On this Motley Fool Answers episode, Robert Brokamp is on his own to interview Rachel Schneider, a senior VP at the Center for Financial Services Innovation, and professor Jonathan Morduch, who teaches public policy and economics at NYU, about their new book, The Financial Diaries: How American Families Cope in a World of Uncertainty. For the study behind the book, their team tracked essentially everything about the finances of 235 families in five states for a full year, giving them deep insights into where we are succeeding, where we're not, and what obstacles are most commonly in our paths.
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One macroeconomic roadblock we face is that average wages have remained relatively flat for a long time, while costs for things like healthcare, education, and housing have soared. Some might say the response to that by cash-strapped families should be increased frugality -- but in this segment, Schneider and Morduch explain why that simple answer often doesn't solve their financial problems and can even make them worse.
A full transcript follows the video.
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This video was recorded on Sept. 26, 2017.
Robert Brokamp: Another part of this, too, is something we've all heard about, and that is average wages have not grown significantly, but other things have [healthcare, college, housing]. That's part of this. You can't just get by on what you used to be able to get by on maybe 20 or 30 years ago.
Rachel Schneider: I think that is part of it. It's a big part of why people have a hard time building up that cushion. Like you started us out by talking about that $400 statistic that has really made an impact on how people understand this issue. So why can't people put aside $400? It seems like a relatively small amount. But what's happened is the cost of a middle-class life has not kept pace with middle-class incomes, and so people are really stretched and living in a way that makes it pretty hard to set aside that money.
The obvious answer for a lot of people is just spend less. And I think if what we were talking about was luxury goods, and extra vacations, and really fancy cars then that's an easier case to make. But what we're really talking about is people putting their money toward rent in a neighborhood where the schools are good. Or buying a house in a neighborhood that's not such a far drive from work. Or having two cars so that both members of a couple can get to work and drive kids around. We're not really talking about things that are easily cut.
Brokamp: It's funny. You bring up things like cars, and houses, and things like that. And if you don't have a lot of money to begin with, you have to make choices that can cost you more money down the road. I know someone who does not have much money, so she bought a used, old car. So what does that mean? She then had a series of repairs that she didn't have money for, and it's the same with buying an inexpensive fixer-upper, or buying a house in a neighborhood that's not as safe or the schools aren't as good. Eventually the parents have to make that decision [whether to] stick with the bad school or go to a private school.
Jonathan Morduch: Yes, we saw a lot of that. And it also came down to how well you take care of yourselves physically. I think there was Federal Reserve stat that said 25% of Americans are passing up going to the doctor for things they need, and eventually that's going to catch up with them.
Schneider: And it also ends up affecting whole communities at once, because what happens, then, is your car breaks down and you ask your cousin, or your sister, or your mom for a ride. Or [you ask someone for] a loan to fix your car. The good part is they pull together and get each person through the immediate crisis. The downside of that is that the economic problems that one family experiences are usually experienced by their friends and neighbors, too, so it's hard for communities, as a whole, to pull themselves up.
Brokamp: And that gets into safety nets where people who are in better financial situations tend to be surrounded by people in better financial situations, so if they do have to rely on somebody else, those people have the resources to do it; whereas generally if you're in these other communities, they don't have the same resources. But it still happens, and you write about that in the book. It amazed me how some of these people who don't have much money are still lending money to friends and family if they need it. That's like their own, private banking system.
Schneider: It's really true. Janice, who you were talking about, who works at the casino feels a real responsibility to tithe at her church. It's more than just a financial choice. It's a choice to be part of her community. To connect with other people in her church. It's a really meaningful thing to do with her money in addition to meaning that if she gets into trouble the church is also going to be helpful with her. But we saw those kinds of generous acts from everybody. There's just a lot of willingness to help each other in the families that we worked with.
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