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Chapter 1 Savings, Assets, Credit, and Banking Among Low-Income Households: Introduction and Overview Michael S. Barr and Rebecca M. Blank L ow-income individuals often lack access to the sort of financial services that middle-income families take for granted, such as checking accounts, bank loans, or easily utilized saving opportunities. High-cost financial services, barriers to saving, lack of insurance, and credit constraints increase the economic challenges faced by low-income families. The contributors to this volume analyze the financial constraints and choices of low-income families and describe the ways in which low-income families utilize financial services, through both formal and informal financial institutions. In these chapters, they also discuss policies that would spur the private sector to provide financial services that allow low-income families a better chance to achieve more stable economic lives. Access to affordable financial services and opportunities to save and build assets are important to the lives of low-income families, who must deal with sometimes abrupt fluctuations in income that occur because of job changes, instability in hours worked, medical illnesses and emergencies, changes in family composition, and many other factors. If these families have limited access to savings, credit, or insurance, even small income fluctuations may create serious problems in their ability to pay rent, utilities, and other bills. Unfortunately, access to mainstream financial institutions is often limited for low-income families. For many low-wage individuals, take-home pay is reduced by the high transaction costs they face when using financial services. Inadequate access to financial services may diminish the value of government income transfer programs such as the Earned Income Tax Credit (EITC) and increase the administrative costs for government and compliance costs for households in filing their tax returns and receiving refunds. Limited access to mainstream financial services can also limit the ability of low-income families to build assets and save for the future. Savings are important because they help to smooth short-run income fluctuations. Savings can also / 1 provide capital for important long-term investment opportunities. For instance, middle- and upper-income families regularly use their savings to invest in educational opportunities, in the health of family members, in homeownership, and in pension funds for retirement. Thinking cohesively about the financial service and wealth accumulation needs of low-income households is important because these areas are functionally related. Financial institutions can provide the necessary transactional services as well as the opportunities for saving and credit. Savings are needed to access credit, which can then assist with asset accumulation. Imprudent credit usage, however, can undermine asset-building and block access to future savings. As we shall see, some families that are even quite poor use credit and saving, although often through informal mechanisms. The chapters in this volume provide greater understanding of these issues and present new evidence on assets, debt, and saving among low-income families. The volume includes chapters on financial services, credit card usage, and homeownership . Several chapters discuss the emerging literature in behavioral economics, which uses insights from psychology to understand saving, debt choices, and the financial behavior of low-income families. One chapter compares the financial behavior of poor families in the developing world and that of low-income families in the United States, while another chapter focuses on immigrants in the United States. Many of the chapters discuss policy changes that could address current problems. This introductory chapter takes on four tasks. In the first section, we provide an overview of how low-income families manage their economic lives, highlighting key issues that are important in the choices that low-income families make in their use of financial services, saving, and credit. In the second section, we summarize the chapters in this volume, emphasizing their primary conclusions and contributions . We close that section by highlighting a few of the key themes that emerge across chapters. The third section puts forth a single cohesive presentation of key policy options that would provide low-income individuals with better financial services and encourage better financial decisionmaking. Our view is that financial services policy for low-income households is ripe for reform. This section relies heavily on the policy discussions in later chapters but is not limited to those options; we emphasize the most promising new policies that would increase the financial stability and opportunities available to low-income families. In the final section, we discuss the research agenda, noting areas where academic research, data collection, and demonstration projects could enhance our...


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