Image by Refracted Moments.
After two decades, the asset building field has grown up and learned some really important lessons along the way. The field started with a focus on promoting access to long-term assets for major investments like housing and post-secondary education. Since then, we’ve come to recognize that short-term, discretionary, liquid savings – aka emergency and precautionary savings -- is just as, if not even more important, for lower-income families. As Ray Boshara describes in “7 Surprising Findings from the Asset Building Field,” the lesson was most dramatically recognized in the American Dream Demonstration (ADD) when 64% of the participants made an early withdrawal and forfeited a high match to help cover more immediate expenses.
Since the ADD, the need to build emergency savings has become more and more apparent, and it’s not just a problem limited to low-income households. Several online reports have provided headline grabbing, snapshot statistics that claim that 64% of Americans don’t have $1000 readily available in savings and that one-in-four don’t have any emergency savings. Academic research by a team from GWU, Oxford and Princeton confirms the emergency savings emergency; finding that half of American report they probably or certainly would not be able to come up with $2,000 in 30 days in the event of an emergency. Only 22% of those surveyed would cope with the $2,000 emergency by pulling the full amount from savings.
So what happens when people, especially lower-income people, need money in the face of an emergency or drop in income? Last week, the Center for Financial Security at the University of Wisconsin at Madison hosted a webinar entitled,Coming Up with Cash in a Pinch, which explores that question. In the webinar, Dr. Michael Collins presented his newest paper by the same name. He and his co-authors looked at a wide variety of liquidity mechanism utilized when a need for cash arises and describes the pros and cons of each. In his presentation, he also provided some insights into why people don’t have saving. The reasons range from not being able to save, to avoiding savings because of potential asset limit and garnishment consequences, to behavioral failures such as procrastination and a bias for present consumption. He also listed a couple of ways to emphasize emergency savings.
I had the privilege of responding to Michael’s presentation and discussed how policy has a role to create more supports to make it easier for Americans, particularly those in lower-income households, to save. This includes some of our major initiatives such as the AutoSave pilot and the Saver’s Bonus Act proposal. Mae Watson Grote, Executive Director of The Financial Clinic in New York City, then provided information about the clinic’s financial development model helps customers address their immediate financial challenges, while working toward long-term goals and financial mobility. She described how lower-income people her community utilize the different liquidity mechanisms described my Michael and how the clinic works one-on-one with clients to determine what barriers are at the root of the individual’s financial problems, identify their financial goals and develop a pathway out of their current situation.
It’s exciting to see so much work being done to strengthen that first rung of the asset building ladder. While there’s still a lot more to learn about emergency savings, hopefully, some of what we know now can be helpful to start ensuring lower-income families have the opportunity to build up that needed cushion to fall back on in the future.