When the Great Recession began in 2008, it became clear that American families were far more financially fragile than researchers had realized.
“In the US, we have so much financial data,” said Rachel Schneider, ’97, senior vice president at the Center for Financial Services Innovation, an organization dedicated to improving the financial health of Americans. “We don’t have a lack of data, and yet somehow that data wasn’t giving us a full picture of people’s lives.”
So Schneider teamed up with Jonathan Morduch, professor of public policy and economics at the Wagner Graduate School of Public Service at New York University, and executive director of the Financial Access Initiative. The two created the groundbreaking US Financial Diaries research study, which compiled data about how 235 households handled finances over the course of a year. The study did something new in the US: it dug into the day-to-day financial lives of Americans to see how they were coping, saving, and spending on a daily basis.
What they found had broad implications for the way we approach the financial health and security of families in the United States. Schneider and Morduch coauthored a new book based on their study: The Financial Diaries: How American Families Cope in a World of Uncertainty.
Chicago Booth Magazine sat down to talk with Schneider about her trending book.
CBM: How does your study challenge the traditional approach to researching poverty?
Schneider: A lot of times we look at aggregative numbers, or averages, such as the overall poverty rate. But our country is huge. We’re 350 million people. So let’s say 4.4 percent of adults are unemployed—that is really a very thin understanding of the employment picture.
What was unique about The Financial Diaries is that it is both quantitative and qualitative. We selected a huge amount of data about the families we worked with, but we could ask them about it. So we not only have really solid quantitative understanding of their experiences, but we also have their interpretations of why they’re experiencing it as well. That opportunity to ask “why” questions is unusual in the research world.
For example, Janice, a blackjack dealer in Mississippi, was doing exactly what general financial advice would tell her to do—splitting the direct deposit of her paycheck into two bank accounts, checking and savings. But she was mostly using check cashiers to pay her bills. While the FDIC data about under-banked people in the US can tell us how many people in the country manage their financial lives that way—roughly 20 percent—it’s hard for a national survey to figure out why she would do that.
We were able to ask Janice why. She explained that she cut up her checkbook so that she would not be tempted to use payday loans, which require a post-dated check as collateral. She also cut up her ATM card and kept her savings in a credit union that was an hour away so that she wouldn’t be tempted to touch her savings, except for things she really needed.
CBM: What was one statistic that surprised you?
Schneider: The basic volatility of people’s lives and income. The reality is that 56 percent of Americans work in hourly jobs and those jobs often come with no paid time off, so any sick day creates volatility in income. They often don’t come with scheduling predictability or consistency. Week to week, the number of hours that someone gets at work may vary.
During the year of our study, Janice had a low paycheck of $900 and a high of $1,200, which is a swing of 30 percent of her $1,000 average. Her pay can even depend on whether it’s an odd- or even-numbered year. Janice works on tips, and every odd-numbered year, Alabama and LSU play Mississippi State in Starkville. Many of the fans will visit the casino on their way home from the games. If it’s an even-numbered year, her annual salary suffers.
CBM: What is one policy that would most help the families you profiled in this book?
Schneider: Big picture, we need to spend a lot more effort looking at cash flow, and give people advice and products that help them manage it. One way to think about The Financial Diaries is to think about corporate finance. When we think about financial health of a company we look at its income statement, balance sheet, and the cash flow statement. All are important, but it’s the cash flow statement that runs companies aground, and it’s cash flow statements that are most pressing and painful for families as well.
Our research shows how important it is that we do better helping people manage their day-to-day or month-to-month cash flow needs. Once you do that, a different set of ideas rise higher on the priority list. For example, it becomes more important to think about how to deliver real-time payments.
CBM: How do you think the relationship between technology and improving people’s financial lives can be beneficial?
Schneider: We can’t underestimate how important big data will be for driving solutions for these families. The financial advice that we give people is how much to save for retirement or how to allocate a portfolio, and all of that information is provided in a relatively general way.
We’re going to get to a place where your financial services provider can look at your cash flow over time and give you specific advice that is relevant to your needs. Big data will enable that.
CBM: How do your findings change the traditional view of the American Dream and how people are actually setting their goals?
Schneider: There was a national survey in which out of a representative sample of Americans, 92 percent said they would choose stability over more income. That number has actually increased by 7 percent in the three years post-recession. People don’t feel sufficiently stable to think about upward mobility, and there is a real trade off between the two.
We think about the American Dream as how people can strive to be upwardly mobile, get more education, better jobs, and save for retirement. We aren’t thinking enough about how much risk there is in making those choices—how unlikely and in some ways unfair it is for people to bear those risks so much on their own. It’s really hard for people to manage those risks and to also try to strive for something better than what they have today.
—By Leah Rachel von Essen
July 14, 2017