Low- and moderate- income (LMI) households in the U.S. face numerous challenges to their financial well-being, including insufficient or volatile incomes, low levels of liquid assets to buffer them against emergencies, barriers to accessing mainstream banking or credit products and a subsequent reliance on high-cost alternative financial services, and so on. To understand the ways in which these multifaceted issues impact how households perceive their financial state and to give financial professionals—including financial coaches, credit counselors, and financial educators--a standardized way of measuring the financial well-being of their customers and clients, the Consumer Financial Protection Bureau (CFPB) recently developed a financial well-being scale.
This paper presents one of the first in-depth looks at financial well-being in the United States using a novel dataset that includes a longitudinal survey of LMI tax filers paired with administrative tax data. First, we examine the overall levels of financial well-being in low- and moderate- income households, compare these levels to those of the general population, and take the first steps toward understanding the stability of financial well-being in a population over time. Additionally, our work exploits the longitudinal nature of the survey to explore the factors affecting financial well-being including economic shocks, material hardships, and unsecured debt. Third, we also aim to understand the degree to which key financial characteristics—such as liquid assets or access to credit products--can mitigate the impacts of these economic shocks.
This paper uses data from the longitudinal 2017 Household Financial Survey (HFS), which asks 31,962 LMI household respondents questions about their financial situations when they file their taxes and six months later. Using basic statistical approaches combined with OLS and fixed effects panel regressions, we can assess both the marginal contribution of a wide variety of household characteristics to financial well-being, and rigorously examine the factors that predict both stability and instability in financial well-being over the course of a year.
We find that the weighted average financial well-being score for LMI population is 48 points, which is six points lower than the general U.S. population (CFPB, 2017). We also find that liquid savings and access to emergency financial resources were the largest predictors of higher financial well-being scores. Unsurprisingly, we also find that the recent experience of a financial shock or hardship was associated with a decline in reported financial well-being, although we observe a large degree of variation between the type of shock or hardship and its association with financial well-being.
By showing how financial characteristics and experiences of financial shocks, hardships, and debts are associated with financial well-being overtime, this research helps catalyze researchers, policymakers, and practitioners to further understand the financial well-being of their target populations. Our research will also help shed light on the factors that best insulate households against the impact of financial emergencies, and can help guide future program design decisions on the specific mechanisms to target in promoting financial resilience.