It is tempting, but dangerous, to assume that Americans’ financial trajectories trace steady climbs, their upward momentum stymied only by big events like lost jobs or medical emergencies. Instead, the households we got to know in our yearlong financial diaries’ research — even those households whose annual incomes put them in the middle class — experienced financial uncertainties that consumed their attention and led them down costly paths.

The families coped with erratic incomes, checks that arrived too late to make payments, and variable and sometimes unpredictable spending needs. As they juggled medical bills with retirement savings, and utility bills with tuition payments, they were often trying to balance immediate, near-term and long-term financial goals (what we came to refer to as “now, soon, and later”). None of the households were recklessly spending in the present rather than saving for later, but they were often prioritizing what they needed “soon” over ambitious and long-term financial priorities.

In deciding what to prioritize, they rarely had adequate financial tools and resources to make the wisest trade-offs. While the U.S. financial services marketplace is large, its products and services are typically tailored to wealthier Americans and often geared toward helping families make big decisions about financial planning and investing. The marketplace for services to help struggling families balance their needs for now, soon, and later — with better ways to save, spend, borrow, and plan — is growing and improving, but still insufficient. We need new products and policies designed to benefit lower- and middle-class families. Here are three examples that we hope will provide inspiration for the change that is needed.

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The marketplace for services to help struggling families balance their financial services needs for now, soon and later is growing and improving, but is still insufficient. Adobe Stock

Smooth and spike

To manage financial instability, families borrow, save and plan so they have money to spend when they need it most. Sometimes this means evening out their incomes so that spending can be smoother over time. Other times families need a spending spike—to buy airplane tickets or put down a security deposit on an apartment. As families try to both smooth and spike their spending, they often face dilemmas: If their earnings one month are unusually high, should they immediately put their extra money aside for a later dip? Or should they seize the chance to finally repair the car or purchase the airline tickets?

The policy discussion about tax refunds shows the dilemma well. Many of the Diaries households experienced their highest-income month during tax time, when they received a refund. Families anticipated the refund and often knew exactly how they would spend the money. Seeing the spike in earnings that this creates for families, some have proposed enabling tax filers to divide their refund check into smaller checks, perhaps received quarterly, rather than annually. When this idea was tried as a pilot, however, less than 3% of tax filers took advantage of the opportunity. That may be because filers were counting on the future spike. As newer experiments to split tax refunds are developed, they will be most effective if they provide ways for families to both smooth and spike their incomes and spending.

Given the complexities of aligning income spikes with spending needs, families can benefit from expert guidance. The company Digit, for example, tracks customers’ earning and spending patterns and transfers money (usually between $5 and $50) from their checking to their savings account when its algorithm assesses that the customer won’t need the cash. Approaches like Digit’s help people with at least some of the complexity of knowing when and how much to save.

Align cash inflows and outflows

Families that smooth spending and create income spikes are trying to align cash flows with spending needs. Challenges arise when their paychecks arrive at the wrong time or in the wrong size relative to their needs, even if their annual income is sufficient to cover their expenses overall. Similarly, their options for paying bills flexibly and quickly when they do have cash on hand can be expensive. But the digital age has afforded easier ways to help people match their earning and spending.

Since most employers pay their workers electronically, instead of by paper check, companies could, in principle, give workers access to their earnings on a more flexible basis. Ride-sharing companies, such as Lyft and Uber, enable drivers to receive their earnings instantly, and third-party companies such as PayActive, Active Hours and FlexWage have emerged to enable other kinds of workers to receive their pay outside of their usual pay cycle.

Families who experience roller coaster finances sometimes turn to the services of check cashers, paying a fee in order to get immediate access to cash rather than wait three to five days for a check to clear. They pay fees to rush bill payments in order to pay on the exact date the bill is due or because they don’t have the cash far enough in advance to risk mailing a check. They sometimes avoid bank accounts when they have volatile earnings and spending, likely in order to prevent overdrafts.

These families would benefit greatly if the financial services industry enabled real-time payments, but until recently, it has had little incentive to develop a faster system. The U.S. payments system moves a jaw-dropping $175 trillion through the economy on an annual basis in more than 120 billion transactions with inspiring accuracy, so delays of a few days to move money have not been perceived as justifying the extraordinary investment and coordination required to develop the infrastructure for faster payments.

Balance structure and flexibility

When families sought to devise their own financial workarounds, they were often trying to balance structure with flexibility. Existing products sometimes provide the wrong mix. Lenders, for example, offer little structure around borrowing limits but a lot of structure (and little flexibility) around the consequences for borrowers who cannot repay. Katherine Lopez, a Californian who struggled with car payments, wished her credit card company had been less flexible in increasing her credit line but more flexible in helping her manage her debt.

This is the case for savings products, too. Behavioral economists identify lack of discipline, rather than simple impatience, as a main reason people don’t save more — a characteristic that has led to the creation of a variety of savings products that provide discipline (by requiring deposits or restricting access until a goal is met). That discipline can be useful, but it can also be counterproductive. Workers experiencing a high degree of volatility often need cash in emergencies. For such individuals, savings products that provide simple cues to help savers maintain discipline while allowing them the flexibility to make their own financial decisions could work better.

Excerpted from “The Financial Diaries: How Americans Cope in a World of Uncertainty” by Jonathan Morduch and Rachel Schneider. Copyright © 2017 by Jonathan Morduch and the Center for Financial Services Innovation. Reprinted by permission.

Jonathan Morduch

Jonathan Morduch

Jonathan Morduch is co-author of "The Financial Diaries: How American Families Cope in a World of Uncertainty."

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Rachel Schneider

Rachel Schneider

Rachel Schneider is co-author of "The Financial Diaries: How American Families Cope in a World of Uncertainty."

BankThink submission guidelines

Want to contribute to BankThink, American Banker's platform for informed opinion about the ideas, trends and events reshaping financial services? View our detailed submission criteria and instructions.