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Insufficient Funds

Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households

Rebecca M. Blank
Michael S. Barr
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    Insufficient Funds
    Book Description:

    One in four American adults doesn’t have a bank account. Low-income families lack access to many of the basic financial services middle-class families take for granted and are particularly susceptible to financial emergencies, unemployment, loss of a home, and uninsured medical problems. Insufficient Funds explores how institutional constraints and individual decisions combine to produce this striking disparity and recommends policies to help alleviate the problem. Mainstream financial services are both less available and more expensive for low-income households. High fees, minimum-balance policies, and the relative scarcity of banks in poor neighborhoods are key factors. Michael Barr reports the results of an in-depth study of financial behavior in 1,000 low- and moderate-income families in metropolitan Detroit. He finds that most poor households have bank accounts, but combine use of mainstream services with alternative options such as money orders, pawnshops, and payday lenders. Barr suggests that a tax credit for banks serving primarily disadvantaged customers could facilitate greater equality in the private financial sector. Drawing on evidence from behavioral economics, Sendhil Mullainathan and Eldar Shafir show that low-income individuals exhibit many of the same patterns and weaknesses in financial decision making as middle-class individuals and could benefit from many of the same financial aids. They argue that savings programs that automatically enroll participants and require them to actively opt out in order to leave the program could drastically increase savings ability. Ronald Mann demonstrates that significant changes in the credit market over the past fifteen years have allowed companies to expand credit to a larger share of low-income families. Mann calls for regulations on credit card companies that would require greater disclosure of actual interest rates and fees. Raphael Bostic and Kwan Lee find that while home ownership has risen dramatically over the past twenty years, elevated risks for low-income families—such as foreclosure—may well outweigh the benefits of owning a home. The authors ultimately argue that if we want to demand financial responsibility from low-income households, we have an obligation to assure that these families have access to the banking, credit, and savings institutions that are readily available to higher-income families. Insufficient Funds highlights where and how access is blocked and shows how government policy and individual decisions could combine to eliminate many of these barriers in the future.

    eISBN: 978-1-61044-588-7
    Subjects: Economics, Sociology, Political Science

Table of Contents

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  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. About the Authors
    (pp. ix-x)
  4. Chapter 1 Savings, Assets, Credit, and Banking Among Low-Income Households: Introduction and Overview
    (pp. 1-22)
    Michael S. Barr and Rebecca M. Blank

    Low-income individuals often lack access to the sort of financial services that middle-income families take for granted, such as checking accounts, bank loans, or easily utilized saving opportunities. High-cost financial services, barriers to saving, lack of insurance, and credit constraints increase the economic challenges faced by low-income families. The contributors to this volume analyze the financial constraints and choices of low-income families and describe the ways in which low-income families utilize financial services, through both formal and informal financial institutions. In these chapters, they also discuss policies that would spur the private sector to provide financial services that allow low-income...


    • Chapter 2 The Assets and Liabilities Held by Low-Income Families
      (pp. 25-65)
      John Karl Scholz and Ananth Seshadri

      There are many reasons to be interested in the assets and liabilities held by American households. Net worth, the difference between assets and liabilities, can be used to maintain living standards when families are hit with adverse employment, income, or health shocks. These resources may provide the critical buffer that allows a poor family to fix a broken car and remain employed, find help in caring for a sick child, or move out of a dangerous neighborhood. Net worth may allow families to take advantage of investment opportunities, such as pursuing further education. Many families need to accumulate net worth...

    • Chapter 3 Financial Services, Saving, and Borrowing Among Low- and Moderate-Income Households: Evidence from the Detroit Area Household Financial Services Survey
      (pp. 66-96)
      Michael S. Barr

      This chapter presents new empirical evidence documenting the financial services behavior and attitudes of low- and moderate-income (LMI) households. The Detroit Area Household Financial Services (DAHFS) survey uses a random, stratified sample to explore the full range of financial services used by LMI households, together with systematic measures of household preference parameters, demographic characteristics, and households’ balance sheets. Results from over one thousand interviews in the DAHFS study suggest that the structure of the financial services, credit, and payments systems in the formal and informal sectors imposes significant costs on LMI households. Within the severe income constraints they face, LMI...

    • Chapter 4 Banking Low-Income Populations: Perspectives from South Africa
      (pp. 97-120)
      Daryl Collins and Jonathan Morduch

      When Muhammad Yunus was starting Grameen Bank in Bangladesh in the late 1970s, Mary Houghton and Ron Grzywinski, founders of Shorebank, the leading community development bank in the United States, made repeated trips to Bangladesh to assist the novice banker and his funders. The international exchange went two ways. In the mid-1980s, Muhammad Yunus met Bill and Hillary Clinton in Washington, and Yunus inspired the Clintons to help launch a replication of the Grameen Bank in Arkansas (Taub 2004; Yunus 1999). Since then, exchanges have proliferated as the Grameen model has been replicated elsewhere in the United States, including Project...

    • Chapter 5 Savings Policy and Decisionmaking in Low-Income Households
      (pp. 121-146)
      Sendhil Mullainathan and Eldar Shafir

      Theories about poverty, held both by social scientists and by regular folks, typically fall into one of two camps: those who regard the behaviors of the economically disadvantaged as calculated adaptations to prevailing circumstances, and those who view these behaviors as emanating from a unique “culture of poverty” that is rife with deviant values. The first view presumes that people are highly rational, hold coherent, well-informed, and justified beliefs, and pursue their goals effectively, with little systematic error and no need for help. The second view attributes to the poor a variety of psychological and attitudinal shortcomings, presumed to be...


    • Chapter 6 Using Financial Innovation to Support Savers: From Coercion to Excitement
      (pp. 149-190)
      Peter Tufano and Daniel Schneider

      In certain stylized economic models, household savings emerge mechanically and effortlessly as informed rational agents maximize lifetime consumption in light of their likely income streams, their needs, and the hazards they might encounter. In other models, households are massively confused about intertemporal trade-offs. They employ a set of time-inconsistent discount rates to evaluate options that vary greatly from period to period, and their resultant decisions may be time-inconsistent (Mullainathan and Shafir, this volume). Although these are both useful observations about household decisionmaking, they abstract away from the messiness of saving (Collins and Murdoch, this volume). Families—and of particular interest...

    • Chapter 7 Individual Development Accounts and Asset-Building Policy: Lessons and Directions
      (pp. 191-217)
      Michael Sherraden

      This chapter addresses individual development accounts (IDAs), which feature matched savings for the poor as a strategy for building assets. A large, multi-method, and continuing research project known as the American Dream Demonstration (ADD) provides the empirical foundation for the discussion. Several research methods and key results from ADD and other studies are summarized and discussed. Evidence is considered in light of current and potential policy, and future research directions are suggested.

      It is a commonplace that asset accumulation and investment pave the way to household development. With few exceptions, families must save and invest in education, skills, experience, a...

    • Chapter 8 Homeownership: America’s Dream?
      (pp. 218-256)
      Raphael W. Bostic and Kwan Ok Lee

      Living in a single-family, owner-occupied dwelling unit is central to the American conception of a secure and successful life—the quintessential “American dream.” Study after study has justified the interest in homeownership among Americans by claiming that it confers benefits both to individuals and to the society as a whole. First and foremost, homeownership fosters asset-building and helps to insulate households from generally rising housing costs (Di, Yang, and Liu 2003). Homeownership is also thought to contribute to life satisfaction, psychological and physical health, positive child outcomes, and greater civic engagement (DiPasaquale and Glaeser 1999; Fannie Mae 1999; Galster 1987;...

    • Chapter 9 Patterns of Credit Card Use Among Low- and Moderate-Income Households
      (pp. 257-284)
      Ronald J. Mann

      Ensuring that the poorer segments of the population have access to financial products and services has taken on increased significance as policymakers have come to understand the broad social ramifications of inclusive financial regimes. Access not only promotes savings but also enables the poor to manage cash flows and to meet basic needs such as health care, food, and housing. In the United States, the last few decades have seen remarkable progress on that front as low- and moderate-income (LMI) households increasingly use both mainstream products like deposit accounts and “fringe” products like payday lending, check-cashing services, and pawnshops (Barr,...

    • Chapter 10 Immigrants’ Access to Financial Services and Asset Accumulation
      (pp. 285-318)
      Una Okonkwo Osili and Anna L. Paulson

      More than 191 million people live outside their country of birth, and about 20 percent of these emigrants live in the United States (United Nations 2005). Today at least one in nine U.S. residents, or 35 million people, were born abroad, and nearly one in five U.S. schoolchildren have an immigrant parent (Capps et al. 2004). Immigrants make up a disproportionate share of low-and moderate-income U.S. residents. Among individuals with below-median income, one in six were born abroad.

      Since 1990, the growth in the immigrant population has been fastest outside of traditional immigrant-receiving regions (Singer 2004). As a result, immigrants...

  7. Index
    (pp. 319-326)