Credit: Stephan Greyer (Flickr)

American Families Are Trapped in a Cycle of Financial Struggle — And It’s Not Just the Poor

A car repair, a medical bill, a sick family member, a tax bill, a leak. All of these could easily cost $2,000, and for more than a third of U.S. households, they represent an insurmountable challenge. A growing number of families are trapped in a cycle of financial struggle, and it’s not just the poor.

According to the Center for Financial Services Innovation (CFSI), one in three American households today can’t cover a $2,000 emergency expense — the types of things that can happen to anyone at any time. And these aren’t just low-income households; one in five of households making more than $75,000 a year say they are not confident that they could cover the $2,000 emergency.

Many of these families appear to be financially healthy, with jobs, homes, health insurance, and even college degrees. Beneath the surface though, they have little to no wiggle room. To understand why, we need a more complete picture of households’ financial lives, including their income, expenses and balance sheets — what they save, own, and owe.

We often talk about family finances in terms of annual or average household income. Viewed that way, a household may appear to be doing fine financially.
But people don’t live “annually” or on “averages” — they live day to day, week to week and month to month.

Over the past decade, household incomes have become less certain and more variable, especially for lower-income families and those with multiple sources of income from part-time or seasonal jobs. This lack of predictability makes it difficult for families to meet daily needs, pay bills, absorb unexpected expenses, or plan and set money aside for vacations, education or retirement.

A U.S. Financial Diaries (USFD) study documented the financial lives of 235 poor and moderate-income households for a year, tracking every dollar earned, spent, borrowed, and saved.

What the study found: families typically experienced almost three months when their incomes fell at least 25 percent below their average income. They also had close to three months when their incomes spiked at least 25 percent above average.

Perhaps not surprisingly, when asked whether “financial stability” or “moving up the income ladder” is more important, 77 percent of the participants in the USFD study chose “financial stability.” And 2015 Pew Charitable Trusts research found that 9 in 10 Americans believe “achieving financial stability is more important than moving up the income ladder.”

Income volatility can be a big problem for households. For instance, it’s hard to make and stick to a budget when you don’t know what your income will be each month.

Spikes and dips in income do not necessarily match spikes and dips in expenses. This can force households to delay spending, even on necessary items like medicine or rent, until they have cash on hand, or can force them to make undesirable choices, such as turning to a payday lender, running up credit card debts or borrowing from family or friends.

Income volatility can cause households to turn to costly solutions to short-term cash flow shortfalls.

But that’s not all there is to the story.

The Great Recession wiped out $16 trillion of family wealth; a full two decades of growth in income and wealth were erased, bringing us back to 1989. Too many Americans had too much wealth in homeownership, too much debt, and too little available savings to weather the losses, leading to the financial crisis and ensuing recession.

In addition, many younger Americans who had invested in their financial futures by pursuing higher education and taking out student loans were unable to get jobs commensurate with their training — if in fact they were able to get jobs at all.

People who entered the job market during the Great Recession were affected most, and are likely to experience lifetime losses in income and wealth. And the wealth losses for those in their 20s and 30s were particularly harsh.

According to the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, younger Americans were most likely to lose wealth and have been the slowest to recover it. This is not, however, merely a phenomenon of the recession; it is a generational phenomenon as well: people born in 1970 are likely to accumulate 40 percent less wealth over their lifetime than people born in 1940.

And younger Americans were not the only ones to be hit hard by the recession. St. Louis Fed research shows that minorities and families with less education were also among those most impacted by the recession, and most of them have yet to recover their wealth — making it harder for them to achieve financial stability and, accordingly, contribute to a stronger economy. Meanwhile, the majority of older, better-educated, and white and Asian Americans have more than recovered the wealth they lost in the recession.

These uneven, very different recoveries following the recession exacerbated longer term trends segregating “thrivers” from “strugglers” such that, today:

  • Whites have roughly 12 times the wealth of Blacks
  • The best educated have about 26 times the wealth of the least educated
  • Older Americans have about 15 times the wealth of the young

And these disparities persist despite overall gains in educational attainment across the board.

So, here we are, in a post-recession world in where many people still have too much debt, too little savings, and credit is too hard to access.

So how can we restore the financial health of households in America?

Millions of families are working hard yet finding it increasingly difficult to get by. Individual will or behavior is not enough.

Just as the problem is complex, there is no one simple solution. Creating financial health and well-being for American households requires addressing very real challenges like stagnant and spiky incomes, integrating opportunities to achieve financial health across communities and changing the systems that shape financial opportunities.

A forthcoming book, What It’s Worth: Strengthening the Financial Future of Families, Communities and the Nation, will provide a 360-degree view of the financial problems and challenges millions of American households face, the enormous creativity and innovation already happening to increase financial well-being, and how we can implement proven and emerging solutions.

The book also makes clear that there is a role for everyone, including those working in the health, housing, workforce, and financial capability arenas. And that improving financial health and well-being is a big challenge that requires everyone pulling together and doing their part.


By Jennifer Tescher, Center for Financial Services Innovation (CFSI) and Ray Boshara, Federal Reserve Bank of St. Louis


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