Family Decision Making And Financial Literacy
By necessity, low-income and asset poor individuals are unable to accumulate wealth to build assets and focus on long-term sustainability due to their focus on current financial instability. Most lack the access to and knowledge of appropriate financial tools and tend to rely on informal borrowing tools and social networks for assistance. …show more content…
Then, an unexpected expenditure such as a breakdown of a car requires spending all existing ‘savings’ in addition to perhaps taking an informal loan from a family member or covering the gap with a credit card or payday loan. In the rare case earnings exceed outstanding expenses, working a job that does not qualify for direct deposit or built in retirement or savings programs requires physically travelling to a bank to save a seemingly insignificant amount of money. Even more, the closet bank is outside the low-income neighborhood and requires a minimum balance unattainable the following month, reinforcing the idea that banks operate for the sole use of the wealthy. (Savings Policy, Getting by, Chapter One).
Throughout the readings, a number of thought-provoking issues rose to the surface including the use of behavioral economic theory to understand optimal decision-making, the impact of family connections, and the Earned Income Tax Credit on low-income households’ financial stability.
Behavioral Economics & Optimal Decision …show more content…
Research indicates that individuals who initially acquire assets through family-created opportunities, such as assistance for a down payment on a home or investment in education, increases asset building potential over the course of their lifetime. (Chapter 3).
Family connections also serve to aid financial instability in lieu of formal financial tools for the unbanked population through social networks where “borrowing, saving, and lending are complements not substitutes” (Getting by). In these circumstances, one household may manage cash flow by lending money to a family member in dire need while simultaneously taking out a payday loan to cover personal expenses. In essence, one family’s finances become inseparable from those of family and close friends (Chapter One). Unfortunately, unlike the intergenerational transmission of assets, kin and personal ties among the financial unstable may serve as a burden rather than a resource. (Chapter One) Even more, social norms within communities may discourage any form of saving, encouraging any ‘extra’ income to be shared. (Chapter