Random financial advice harmful!

Dhaka,  Sat,  24 June 2017
Published : 14 May 2017, 14:46:56 | Updated : 14 May 2017, 14:47:02
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Random financial advice harmful!

With many middle- and low-income workers lacking access to mortgages, IRAs, or even savings accounts, the saving mantra beloved by advisers is wrongheaded and sometimes harmful, says a global media report.

Janice, a middle-aged card dealer living in Mississippi, has both a checking account and a savings account. But she cut up her check-book, using cash and money orders to pay bills instead. She chose a credit union whose closest branch is an hour and a half drive away for her savings account. She cut up the ATM card as soon as she got it too.

Mike, a building manager in Ohio, only rarely spends more than $20 at a time. It happened just six times during the year we got to know him. He buys groceries and gas every few days, always in cash, even though he has a bank account. He saves in cash too, keeping $100 in his wallet and more than that stashed in two separate envelopes at home—one for his property taxes and one as a general fund.

These choices may seem unusual, or worse—wasteful and foolish. Why waste time and gas money driving to the bank? Why shop so often when buying in bulk could be cheaper? Why risk theft and pay fees to buy money orders instead of keeping money safely in the bank and using checks to pay bills? Janice and Mike’s financial management strategies don’t just fly in the face of typical financial advice—they give it a knock on the chin. And certainly their choices don’t fit with how banks expect customers to use their products. But workarounds like these are not only common, they also usually have a well-reasoned explanation.

Janice cut up her checks to avoid the temptation of payday lending. Janice is a card dealer, and the size of her paycheck depends on tips, which are higher in the summer, or when football games are played near the casino where she works. The volatility of her income means that she sometimes needs a way to access cash when she doesn’t have it, but will in a few weeks or next month. In her words, she “got into trouble” with those high-priced, two-week loans in the past. Payday lenders require a post-dated check to make a loan, so Janice cut up her checkbook. She parked her savings in a faraway bank as another way to create discipline.

Mike spends in cash and in small amounts to maintain clarity and control. Like Janice, he doesn’t have much cushion between what he earns and what he spends—both have annual incomes above the poverty line, but not much. Also like Janice, he has ups and downs in his earnings, though in his case, those stem from when he works overtime. He works overtime often, and the extra income is crucial to paying his bills. But, he never knows exactly how much overtime he will get, or how quickly his boss will pay him for it. Knowing his exact balance and spending in small amounts is important for him to keep his spending within his budget.

Mike and Janice may be idiosyncratic, but they are not unusual. They are two of the people we got to know through the US Financial Diaries project. Our research team tracked every dollar that came in or out of the homes of 235 households for a full year. All the households we talked to had at least one worker, and none were among the poorest or richest in their communities. Beyond that, the households were diverse: rural, urban, white, black, Hispanic, Asian, recent immigrants, and families in the US for generations.

The data about how families earn, spend, save, borrow, and plan creates a moving picture of their strategies to create economic security out of lives that were often inherently volatile.

- SZ
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