By Tanya Ladha and Rachel Schneider
Financial Health Network
Maybe you’ve been there — you break a dish, clean down the middle. You find the superglue, carefully squeeze a small stream of the potent liquid on either side of the break, and patiently hold for the allotted 90 seconds. When you move to place the mended dish down, you realize that you yourself are now bonded to it! Those few drops were small but mighty! You may have also learned that lesson a few times with your favorite hot sauce. While all around us we are fed messages of going big, growing fast, or reaching the top, it is important to remember that sometimes small doses can have great impact.
Our financial lives are no exception.
Over half of Americans can’t come up with $400 for an unexpected expense without borrowing or selling something. This is troubling. Not only is $400 a relatively small amount of money, it is also the cost of a relatively typical financial surprise — a broken water heater, a sick pet or car trouble. 53 percent of us aren’t ready for the inevitable bumps in the road. These small dollar financial shocks can derail financially fragile families — payday loans can create overwhelming cycles of debt, one missed utility bill can cut off basic necessities, a missed rent payment could lead to eviction. As practitioners and policy makers struggle to create comprehensive supports and solutions for millions of financially vulnerable Americans, the problem itself begs the question — given both the dollar size and likelihood of these unanticipated life events, what if we tried delivering relatively small amounts of money to families at the right moment, in the right way?
There is growing evidence that small, well-timed strategic cash infusions can have an outsize impact on people’s lives. Globally, and even here in the U.S., different organizations and sectors are exploring ways to infuse small doses of financial relief into the lives of those who are financially vulnerable. With the support of the Omidyar Network, we reviewed the existing research, both domestic and abroad, to learn more about how to design the most effective interventions. This is a nascent body of learning, so there are still plenty of open questions. But, here’s our take on some of the design features that show promise:
Magnitude: Go small. Or medium.
According to The Pew Charitable Trusts, the median cost of a household’s most expensive shock is $2,000. Providing financial relief that is responsive to the size of a shock can help families bridge an otherwise impassable gap. Our research found that large cash infusions often led to increased asset accumulation or the purchase of durable goods. These are certainly worthwhile investments, but they do not address the immediate chasms produced by financial shocks. That’s a separate problem, and it warrants a separate solution.
Frequency: Respond directly to financial need or shock
Households who are expecting scheduled or recurring financial supports typically factor that money into their budgets. Consider tax refunds or student loans — families who rely on this income typically spend it months before it arrives. This mental accounting often precludes those funds from being available to act as real-time relief for a financial bump in the road. Real-time infusions have the promise of acting as powerful and immediate financial salves.
Population: Target the illiquid, not the insolvent
The U.S. Financial Diaries uncovered a startling reality about how cash flows in and out of many households — it is often unpredictable and volatile. The spikes and dips of everyday life create unique moments of hardship for families without financial slack, particularly those with low savings or limited access to credit. These challenges are distinct from deeper, ongoing economic hardship. Cash infusions that specifically target the illiquid, or those that are short on cash “now,” are hard to come by.
Delivery: Cash is king
The research made clear that there are psychological and financial consequences to how financial transfers are delivered, which can impact the take-up, usage and efficiency of the program. When compared with vouchers or third-party payments, cash infusions have comparable, if not improved, outcomes while adding the advantages that they are typically less expensive to administer and give the recipient greater agency and empowerment.
Our thinking, and the research that informs it, represent preliminary steps in an emerging national conversation about new ways to support and protect the financially vulnerable among us. Important research exists about the dire consequences of being unprepared for small dollar financial spikes and dips, but we need more innovation around the the small dollar remedies that could mitigate them. You can read more about the work that Rachel will be doing about that in 2018 here. They may well turn out to be the small but mighty force that can help families hold it all together.
Rachel Schneider is the Network Entrepreneur-in-Residence at the Aspen Institute Financial Security Program (FSP), and co-author of The Financial Diaries: How American Families Cope in a World of Uncertainty. Rachel is launching a new effort to evolve the social contract to take into account the increasing financial volatility that workers experience. She is particularly interested in how small, strategic cash infusions can go a longer way by helping families at pivotal moments in which they simply don’t have the cash on hand that they need. Rachel spent the last decade working to build the financial health of Americans at the Financial Health Network, where she is still a Senior Advisor. Rachel began her career as an investment banker at Merrill Lynch & Co., but credits her commitment to the potential for innovative finance to solve major social problems from her days as a VISTA Volunteer (now AmeriCorps). She holds a J.D./M.B.A. from the University of Chicago, and a B.A. from UC Berkeley.
Tanya Ladha is a Senior Manager at Financial Health Network, working with a wide variety of financial services providers to identify, integrate and distribute high-quality products for the emerging consumer. With years of alternative financial services and cross sector experience, Tanya believes in the power of collaboration to improve consumer financial health. Born and raised in Texas, Tanya earned her M.B.A. and M.P.A. dual degree at the University of Texas at Austin.