The Inclusive Economy
Why CFED Believes in Financial Capability for All
By Kate Griffin on 04/01/2015 @ 10:00 AM
Here at CFED, we have a profound belief in the human spirit. It’s written in our vision: “Given a reasonable opportunity, CFED believes every family can save, build assets and create a more prosperous future for themselves and their children.” A crucial ingredient in achieving this vision is providing opportunities for families to build financial capability, defined as having financial knowledge, practicing financial skills and accessing financial products. These strategies provide on-ramps for families to get on the path toward saving and building assets.
For families with low incomes and few or no assets, there is little room for error. By working together with families to make good financial decisions easier, financial capability practitioners are setting families on a path to financial security in the long-term. Here’s what that looks like in practice:
- The moment when you’re about to make a financial decision is the single most important time to have information, advice and financial products in front of you. Let’s say your neighbor is struggling to pay the bills this month and is making a decision about whether to let the electric bill slide, pay a small amount towards all the bills or head to the payday loan shop down the street to get a lump sum that will help her get out from under the stress of paying bills that month. What information does she have about all of her options? Who does she trust to talk over this decision with? Are there other, better products that could help her, and does she know about them? The ability for service providers to intervene in that moment—with a better product for her needs and/or with trusted advice that she is more likely to follow—is financial capability at work.
- Every time you make a financial decision, it’s practice for the next one and the one after that. Exercising knowledge to make decisions is what turns knowledge into skills and skills into habits over time. If your neighbor gets some trusted advice and taps into a better financial product than a payday loan to keep her lights on, it will influence the way she decides next month how to handle her bills. She may know more about other options, or she may have built trust in whomever guided her to that decision. If it went well, she has gained confidence in her own ability to make good financial choices. She is now more likely to use that knowledge the next time she needs to make a financial decision, such as what to do with a financial windfall at tax time. When she is less stressed about paying bills, she has more bandwidth to think about the future and may return to that trusted advisor to plan for emergency savings or a downpayment for a home. These financial capabilities she is building will take her ever closer to saving and asset ownership—and build her own confidence in her ability to get there on her own.
- When you build financial capability over time, you experience financial well-being. The Consumer Financial Protection Bureau recently released their definition of financial well-being, which shows us that this concept of financial wellness is very subjective. How you feel about the state of your finances, your ability to make good financial choices (regardless of actual income level or dollars in a savings account) and your capacity to absorb a financial shock are all integral to achieving financial well-being. As we think about financial well-being in these more subjective terms and apply the concept to our work, we believe more people will see financial capability strategies as a key stepping stone to financial well-being.
- In order for you to build financial capability over time, advice and products need to be available wherever you are making decisions. From early childhood through old age, people make financial decisions. Parents must choose whether and how to start financial habits with their children very early on. Students must pay for postsecondary education. As youth move out of from their parents’ homes and start households of their own, they must learn that credit scores matter and rent needs to be paid on time every month. Older adults must learn to navigate fixed incomes, and some will even find themselves parenting again when grandchildren come back into their lives. All of these and more are financial decision-making moments where we can embed conversations and products that help people make better choices. Trusted advice and access to financial products need to be embedded in schools, in workplaces, in communities and at pivotal moments in people’s lives, such as leaving home for the first time, renting a new apartment, getting a new job, having a child, paying taxes or even seeing a new health care provider. We are beginning to see the power this can have—to have an integrated, tightly woven network of ways to meet people where they are.
What are the strategies we see organizations deploying? And how do we know which strategy to use when? Tomorrow, the Department of Health and Human Services’ Administration for Children and Families (ACF) and CFED are launching an amazing resource for the field, Building Financial Capability: A Planning Guide for Integrated Services. It outlines ten key financial capability strategies, such as financial coaching and counseling, credit building, and asset ownership. It also helps organizations determine which services to deploy to their clients, how and when.
Ultimately, deploying these strategies at the right time and in the right place will enable people to build habits that will lead to a more prosperous future for themselves and their families. Over the month of April, National Financial Capability Month, we’ll be introducing a range of resources, ideas, examples, data and tools from the field that will highlight these concepts. We look forward to engaging with all of you in this dialogue.