Policy & Practice April 2015

Many low- and moderate-income

The Great Recession eroded years of wealth building, making family house- hold finances incredibly unstable. Many families lost thousands of dollars in housing wealth and business equity, took on unsustainably high levels of debt, and tanked their credit. Between 2007 and 2010, the Federal Reserve Bank of St. Louis found that median household wealth dropped 39 percent—with younger families, individuals with less than a college education, and households of color suf- fering particularly large wealth losses. The Federal Reserve Bank of St. Louis has coined this recession a “balance sheet recession” due to the extreme loss of net worth it caused. A balance sheet changes with the household’s rising or falling savings, debt, income, and expenses; all of these components affect a family’s financial well-being. HOUSEHOLD SAVINGS ARE LOW According to the Corporation for Enterprise Development’s (CFED) 2015 Assets & Opportunity Scorecard, 44 percent of Americans are “liquid asset poor,” meaning they have less than three months’ worth of savings (approximately $5,963 for a family of four, or three times a monthly income at the poverty level). These families are living one financial emergency away from ruin. This group includes many who would consider themselves middle class—fully one-quarter (25 percent) of those earning between $56,113 and $91,356 annually are liquid asset poor. These rates are even higher for house- holds of color; two-thirds of households of color live in liquid asset poverty. For short- or long-term savings, such as for retirement or for a downpayment on a house, individuals need access to safe, affordable financial products. The Federal Deposit Insurance Corporation reports that 1 in 13 households were unbanked in 2013 while an additional 1 in 5 banked households used an alter- native financial service to meet their banking needs. The highest unbanked rates continued to be found among communities of color, lower- income

households, younger households, and unemployed households. The lack of access to mainstream financial products and services decreases house- holds’ ability to save and increases household vulnerability. With no savings and no place to save, families often resort to high-cost credit cards or payday lenders during financial emer- gencies, creating a cycle of debt that can last for years. HOUSEHOLD DEBT IS HIGH Debt is a fixture in the majority of Americans’ lives. CFED’s 2015 Assets & Opportunity Scorecard found the average amount of revolving debt is $9,890 for an individual, while the average student is graduating with $28,400 of debt from a four-year institution. Debt can be mentally taxing to households and can delay buying a house or investing in other long-term assets. Additionally, more than half of consumers have subprime credit scores, meaning they cannot qualify for credit or financing at prime rates. With the majority of consumers receiving credit at higher interest rates, the probability they will tap into preda- tory financial services and accumulate even more debt is high. households experience significant fluctuations in income frommonth to month in both amount and timing as they seek additional opportunities to stitch a livable income together. Income fluctuations create problems even for households whose finances are adequate on average over the course of the year.

Kate Griffin is the vice

president of Programs at the Corporation for Enterprise Development (CFED).

Jeremie Greer is the vice president of Policy and Research at CFED.

Alicia Atkinson is a policy analyst on the Policy and Research team at CFED.

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Policy&Practice   April 2015