by Stephen Sorrell
Early in 2012 and into 2013, Tim Ogden '95 and the U.S. Financial Diaries took off with funding from the Ford Foundation, Citi Bank, and Omidgar Network to research and evaluate the volatility of incomes coming from low-and moderate- income households. Studying financial data from 235 households at frequent intervals throughout the year, they sought to answer why lower income families have grown so poor. In their analysis, Ogden's research tracked cash flows in households. Their goal was to understand how people spend and save their money, and they uncovered lots of personal details in their frequent visits that happened to explain lots of their data.
What Ogden found is that income stability varied from household to household, but in general, what really caused unstable financial environments was overcompensation. The study found that members of households had begun to take multiple jobs to fill in for downs or losses with primary job earners. As a result, all salaries came in at once, leading to an average of five major spikes or dips in household income each year. Another important discovery made by Ogden's research was that in analyzing household spending habits alongside income reception, people would expect spending to remain stable off of a monthly budget. But data showed that spending spikes coincided with income reception. Households fall into a paycheck-to-paycheck lifestyle because with no stable income, they are unable to afford financial services such as wealth management planner, leading to cyclical poverty. Ogden noted that these households often intended to save roughly 19% of their annual income and spend 72%, but what he found was that within six months, households withdrew money from their bank accounts four-and-a-half times more than they deposited money. Some American households were living below the poverty line for as many as six months out of the year, which forced them to use their savings to pay off debts and loans. In total, the low-to-middle income families of the United States do not have a reasonable capability to build up assets through investment.
Based on this discovery, Ogden pointed out that our country’s leaders have continuously assured its citizens that by saving, stability in incomes will start to grow, but many of them don’t realize the challenges of trying to save without the help of a financial professional. As a result, Ogden suggested different educational measures need to be made, because current common financial advice is poorly-suited to fit the realities of a low-income lifestyle. Furthermore, Ogden suggested that more economic research needs to be done on these low-budget households, because current surveys are only capturing about 50% of their economic activity, which creates a drastic information void.
Out of his research, Ogden has paved a pathway for solving the emerging issues involving income volatility in America's poorer classes. Ogden acknowledges that this kind of research takes time and money to perform, but with further research he thinks that financial servicing companies could make a profit off of helping lower income households grow their assets. This will not only bring a more stable economic lifestyle to lower income families, but it will also grow our national savings and financial services market. In total, the U.S. Financial Diaries is growing its research to find ways to help educate these households on how to save and invest. More of their work can be found online on their website, http://www.usfinancialdiaries.org/households, where Ogden and his colleagues have posted case studies on specific households and have given the public data on lower income assets in the United States.