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The U.S. Financial Diaries with Jonathan Morduch

Today we discuss the new book The U.S. Financial Diaries with Jonathan Morduch.

Jonathan Morduch is a  Professor of Public Policy and Economics at the NYU Wagner Graduate School of Public Service and Executive Director of the Financial Access Initiative at New York University. He joins us to discuss his new book, The Financial Diaries: How American Families Cope in a World of Uncertainty (Princeton University Press; April 2017).

The Old Advice No Longer Works

Financial advice is largely still geared towards a model that no longer exists. The advice works well when we assume people will graduate from college, get a secure job that provides, predictable steady income with yearly raises, buy a home, save for college, retire at 65 with a pension.

But for millions of Americans that path is no longer available. The cost of college has soared 538% since 1985 and people are saddled with tens, sometimes hundreds of thousands of dollars of debt before they even enter the job market.

Job security is a thing of the past and will only get worse as more and more jobs become automated. Even those employed at larger companies may not be employed by those companies. Just above 40% of Americans have what are considered “contingent” jobs; agency temp jobs, on-call jobs, or contract jobs, part-time jobs, or are self employed.

Companies no longer share their success with employees in the form of raises and benefits, profits are now only the preserve of shareholders.

Home prices are out of reach for many Americans as is a college education. Pensions are now part of a by gone era. Only 4% of American workers in the private sector have a pension as their only retirement account, down from 60% in the early 1980’s.

In these circumstances you can see why the old advice doesn’t work. Getting a college degree, if you can afford it at all (you can, just not in the traditional way), is no longer the almost certain path to the upper middle class it once was. If you do manage to get a degree, it’s hard to save for a home or anything else when your student loan payments are so high.

It’s hard to make a budget when your hours and therefore your paychecks vary week to week. An employer sponsored 401k is not only a means of “forced” saving but also a first introduction to retirement savings and investing for many people.

If your employer doesn’t offer a 401k, you may never know there is such a thing as tax sheltered savings or find out much later in life and lose out on all of the time that money had to compound which is how money really grows.

The Study

The study is based on 235 families from all across the United States. For one year they gave the authors access to every detail of their financial lives. The families were not among the poorest nor were they among the richest. A quarter were below the poverty line, half were at or making two times the poverty line, and a quarter were above the prior group.

To understand what that means, federal poverty guidelines for a family of four is $24,600 per year.

The book bears out what we described above, that the model has changed but the advice has not. And many people, notably politicians, don’t want to admit that the model has changed. To them, the advice is good and the people struggling are entirely to blame for their situation because they have failed to follow it.

The book proves otherwise. The model is no longer predictable and people can do everything “right” and still find themselves one relatively small, unforeseen expense, away from financial disaster.

Part of the change has been that companies are no longer willing to insulate employees from fluctuations whether they be seasonal or economic. Now if things are slow in the summer, you better have prepared for that when things were good because you might be temporarily laid off or simply told to go home early or not come in the next day because things are slow.

Broke on 65K a Year

It’s not hard to see why those working service industry or low end retail jobs are struggling to get by but what about people making what many of us would consider pretty good money? Why are people making $65,000 a year facing the same struggles?

Largely for the same reasons. Jobs have changed and even those who used to be “safe” from larger forces in the economy aren’t so safe anymore. You may be making good money as a contract employee working for a large, successful, secure corporation but you and your income are no more secure in that situation than the front desk clerk at a middling chain hotel making minimum wage as a contract employee.

An emergency fund is part of what used to protect those making a good living but now it’s sometimes just as hard for them to save up the much touted 3-6 months worth of expenses as it is a minimum wage worker.

Even the $1000 emergency fund which is the least conventional advice tells us we should have seems out of reach so 3-6 months worth of expenses might as well be a million dollars.

Having kids in these circumstances can make it even harder to save up an emergency fund and it’s not just the regular expenses that go with having a kid. It might be hard to deny yourself when you’re trying to save money but it’s even harder to deny your kids. They just want what other kids have and want to do what other kids do so when they come to you asking for money for a field trip or to join a sports team, it’s hard to say no and harder to save money.

When you have steady income that doesn’t fluctuate, it’s pretty simple to make a budget. You decide where to allocate your money and it doesn’t change all that often. Your income is steady as are your expenses.

Now imagine having to make those decisions every month or even every week. How stressful that would be especially when you know there just won’t be enough money for everything. It’s depressing and exhausting and small wonder people can’t face it and don’t bother.

Into every life some luxury might fall. For you that might mean going on vacation once a year, to someone else, a trip to the movies every few months. No matter how bad your situation, it’s important to try to find some money for those luxuries.

Life is grim when you’re constantly in denial mode and giving into temptation once in awhile can prevent a reckless splurge you can’t afford when you can’t resist the temptation any longer.

The Spending Firewall

So how do people in tough situations mange income volatility? The book found that many people create a “spending firewall.” One woman kept her money in a bank that was an hour away and cut up her ATM card. One man saved his money in his mother’s savings account rather than his own.

These people have created a balance between discipline and flexibility. The money is safe from impulse spending but there if they really need it. These might seem like extreme lengths to go to when many of us use things like our Betterment accounts or IRA’s to save money and we might wonder why other people don’t use these things too.

Why are they letting that money sit around in a low yield account at sub 1% interest when it could be getting an average return of 7% or so if it was invested?

From our perch in the middle and upper middle class, many of us just assume people know about things we take for granted like Betterment. Or that they understand they’re actually losing money to inflation in those low yield accounts when they could be making money in the stock market. Or that people understand that while the market fluctuates, by and large and over time, their money is safe if they invest it.

We assume that everyone has internet access or knows how to use it to set up an investment account. Everyone doesn’t so while their firewall solutions aren’t ideal, they are solutions. This lack of accessible products for people in these situations seems like a gap that someone could fill that would not only help these people find better solutions but possibly make a fortune for themselves. One of you clever LMM listeners get on it!

The Cost of Being Poor

It’s expensive to be poor which is a subject we devoted an entire article to. Things like security deposits for utilities, over draft fees for bounced checks, the predatory fees charged by payday lenders, the charge to cash checks when you don’t have a bank account, the extra expense when you can’t afford to buy in bulk which is cheaper but instead have to buy whatever quantity you can afford.

There are all kinds of extra costs to incur when you’re poor which makes saving for an emergency fund or retirement even more difficult. And many people in these situations have no illusions about retirement.

They know they will be working until no one will hire them any longer, they are physically unable, or they drop dead. I don’t know what they think will happen to them if they can’t work yet have no savings but they are probably too afraid to think about it at all.

Their Own Lending Club

While we can turn to banks or a peer to peer lender like Lending Club if things get tight, people without access to those things have their own lending clubs of sorts. Poor Americans are more generous than rich Americans. We have stats on what that means for charitable donations so we can expect the same results when it comes to things like bailing a family member or friend out of a tight spot.

That might mean a monetary loan, a temporary place to stay, use of a car or helping out with a few extra gifts for their kids at the holidays. It’s not hard to see why poor Americans are more generous. It’s the same reason people who work in the service industry tip other service industry workers well when they go out. Because they know what it’s like.

Poor people know what it’s like to need help and are quicker to offer it than rich people who’ve never needed help. The question raised above about what will happen to people who can no longer work but don’t have any savings is probably answered here. Their own version of the lending club will step in to help.

The Solution

I don’t know. Revolution? Anarchy? As a country, we’re still to comfortable for that. In most of America even those without much still have, if not exactly enough all of the time, they have enough, enough of the time to keep them from taking to the streets.

I don’t know how much longer that will last though. If people lose health care and watch enough loved ones die because of it, they might hit the streets. If tens of thousands of jobs are lost to automation without jobs to replace them or universal basic income, maybe that will do it.

We all want to help and I think there are ways we can. We need to be more open about money. There is too much stigma surrounding it and it makes people ashamed and embarrassed to bring it up which means you don’t know who among your circle of friends or family may need help or advice.

When people are too ashamed to ask for help, they end up doing things that make the situation worse like ignoring bills and taking out more and more credit cards to stay afloat. A small amount of intervention early on can stop things from escalating.

Don’t assume people know what you know. Who on earth hasn’t heard of Betterment or IRA’s or 401k’s or Lending Club or college scholarships? Well, you might be surprised. Again, this is why it’s so important to make money and the things around it a usual topic of conversation.

You can be part of someone’s lending club even if you can’t afford to help them financially by teaching them what you know. Because for many Americans, that is the only safety net they have.

Show Notes

The Yin Evil Twins Brewing: The black of the black and tan.

U.S. Financial Diaries: More information about the study, the people involved, and the book.

Simple Wealth: Research and evaluate rental properties.

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