Partners, Volume 13, Number 3, 2003
Partners, Volume 13, Number 3, 2003
|Financial Education Helps to Bridge the Wealth Gap|
Many people think that financial planning is only for the wealthy. After all, how much can a family really plan when it doesn’t have much money?
But in today’s economy, financial planning is crucial for anyone trying to pay off debt, save for a home or invest for the future — and that includes most low- and moderate-income workers.
Wealth in relation to financial planning
Because they need to make every dollar work for them to meet their financial goals, low-wealth households require as much, or even more, financial advice and assistance as wealthy households. Plus, low-wealth households tend to be more vulnerable in adverse circumstances such as layoffs or financial emergencies that demand astute planning.
So what do we mean by “low wealth” or “wealth poor”? According to a joint report by the Consumer Federation of America, the Credit Union Foundation and the Credit Union National Association, 25 percent of American households are considered wealth-poor, with net assets under $10,000.
Profiling those with low wealth
The joint report indicates two general types of wealth-poor households — young debtors and those with low incomes. Young debtors tend to maintain debts larger than their assets and spend more than their incomes. The income-poor have low incomes and are not likely to carry installment and credit card debt. Other types of low-wealth families include 7 percent who have incomes over $50,000 and 14 percent who own their homes.
The role of financial education
The need for more extensive financial education, heralded by the large percentage of low-wealth families, has attracted significant attention lately from the banking industry, governmental entities, financial intermediaries, community groups and others.
Many of these groups have never coordinated efforts with one another. The broad spectrum of collaborative partners now includes the Internal Revenue Service, Federal Reserve System, Federal Deposit Insurance Corporation, Freddie Mac, AARP, National League of Cities, financial institutions, city and county governments, academic institutions, philanthropic foundations and other stakeholders too numerous to mention.
Successful financial education programs not only help to change negative patterns by providing the information people need to make wise financial decisions, but they also offer much-needed inspiration through practical tools and coaching.
America Saves began as collaboration between the Consumer Federation of America Foundation (CFAF) and the Ford Foundation to encourage savings and wealth building. In March 2001 a pilot model was launched in Cleveland, Ohio. By year’s end over 1,000 Cleveland savers had enrolled.
Inspired by this effort, the CFAF formed an America Saves Advisory Committee to begin organizing similar efforts throughout the country. This nationwide campaign calls upon a coalition of nonprofit, corporate and government groups to assist individuals and families with saving and building wealth.
Participants in the program set savings targets that can be as low as $10 per month. They may also begin with debt repayment or combine plans that involve both saving and debt reduction. Typical goals include homeownership, educational degrees or retirement planning. Along the way, participants receive free advice over the phone or by e-mail each month from a “wealth coach.” The Georgia Saves campaign expects to use 300 wealth coaches to encourage 3,000 savers in 10 pilot cities.
The Department of the Treasury’s grant program, First Accounts, assists organizations that help unbanked low- and moderate-income individuals open a bank account. The program was established as a result of the 2001 Consolidated Appropriations Act and the 2001 Department of Transportation and Related Agencies Appropriations Act.
According to the grant criteria, organizations receiving funds must provide financial education training, assist individuals in opening insured accounts, develop low- or no-cost products and services, and serve as a replicable model to other communities without the need for ongoing public subsidies.
Decatur, Georgia, received $271,000 in grant funds to provide financial education training in English and Spanish to unbanked individuals. Upon completing eight instructor-led modules of the FDIC’s MoneySmart Curriculum, participants receive a certificate of completion to present to banking partners in order to open a low-cost bank account. In many cases, banking partners will offer their traditional products to participants. The banking partner typically forgives the participant’s past negative banking history.
Get Checking, a program developed by eFunds Corporation, Consumer Credit Counseling Services of Milwaukee, the University of Wisconsin Extension and the University of Wisconsin-Milwaukee School of Continuing Education, provides a second chance for unbanked consumers. It especially targets those who have previously had bank accounts, but are now denied services due to poor account management. (Individuals who have committed fraudulent acts are not eligible.)
Beginning with a pilot site in Milwaukee, Wisconsin, in 1998, Get Checking has now expanded to over 30 communities nationwide. By December 2002, 1,389 individuals — 92 percent of those who embarked upon the course — had completed the Milwaukee pilot program. Of those who completed the course, 83 percent opened new accounts and 98 percent of the accounts remained open after one year.
Participants are expected to complete a six-hour class on the “how-to’s” of checking and savings accounts. The cost of the class ranges from $35 to $50. Upon completion, participants receive a certificate that allows them to open a checking or savings account at a participating financial institution. Financial institutions agree to waive their standard requirements and to forgive account management problems. Even participants who have a negative record with ChexSystems can obtain an account.
ChexSystems is a wholly owned subsidiary of eFunds, which flags a participant’s record to indicate that he or she has taken the course and intends to become more fiscally responsible. Furthermore, ChexSystems is not involved in the decision to open or close an account, which is left to the individual financial institution partners. However, participants who owe money to a financial institution due to bounced checks must show proof that the debt has been paid before receiving a certificate of completion.
Financial education collaboratives now exist widely throughout the country for low-wealth individuals who once had nowhere to turn. Today a host of new financial education initiatives have arisen to address the needs of the wealth-poor. Financial institutions are becoming increasingly willing to establish accounts for individuals who have completed qualified programs. Many financial institution partners are even going beyond basic savings and checking accounts to offer products such as individual development accounts and home mortgages in conjunction with a customer’s growth — products that can enhance the bottom line while assisting a family bridge the wealth gap.
By Sibyl Howell, regional community development manager in the Fed’s Atlanta office.