Why Cities Should Care about Family Financial Security

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April 21, 2016
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Why Cities Should Care about Family Financial Security

April 21, 2016

A city is only as strong as the people who live in it. When residents struggle to make ends meet, cities can too.

Over the course of a year, roughly one in four American families at all income levels will lose a job, experience a sharp drop in income, or suffer an injury or illness that limits the ability to work.

“This isn’t just a low-income issue, it’s a middle-income issue, and to some extent, it’s also a high-income issue,” said Caroline Ratcliffe, senior fellow at the Urban Institute.

For families, these income disruptions mean being more likely to miss housing or utility payments, receive public benefits, and, worst-case scenario, be evicted from their homes. Evictions in particular can have long-term effects on families, especially children.

For cities, these income disruptions can mean reduced revenue from city-owned utilities and property taxes as citizens miss payments. Coming up short on revenue forces decisionmakers to make tough choices about what programs to fund and what programs to cut. That has serious implications for schools, public safety, housing, and numerous other public services.

 

How savings can protect families from income disruptions

 

When families are able to manage their finances and weather income disruptions independently, they and their communities are better off. The key: savings, whether held in a checking, savings, or money market account or in nonretirement stocks and bonds.

More savings mean more of a cushion, but even a small amount in the bank helps. According to new Urban Institute research, families with as little as $250 to $749 on hand are less likely to miss housing or utility payments or be evicted after an income disruption. Families with as little as $1 to $249 are significantly less likely to receive public benefits than families with no savings.

Savings cushion families after an income disruption

 

Source: McKernan, Ratcliffe, Braga, and Kalish (2016) calculations of the 2008 Survey of Income and Program Participation, waves 4–12 (September 2009–August 2012).
Notes: Values are in 2015 dollars. In all three charts, differences between $1–$249 in savings and $250+ in savings are statistically significant at the 5% level. In the received public benefits chart, the difference between $1–$249 in savings and no savings is statistically significant at the 1% level. See the brief for eviction findings and additional data and definitions details.

A few hundred dollars in savings “could help you pay a utility bill. That could keep you from taking out an auto title loan or a payday loan, which can lead you potentially into a spiral of debt,” said Signe-Mary McKernan, senior fellow at the Urban Institute. “That doesn’t mean that more savings isn’t better…because we are finding that higher savings are associated with even lower hardship levels. So having more than $750 is going to get you even further. But don’t let that wanting-to-get-further keep you from getting started.”

When it comes to withstanding income disruptions, savings play a bigger role than income. Analysis shows that being low income (in this report, defined as earning up to $32,280 a year) with $2,000 to $4,999 in savings is better than being middle income (bringing in between $32,281 and $72,120 a year) and living paycheck to paycheck.

Savings matter for families at all income levels

 

 

Source: McKernan, Ratcliffe, Braga, and Kalish (2016) calculations of the 2008 Survey of Income and Program Participation, waves 4–12 (September 2009–August 2012).
Notes: Values are in 2015 dollars. For the low-income third of families (annual income $0-$32,280), differences between $0 in savings and $1+ in savings are statistically significant at the 10% level. For the middle-income third of families (annual income $32,281-$72,120), differences between $0 in savings and $2,000+ in savings are statistically significant at the 1% level. For the high-income third of families (annual income $72,121+), differences between $0 in savings and $5,000+ in savings are statistically significant at the 1% level. Savings of $2,000–$4,999 for low-income families do not differ significantly from savings below $2,000 for high-income families. See the brief’s data and definitions box for additional details.

Unfortunately, nearly two-thirds (62 percent) of families have less than $5,000 in nonretirement savings accounts. Almost a quarter (24 percent) don’t have any cash savings at all.

Even those with $5,000 in the bank are considered asset poor; they could only support a family of three at the poverty level for three months.

And this isn’t just an issue for lower-income families. Though savings generally increase with income, about 1 in 10 high-income families making over $72,120 a year don’t have any savings, compared with 4 in 10 low-income families and 2 in 10 middle-income families.

Many families have only a small financial cushion

 

Source: McKernan, Ratcliffe, Braga, and Kalish (2016) calculations of the 2008 Survey of Income and Program Participation, wave 11 (January– April 2012).
Notes: Values are in 2015 dollars. Nonretirement savings include transaction accounts, interest-earning accounts, and other financial assets.

Automatic savings could be a solution. “It’s easier to save through your home because when that mortgage payment comes due, you automatically pay it, especially if you have some emergency savings to help make it. It’s easier to save through retirement when your employer automatically deducts it,” McKernan said. Regular, automatic contributions to a checking or savings account (or even a prepaid card)—“even if it’s a couple percent of your income”—will add up over time.

 

Why cities are taking action

 

“Creating financially healthy communities is a goal of city leaders,” Ratcliffe said, “and financially healthy families are a great place to start.”

When residents have a cushion that allows them to bounce back from an income disruption, they don’t need to rely on their cities for aid. This saves money for local budgets and stops the cycle of benefit receipt before it starts.

When residents can pay their utility bills, cities aren’t put in the tough position of shutting off service, avoiding impacts to residents’ well-being and costly measures to access pipes and wires.

When residents have emergency savings, they are better equipped to leave dangerous or unhealthy living situations, conserving city resources that can be spent on others in need.

When residents are financially secure, they are better positioned to buy homes, support city businesses, and contribute to the local economy, helping their communities thrive.

And when children see their parents save, they’re likely to adopt saving habits too, meaning families and their cities could see benefits for years to come.

By strengthening the financial health of their residents, cities are protecting their own financial health.

Through Volunteer Income Tax Assistance sites, affordable housing developments, and workforce development programs, cities can help residents improve their financial stability and enroll people in programs that will help them build nest eggs.

Programs that offer matched savings at tax time, when many low- and middle-income families receive an influx of cash via a tax refund, have shown promise. Individual development accounts, which can be administered through local governments, provide matching funds for specific goals, such as buying a home.

Some cities offer one-on-one financial coaching. Participants in a Miami-area coaching program made more deposits, saw their balances grow, and got closer to reaching their savings goals.

“These are initiatives that cost money, but they can help people take that next step and provide financial security,” Ratcliffe said. By strengthening the financial health of their residents, cities are protecting their own financial health.

 


Project credits

Research: Signe-Mary McKernan, Caroline Ratcliffe, Breno Braga, and Emma Kalish

Graphics: Hannah Recht

Editorial: Fiona Blackshaw


This feature was funded by a grant from JPMorgan Chase. We are grateful to them and to all our funders, who make it possible for Urban to advance its mission. The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders. Funders do not determine research findings or the insights and recommendations of Urban experts. Further information on the Urban Institute’s funding principles is available here

Photo via Shutterstock

As an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research.

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