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Tag: Research

Hierarchy of Financial Needs: An Introduction

MAF’s Hierarchy of Financial Needs provides a framework for evaluating every person’s economic well-being.

Eight years into our mission to build a fair financial marketplace for hardworking families, we at MAF know that Lending Circles are empowering participants to build credit, reduce debt, and increase savings. But how do those gains translate into greater financial security? Do they produce meaningful improvement in our clients’ larger financial lives?

As Lending Circles have flourished and expanded over the years, we’ve amassed data allowing us to better understand the program’s impact on clients’ overall economic stability and mobility. But as we began to dive more deeply into these questions, we realized that we lacked a clear definition of financial security and, by extension, a reliable way to measure it.

An Incomplete Picture of Financial Health

Typically, income or credit scores are seen as proxies for a person’s financial well-being. But these common metrics aren’t adequate for assessing a person’s full financial life. Knowing someone’s income alone does not say much about her expenses, debts or net worth — especially in cases where income is volatile, uncertain from day to day or week to week. And while credit scores predict the probability that a borrower will repay a debt, they tell us little about a borrower’s true ability to repay.

What will it take for a borrower to pay back that loan? Will she need a second loan to pay off the first? If so, can we honestly say she is able to repay that initial loan? And what about the myriad informal financial transactions our clients rely on to meet their financial obligations? Where do those fit in when assessing an individual’s financial security?

MAF’s Hierarchy of Financial Needs

For answers we turned to Abraham Maslow, the revered American psychologist who developed the “Hierarchy of Needs,” a model that outlines the physical, social, and psychological requirements that must be satisfied for an individual to realize her true potential. In his seminal work from 1943, Maslow organized human needs into five levels, ordered from the most basic (health and well-being) to the most complex (self-actualization), with each level facilitating the satisfaction of the subsequent, higher-order need. Using the same logic, MAF developed the “Hierarchy of Financial Needs” (HFN) to explain what individuals require to realize their true economic potential.

The HFN identifies financial parallels to physiological needs (income), safety (insurance), love and belonging (credit), esteem (savings), and self-actualization (investments):

  • INCOME: The most basic financial need is income to cover basic living expenses, such as food, housing, and utilities. Income can take many forms, from wages and dividends to government benefits or even transfers from family or friends. Income is the foundation of financial security.
  • INSURANCE: To protect earnings, people must insure against unforeseen events that create setbacks. This requires taking stock of assets, including cash, belongings, and health, and securing against loss, theft, damage, and illness.
  • CREDIT: To acquire assets such as a car, home, or education otherwise unattainable through income alone, people need credit. This requires individuals to have credit histories and credit scores to access, and leverage, low-cost capital.
  • SAVINGS: When individuals save, they put away resources for specific goals. The ability to save demonstrates discipline and engenders confidence, a sense of achievement, and respect for oneself and others.
  • INVESTMENTS: The pinnacle of the HFN is when people realize the dynamism of their economic potential. This is the stage where people can invest in ventures that carry risk as well as the potential for return. It represents a turning point because people have investments to generate income, rather than relying solely on earned wages. Through investing, people have the opportunity to attain important life goals such as achieving financial security for their families, retirement, and dignity in old age.

The Hierarchy of Financial Needs is a revolutionary yet simple model that provides clarity regarding what people need to do to realize their true economic potential. For most Americans, financial security starts with a job. People need income to pay for expenses and balance their budgets. They also need to insure against shocks; they need to leverage credit to acquire assets; they need to save for a rainy day; and they need to invest for future returns. Although every individual faces a unique set of circumstances and challenges in managing these needs, the model is applicable across all income and demographic groups. In the same way that Maslow’s model applies to all people, we believe HFN applies to everyone as well, providing a clear 360-degree view of people’s financial lives.

A New Framework for Moving Forward

Despite the fact that 1 in 4 Americans is financially underserved, there has yet to be a comprehensive framework for understanding an individual’s economic needs. MAF’s Hierarchy of Financial Needs fills a gap in the economic development field, giving us a means of evaluating every person’s financial well-being. Consumers — especially low-income consumers — have complicated financial lives, often mixing and matching different financial products, informal practices, and government programs to achieve their unique version of economic security. Our holistic view of their financial well-being enables us to identify their strengths and challenges at every level. This comprehensive approach will equip the nonprofit sector, financial services industry, and policymakers to provide far more meaningful and effective solutions to improve people’s financial well-being.

What It’s Worth: MAF Featured in New Book

Read CEO Jose Quinonez’s essay “Latinos in the Financial Shadows” in a new book on economic well-being.

Earlier this year I was invited to contribute MAF’s perspective to a joint publication from the Federal Reserve Bank of San Francisco and the Corporation for Enterprise Development (CFED), with the support of the Citi Foundation. The resulting book, titled What It’s Worth: Strengthening the Financial Future of Families, Communities and the Nation, is a collection of more than 30 essays that document the financial health and stability of Americans across the country. The authors put forth promising strategies for improving economic security and mobility in low-income and underserved populations.

My piece “Latinos in the Financial Shadows” highlights the informal lending practices common among immigrant communities, documenting the important role they play in the lives of people operating outside the financial mainstream. It reviews MAF’s strategy for formalizing these informal financial relationships through our Lending Circles program and attests to the impact of our work.

The essay also introduces the Hierarchy for Financial Needs (HFN), MAF’s new model for identifying and assessing the key components of an individual’s financial well-being. The HFN provides a ground-breaking and much-needed framework to help policymakers, practitioners and others working to improve consumers’ financial stability and mobility evaluate their impact more holistically, placing the work in the larger context of economic health.

To download a PDF of “Latinos in the Financial Shadows,” click here. To order a free copy of the What It’s Worth book, visit the Strong Financial Future website.

Love and Money

Yale Sociology Professor Fred Wherry explains how money can complicate love.

What makes life worth living also makes it harder to navigate: Love.

We love our families, our neighbors, and our houses of worship. Where our love lies, our treasure lies also. When a baby is born, we buy gifts. When a parent falls ill, we pay medical bills; a child is the first to go to college, tuition bills; a family dreams to own its own home, a big down payment.

Love’s Fine Print

Love comes at a cost. These costs have been described positively as “lifting as we climb” and negatively as “crabs in a barrel pulling one another down.” In its positive version, when one family member does well, she can share information, serve as a role model, and sometimes provide material assistance to other family members or people in her community who are striving for a better life. In its negative version, love creates obligations to help those in need, and those in need know that you can be persuaded to give up hard fought gains to help them.

In a widely cited study of how people use their kin and friendship networks to navigate their needs in a low-income neighborhood, Carol Stack tells the story of a family receiving an unexpected lump sum that they intended to use for a down payment on a house. The good news traveled fast through their kinship networks, and requests began arriving for monetary help. The down payment disappeared; the aspiring family was pulled back into the metaphorical barrel.

How love affects money depends on what kinds of external supports are available to families trying to make ends meet.

Poor and middle-income families of color are more likely to have parents lacking adequate retirement savings. When their parents fall into financial trouble because the house needs a new roof, an infected tooth requires a root canal, insurance won’t pay 15 percent of cancer treatment costs, or a car’s engine has expired, it is up to the children to assist them. A thousand dollars here or there can devastate a budget where the coupon clippings and the overtime worked still mean that these families are a few paychecks short of eviction.

This view of love and money runs counter to the popular narrative of the impulsive consumer spending freely on frivolities. In April, sociologist Joseph Cohen published his analysis of household income and spending patterns from the 2011 data from the Bureau of Labor Statistics’ Survey of Consumer Expenditures (CEX). He found that incomes have not risen as fast as the prices of basic goods and services. Families with stagnant or falling incomes were spending more on the basics: education, childcare, healthcare, transportation costs, and mortgage payments. Spending on television, computers, and many other non-essentials fell.[1] In other words, when securing their children’s educational future, looking after the health of their loved ones, or securing a dwelling place to own, households experienced the fragility of their finances.

A Love that Lasts

Families that dream of home ownership learn firsthand the value of love; the siblings or parents helping them, its costs. A couple may able to make the monthly payments on a mortgage but their credit files are too thin or their savings too low to qualify for it. They may need a sibling to co-sign on the loan, someone who cares for them and is willing to invest in their family’s security. If there are no other ways to increase the applicants’ credit scores or to shore up savings, compelling a family member to incur more risk seems to be the only answer.

But there are other ways. Rather than decry the negative effects of love, why not mobilize caring relationships to promote economic security? It has been (and can be). Love.

[1] Joseph N. Cohen, “The Myth of America’s ‘Culture of Consumption’: Policy May Help Drive American Household’s Fraying Finances,” Journal of Consumer Culture DOI: DOI: 10.1177/1469540514528196

Frederick F. Wherry is a Professor of Sociology and Co-Director of the Center for Cultural Sociology (CCS) at Yale University. He is currently studying the effects of culture, institutions, and social relationships on the banking and budgeting experiences of immigrant and minority households.

The Credit Catch 22

There’s always a catch. With credit, there’s a Catch 22! It’s too easy for hardworking people to get stuck in this Credit Catch 22. For example, if you want to build a great credit history, you have to have lines of credit. But in order to be approved for lines of credit, you have to show a history of repaying credit. Thus the credit catch 22!

Without a long credit, residential or banking history, you’re more likely to get stuck in this Credit Catch 22.

This is a real problem our clients run into when they want to get an apartment or a credit card but have no file or a very thin one. When a lender does an inquiry to find out if a person qualifies for a loan, that actually lowers the chance of being approved.Without a long credit, residential or banking history, you’re more likely to get stuck in this Credit Catch 22.

We want to help everyone get over feeling stuck, strapped or invisible.That’s why MAF offers products that give clients a responsible line of credit with our social loans and the financial education to finally escape and live a secure, empowered life. The infographic below lays out how the credit catch 22 works and some evidence of the phenomenon from our own members’ experiences.

Social loans enable affordable credit

How do social loans help people get a better deal? By giving them a chance to build on what they have.

As a recent college grad myself, I know that just because I have a credit score doesn’t mean it’s a good one. In fact, many of my peers and I are learning that having a good credit score translates into direct savings in our pockets as we start thinking about financing larger purchases and investments. It turns out that the majority of MAF’s clients who take out one of our social loans actually start with much lower (or nonexistent) credit scores than the nation as a whole, meaning that if they have access to loan products their paying a lot for them. That’s because, for people with low credit scores or very limited credit histories, even a small positive change can have a large impact on the interest rates for important lines of credit such as car loans, mortgages, and even credit cards.

A credit score doesn’t just determine if you get approved for a credit card, but also how much interest you pay.

Most of our clients start with credit scores below the national distribution. As we can see in the chart below, the median credit score of one of our members is around 650, while the national median is somewhere closer to 720. That translates into much higher borrowing costs for our participants.

Our programs include both access to social loans as well as financial management training, which helps enable people to take the first step in towards gaining access to more affordable credit. Often lack of or low credit gets talked about in terms of lack of  access. It’s true that if you don’t either don’t have a score or have a very low score you won’t have access to the same type of financial products as those with established histories. But even if those with nonexistent or poor credit who do have access to these products will pay substantially more for them. I’ve laid out how much you’d be expected to pay for various loan products depending on your credit score in the infographic below:

By making positive payments on their social loans, participants are improving their credit one step at a time. A higher credit score means lower borrowing costs for debt. If  hard-working people with limited or damaged credit want a chance at avoiding sub-prime rates, then using low-cost financial products like a social loan, paying back loans on time, and saving are all great places to start.

Remember, responsible low-cost credit (like social loans) builds responsible, reputable borrowers!

Lending Circle Program Evaluation Released

At MAF, we’re all about understanding the impact of our work in the communities that use our products.

Over the years, we have seen hundreds of people who have been on the margins of the financial mainstream walk through our doors looking for a way to help themselves navigate the world of finance by joining a Lending Circle. While witnessing these lives transformed by a Lending Circle has made us believers, it’s often been difficult to communicate these diverse impacts to the world. We know that a Lending Circle can help people achieve their financial goals, and but we needed the numbers to prove it. That’s why we had independent evaluators at San Francisco State University’s Cesar Chavez Institute study the impact of a Lending Circle on credit improvement among more than 600 participants in five Bay Area communities over two years. We learned that:

1) Pairing the Lending Circle program with financial education is a great model for increasing the financial capability of low-income consumers nationwide.

  • Average increase in credit score post-Lending Circle: 168 points
  • Average reduction in debt per participant post-Lending Circle: $1,000 
  • Average credit score post-Lending Circle: 603

2) Our Lending Circle model works with different non-profit partners.

In their second report, the researchers found that the Lending Circle program has similar results with a wide range of communities and organizations, including recent Chinese immigrants offered the program though The Chinese Newcomers Service Center  and the LGBT community offered the program through The SF LGBT Center, demonstrating its wide appeal.

  • Participating in financial education increases credit scores by an additional 27 points
  • Community-based non-profit organizations are an ideal vehicle for implementing the Lending Circle program

With the results from these two reports, we’re able to effectively communicate the impact of our work to the world. We’re finally able to prove that a little idea that started 5 years ago in the Mission is can make a huge difference in the financial lives of hardworking families.

For more in-depth insights, be sure to check out the full reports.

A special thanks to the Ford Foundation, Center for Financial Services Innovation, and Citi Community Development for supporting our work!