By Ben Ritz
Managing money around the holidays can be tough for low-income families even in the best of times. The pressure to be generous with family and friends can often lead to overspending and a hangover of debt when the new year rolls around. But the challenge has become particularly acute for many after a prolonged period in which rising prices often outstripped modest wage gains. One relatively easy solution is to improve “financial capability” — an individual’s understanding of how to distribute their incomes, manage their debts, balance their cashflow, and protect themselves against financial uncertainties.
A 2021 study from the Financial Industry Regulatory Authority (FINRA) found that an individual making between $25,000 and $50,000 was 15 points more likely to have emergency savings capable of covering three months of expenses if they scored above average on an assessment of financial literacy (another term for financial capability). Individuals in this income range demonstrating high financial literacy were also 10 points more likely to spend less than they earn, putting them on par with people who made more than $100,000 and demonstrated below-average financial literacy. These findings suggest good financial education can give many lower-income families the same financial security high-income households enjoy.
Unfortunately, those households under the most financial pressure are often the least equipped to manage it. The FINRA study found individuals with incomes over $50,000 were more than twice as likely to demonstrate high financial literacy as those without. Improving financial capability may not be a panacea for families in the depths of poverty, for whom there is no substitute for additional resources, but it would clearly make a meaningful difference for many low- and middle-income families.