By Katy Davis & Nicki Cohen

Why we’re wrong about lower income consumers, a three-part series

Products and services that help low- and moderate-income (LMI) consumers manage their day-to-day finances and improve their long-term financial health are a clear need that hasn’t yet been solved by mainstream or alternative financial providers. Why haven’t the needs of LMI consumers been met by the market? The latest research uncovers three pernicious myths that discourage innovation for the low- to moderate-income segment: that lower income consumers don’t want to save, are bad at managing their finances, and don’t have the money to pay for financial services.

In this series, a companion to our recent white paper, Reimagining Financial Inclusion, we’ll tackle each of these three myths in turn. If you haven’t read Part 1 yet, you may want to begin there.

Part Two

We all know that managing our finances day-to-day is no easy task. Keeping track of multiple obligations that have different deadlines (and different consequences if missed) can feel impossible, especially when added to the other items on our everyday to-do lists. Part of the challenge here is our limited working memory, which is best at remembering just seven units of information at any given time. On top of tracking and remembering what we should be doing at any given moment, when it comes to managing our money, we must also exert self-control to choose the most cost-effective option – which we know only further depletes our finite cognitive bandwidth.

To make it worse, half of families experience wild fluctuations in income of 25% or more in a given two year period. Households with lower incomes experience the most volatility, with significant income dips every third month. This lack of predictability in family cash flows is so difficult to manage that 92% of surveyed households would prefer stability to moving up the income ladder. Stop and think about that statistic for a moment–9 out of 10 Americans would choose stability over an increase in income. Quite a startling realization.

For someone who has a sufficient financial “cushion” to cover unexpected financial events, it may be tempting to blame the volatility and financial strain that LMI households face on their own management abilities. Yet again, the research says otherwise: LMI consumers are much more aware of their finances and much less susceptible to biases that could lead to overspending than higher income consumers.

MYTH #2: Lower income consumers are bad at managing their finances.

FACT: LMI consumers actually know more about their finances and are less susceptible to certain cognitive biases than higher income consumers, and they frequently use creative solutions to commit themselves to positive financial behaviors.

  • These same consumers value goods more consistently than higher income consumers, who are more likely to change their willingness to pay a certain price based on where they encounter the item, like the price of the same beer in a store vs. a hotel, for example.
  • They even report using creative informal solutions to stick to their financial goals, like freezing a credit card in a glass of water, giving cash to a “money guard” to hold, pre-paying bills, and budgeting cash with physical envelopes.

A close study of cash flows revealed, many LMI consumers carefully allocate and account for each dollar of income: “Sometimes I get paid and I feel like I’m bound by my check before I even get it. It’s already spent. I can tell you exactly where it’s going.”

The bottom line is that constant money management requires significant mental effort. For people without a savings buffer, even a small financial misstep or unexpected expense can have big consequences, like a car breaking down and requiring a high-interest rate short term loan to fix. In order to free up mental bandwidth and achieve long-term financial health, LMI households need products and services that are well-designed to address these needs – with smart alerts about low balances and due dates, automated savings transfers and bill payments, and access to affordable lines of credit. Learn more about the other myths surrounding LMI consumers and ideas for a better financial solution in our report, Reimagining Financial Inclusion.

Click here for an in-depth look at another dangerous myth about LMI consumers.