Are Government Efforts to Help Poor People Manage Money Working?
Cities have offered financial counseling to low-income people for years, but only recently have some tracked the impact of these services on clients' debt, credit and savings.
For decades, nonprofits that serve the poor have tried to impart lessons about managing money, but until recently it’s been hard to know whether the services work. Now a multi-city initiative is tracking and sharing results, addressing the effectiveness of financial counseling for the poor.
Two years ago, the nonprofit Cities for Financial Empowerment Fund (CFE Fund) awarded $16.2 million in grants to five cities that would offer financial counseling to low-income households. The CFE Fund was trying to export a program pioneered in New York City under then-Mayor Michael Bloomberg. The premise behind the centers was that low-income people would benefit from meeting one-on-one with professionals who could offer advice about budgeting, improving credit scores and making better use of public assistance. The general concept of financial counseling for the poor wasn’t new, but the Bloomberg administration -- and the nonprofit it inspired -- added its own twist by putting mayors in charge of financial counseling centers.
The initiative also made local government responsible for tracking and reporting outcomes. The financial literacy field used to emphasize group education and measured impact by participation indicators, such as workshop attendance. In fact, a decade ago, measuring the effectiveness of financial counseling at all was unusual, according to Seung Kim, who oversees similar financial education programming for the nonprofit Local Initiatives Support Corporation. “Most metrics weren’t tracked in a tangible or in a holistic way,” she said.
By comparison, cities partnering with the CFE Fund have to report on outcomes that reflect a person’s financial standing, such as changes in debt, savings and credit scores. “Rather than looking at how many people visited a website or how many people sat in a chair in a class, you could have a higher standard,” said Jonathan Mintz, the president and chief executive of the CFE Fund. “If you’re going to turn financial counseling into a public service, you have to produce the data to make sure it works and that it’s worth the public investment.”
Two years after the centers launched in Denver, Lansing, Nashville, Philadelphia and San Antonio, what do the data show? Collectively, they have served about 15,000 clients who have increased their savings by $1.6 million and reduced their debt by $12.2 million. The average client has increased savings about $3,000, but still owes more in debt ($21,500) than he or she receives in annual income ($20,800).
The results suggest progress, but also underscore the challenges that low-income households face in trying to get out of debt. “These things take time. We’re working with a very poor population,” said Carey Morgan, program director for financial empowerment centers in Philadelphia. “It’s not like you’re dealing with a middle-class household that can pay bills fairly easily and just needs some budgeting help.”
The centers' clients have trouble saving and paying down debt in part because they don't make much money to begin with. But many are also shut out of banks, forcing them to use payday lenders, pawnshops and check cashers, which charge higher fees than traditional banks and credit unions.
Nationally, 7.7 percent of Americans do not have a bank account and another 20 percent have bank accounts but also use alternative financial services outside the banking system, according to a 2013 survey by the Federal Deposit Insurance Corporation (FDIC). About 20 percent of clients who walked into the financial empowerment centers were unbanked, and most of them still are: Of the roughly 15,000 clients, a little less than 6 percent have opened bank accounts.
Some of the onus is on banks, which usually require a minimum balance to keep an account, charge overdraft fees and refuse to open accounts for people with a history of missed payments at other banks. In Philadelphia, Morgan said the city has struggled to get banks to waive entry requirements that typically screen the low-income residents the CFE Fund is trying to help. (The city has had greater success in working with credit unions, she said.)
Many clients aren’t eager to work with the banks either. Morgan said clients who immigrated from another country often perceive banks to be corrupt institutions that will illegally skim from their savings. In 2013, roughly a third of unbanked households in the United States said one of the reasons why they did not have a bank account was their dislike or distrust of banks, according to the FDIC.
“We originally thought that the financial empowerment centers might be efficient ways to connect people to the banking system,” Mintz said. Instead, clients come into the centers focused on improving their financial situation and “they don’t want to feel like they’re being sold something.”
The centers focus on how people can save money without needing a bank account. Ashley Warbington, a financial counselor in Nashville, teaches clients to set monthly budget goals for food, gas and miscellaneous spending. Then they write the amounts on individual envelopes. The practice is meant to get people in the habit of setting limits without having to entirely eliminate a favorite activity.
Warbington gave the example of an elderly immigrant couple that paid a monthly Comcast bill even though the couple had a difficult time covering other basic living expenses. Television was their only form of entertainment and they didn’t want to give it up. Warbington helped them to establish a spending plan that placed limits on other discretionary items, such as buying clothes and eating out. Some of her clients take the envelope approach and add sub categories, such as travel and hair. “You can’t go over that set amount,” she said, and once you meet the cap, “you have to put off purchasing something until next month.”
The staff at the CFE Fund believe that it takes more than one session for that kind of advice to sink in. So, along with tracking financial outcomes, the nonprofit also counts the number of sessions clients receive. In the first one-hour session, “a certain percentage of people want to know what’s on their credit report and how to use that information,” Morgan said. “When people come back three times or more, [...] they want to deal with debts and are in a place where they can start thinking about savings.” (Across all five cities, clients have undergone 38,000 counseling sessions, equaling an average of 2.5 sessions per client.)
The initiative remains small in scale, but the results so far have been promising enough that the CFE Fund selected an additional seven localities to receive in-kind technical assistance in launching their own financial empowerment cities: Cleveland, Hartford, Hawai’i County, Los Angeles, Miami, San Francisco and Seattle.
One of the reasons cities are eager to have their own financial empowerment centers is the long-term potential of reducing government spending on safety net programs as people exit poverty. But Mintz is careful not to oversell the promise of financial counseling, especially as a standalone solution. “I don’t consider a financial empowerment center to be the ultimate answer for poverty,” he said.