Common Cents Lab ^®

Many Americans are struggling to manage their cash-flow effectively. This is largely due to high income volatility, and unexpected expense shocks. As the Center for Financial Services Innovation has documented, cash flow management is not an issue affecting just temporary, seasonal, or contract workers. According to the U.S. Financial Diaries Project, the average family income experiences a 25% increase or decrease from their
median income for more than five months out of the year.

While the median household income rose 5.2% in 2015, it is still below 1999 levels. With stagnant income and increasing expenses, our middle-class is suffering. And the world is getting more tempting. From the growing persuasiveness of advertising to “one-click” payment methods, it is becoming harder for consumers to resist the temptation to buy. Even when consumers try to be fiscally responsible by setting auto-savings, preliminary research by Daniel Fernandes has shown that many people who have auto-savings will still incur credit card debt because they do not adjust their expenses to account for savings.

Families with low credit scores or limited credit histories are forced to seek liquidity from often predatory lenders such as pawn shops, auto title lenders, and payday lenders. Credit scores can also a ect a person’s ability to rent a home, gain employment, or access student loans. The current lending system has become too focused on trying to measure risk rather than on developing strategies to mitigate that risk. Furthermore, the credit system attributes too much of the risk to individual characteristics without also examining how the way in which the system is structured may actually perpetuate or contribute to missed payments or default. Instead, we believe that how a borrower’s environment is designed can increase the likelihood of repayment, regardless of each individual’s credit risk. This way, we don’t have to push individuals with low credit scores to use predatory lenders who lend at interest rates of upwards of 400%.

In the complex financial lives of Americans, nearly half of all people living in the United States would not be able to live off their savings for three months at the poverty level. The outlook is even more startling for low-income households; only 1 in 3 households earning $15,000 or less even have a savings account. In a study we conducted with close to 1,000 LMI participants, 36% self-reported having less than $500 in savings (including retirement savings).