: 48% had one in the last year (if had checking account); 23% had two + Not Much Slack

Credit cards 78% not paid in full each month 34% had a card near its maximum Not Much Slack

Probability of a 25% income drop Consecutive months: the percent difference from one month to the next

Economic Inequalities Income Wealth Steady, reliable, predictable finances

Labor Income Volatility For each income source, how steady is the total weekly number of hours?

Q: Which of the following is more important to you? A. Financial Stability B. Moving up the income ladder

Pew Survey (2011): Sample 2000 Households Stability vs. Ladder-Climbing

Dealing with Income Ups and Downs Not sufficient: Financial literacy Budgeting Behavioral tricks and “nudges” Needed: Good jobs Tools for Financial emergencies Putting together lump sums Grabbing and holding onto spikes Enhancing control

New York Times Bestseller Summer 2014

Income share of the top 10% % 48% 41% Income share of the top 10%, US 2010

US Poverty Rate,

The missing part of the story Year-to-year and month-to-month volatility has been rising too Challenge and opportunity for credit unions

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