Emergency Savings Salon: Takeaways
May 10, 2013
By J. Michael Collins, Faculty Director of the Center for Financial Security at the University of Wisconsin
“Emergency Savings” Has Many Meanings
Some define this as cash in a pinch, others liquidity (including credit), other definitions include tapping resources of family and friends. Another view is that this is more like formal savings, including the use of traditional bricks and mortar banking institutions. Others see emergency savings as an initial step along a continuum of assets and wealth building. In many ways this diversity reflects the embryonic stage of the field’s development.
Many Emergencies Are Predictable
We frequently discussed transportation break downs, unexpected medical or childcare expenses or the need to replace an appliance or home repair. These are large expenses, and unpredictable as to exactly when they will occur, yet over the course of several months, quite likely to occur. Unlike other insurable events, many emergencies are quite predictable over even a year or two.
Lack of Liquidity is Rooted in Lack of Income, But…
Clearly flat or declining real incomes for working families (especially those with no or only a basic secondary education) constrains what households hold back from consumption. There is little margin for savings, which explains the demand for credit. At some level, income supports are necessary. But it seems a lack of a rainy day fund for unexpected expenses is common even at income levels near or above the median income. Resource constraints are real, but behavioral failures and inadequate financial products/processes may also play a role.
Picking a Target Population is Critical
Given the high degree of variation in what constitutes an unexpected expense and the ability of people to address that expense using savings and/or credit, it becomes very important to focus on one market segment. We discussed targeting through public programs (for example, TANF), through activities (for example, attending community college), technology (for example, social media) and products (for example, pre-paid stored value transaction cards). But within each, there is need to focus on where in the life course someone is at (single, with dependents, in the work force, out of workforce with a disability, etc.) and what the greatest leverage points might be.
Picking a Targeted Moment is also Critical
We discussed a variety of life stages, from younger adults enrolling in community college, to low-income people buying their first home, to income tax filing and even exiting from transitional housing. Some of these are points where people are on an upward economic trajectory and liquidity may help stabilize bumps in the road. Other people are at points where they are likely to be continuously stressed economically. Offering opportunities to save or tap credit at each of these stages will need to be designed quite differently.
What Happens When the “Emergency” Comes? The Savings/Liquidity is Now Gone.
One of the realities of planning for unexpected expenses is eventually the expense will occur, requiring people to tap the liquidity they built up. This means a decrease in savings balances and/or increase in debt. The process of rebuilding the contingency reserve now starts over again. Innovations need to build this process in from the start.
People Will Find Ways to Tap Liquidity, the Question is at What Cost
Low-income people have experience juggling due dates on bills, managing a variety of formal and informal income sources, curbing or forgoing certain expenses and strategically maneuvering program eligibility to make ends meet. Payday loans, late fees, overdrafts, pawn loans, title loans and other products are in the mix for many as tools to get through the week or month. Introducing emergency savings may not eliminate these higher cost products, but may help reduce usage. Implied in the concept of facilitating contingency savings is the idea that people will build their own capability to manage expenses and income, giving them more “tools in the toolbox” as well as increasing their ability to plan and use these tools more effectively.
Should Scarce Subsidy Dollars be used to Support Unrestricted Savings?
While there is broad experience in subsidy for matching savings for education or homeownership, there are few examples of matched savings for unrestricted uses. Current federally-supported asset programs explicitly prohibit all but narrowly defined uses of matched savings. The role of subsidy may depend on if the goal is to start saving (the extensive margin) or to add to existing savings (the intensive margin). Subsidy to start could overcome behavioral biases or other barriers, but ongoing savings might not be matched. On the other hand, subsidy might be used particularly to build a savings ‘habit’ for some time. The exact use of subsidy–if at all–is not clear.
Housing Maybe One Potential Path, But with Challenges
Most people have some portion of their income going toward housing consumption. Housing shocks can be expensive and involve large irregular expenditures, but on a monthly basis housing expenses are predictable. There are opportunities to use housing and variation in housing payments as context for savings, using liquidity or stabilizing living standards. Yet, low-income housing and residents in these projects are already resource constrained. Regulations related to mortgages and mortgage servicing may limit the extent to which savings or borrowing can be built into housing payments or tapping home equity.
A Sustainable Program Needs Incentives for Users and Providers
Any new emergency savings initiative needs to include compelling financial or behavioral benefits for the ultimate users–it needs to be simple, easy to use, and low cost at a minimum. But there also have to be incentives for financial services firms if the program has any hope of reaching a wide scale. While regulatory pressures may encourage some firms to participate, a robust and dynamic marketplace will mean some fees or revenue for private firms. Likewise, a new savings initiative cannot be dependent on nonprofits with a charitable mission perennially seeking grants and donations to keep a program running,
Be Realistic About the Political Reality of any New Savings Policy
To be successful at scale, the goal of any new effort around contingency savings cannot be “X number of people saved” or “$X saved”. Instead the focus has to be on impacts for society: namely reduced use of public services and improved outcomes related to the health and well-being of families. Programs need to focus on bigger picture impacts; issues social equity or helping low income families to be slightly better off financially are not convincing in the current policy environment.