What are your members struggling with? What is their day-to-day decision making process like around finances, particularly those individuals and families near or below the poverty level? For your credit union to meet their needs, we need to better understand those needs.
One powerful way to do that is through the Life Simulation experience from the National Credit Union Foundation, which puts staff in the shoes of members to feel the financial and emotional distress of low-income people. To dig even deeper into this topic though, there are two new books that I recommend. Yes, it’s time for a credit union book club!
The two books are:
- Evicted: Poverty and Profit in the American City by Matthew Desmond (Evicted won a 2017 Pulitzer Prize among other notable honors); and
- The Financial Diaries: How American Families Cope in a World of Uncertainty by Jonathan Morduch and Rachel Schneider (Schneider is SVP at the Center for Financial Services Innovation, a Foundation partner and an organization dedicated to improving the financial health of Americans).
Both books contain powerful insights into the economic day-to-day lives of a variety of Americans to help you better understand their struggle. Evicted specifically focuses on tenants and landlords in the poorest areas of Milwaukee and reads almost like a novel, while The Financial Diaries also shares a variety of compelling personal stories drawing from a year-long research project to profile low- and middle-income families in Ohio, Kentucky, California, Mississippi and New York.
One of the first things that arise from both books is that most people’s financial decisions are a result of short term thinking. People are often living hand to mouth, one day or one week at a time to stay afloat and meet basic needs. Even if they have a long-term goal to get a degree, move to a house from an apartment, buy a car, and so on, they often are drastically hindered by unsteady or low incomes amidst a wide variety of other factors.
I learned a lot from the books, but some other takeaways for credit unions included:
- The importance of teaching budgeting skills, encouraging basic account opening and direct deposit, payday loan alternatives, non-prime auto lending, looking at more than a credit score for lending decisions, incentives for people that pay down credit (not just for spending more), and many more things to list.
- With such instability in incomes, many families looked towards their income tax refund as their biggest windfall of the year, including the Earned Income Tax Credit (EITC). Many credit unions offer free income tax preparation in the form of a Volunteer Income Tax Assistance (VITA) site. Do you?
- Often those that need an emergency fund the most, can’t create them. Interestingly, in Evicted, one woman relayed how her Supplemental Security Income (SSI) was based on countable income, so it was a disincentive to save because if she has too much money in her bank account, she won’t receive her monthly benefits. Therefore, in emergencies or to generate savings, some people use payday lenders, loans from friends, or even a “tanda” (also known as a lending circle). One way to solve this problem that is discussed in The Financial Diaries is the “Rainy Day Reserve”, where users could segregate their money via an app into “spend” and “save” accounts, making it easy and automated. Four in five savers reported “feeling more confident about their ability to handle future expense spikes.”
- With unsteady incomes, generally people need the most help when their income dips, not spikes. Therefore, it makes sense to help “smooth out” their financial life by monitoring these dips and spikes to then move money around accordingly. The Financial Diaries mentions an app, Even, that does just that, calculating user’s average pay and monitors paychecks, transferring funds when needed.
- Often, to make ends meet, people use their local food pantry or other community resources. These types of local nonprofits could be great partners for credit unions.
These are just a few observations and there are countless more to lift from these books to better help you improve the financial lives of members. After you’re done reading, consider a book group discussion with your team, executive staff, board and others.
“The key to good decision making is not knowledge. It is understanding. We are swimming in the former. We are desperately lacking in the latter.” – Malcolm Gladwell