When Saving Really Isn’t Saving and Why This Isn’t Bad

This is the fourth in a series of blog posts related to our work around housing and opportunity. To learn more about this project, check out the first blog post, the second blog post, the third blog post, the full report, the Executive Summary, or our interactive StoryMaps. The views and opinions expressed in the report and this blog post are those of the Center for Community Capital and do not necessarily reflect the views and opinions of JPMorgan Chase & Co. or its affiliates.

Recently, CCC finished an assessment of Housing and Opportunity supported by JPMorgan Chase & Co. in the St. Bernard Area of New Orleans and the Potrero Hill neighborhood in San Francisco; the assessment centered around sites involving the conversion of public housing into mixed-income developments, one completed, one planned.

An important part of this project was to understand residents’ perspectives about opportunity, a key component of which is financial health. One lower-income resident we interviewed, whom we’ll call Donna, stated,

“My savings account is just a hold cell. It’s not really a savings account because the money in there, it never gets saved. It’s just a hold cell…So as I get paid on each pay period, some money goes to that holding cell. And then when it’s time to pay rent, I pull it out of the holding cell…and then I move it back into my checking account so that rent check can clear.”

This quote illustrates how many low- and moderate-income (LMI) households use savings accounts, not to make deposits that accumulate and are held for long periods – the classic definition of saving – but to manage cash flow to make ends meet.

Dipping in and out of savings to manage cash flow is risky. A Pew Charitable Trusts study found that households with annual income under $25,000 and between $25,000 and $50,000 had liquid savings equal only to 6 or 14 days of income, respectively. A lack of emergency savings puts LMI households at risk for experiencing hardship when they experience income volatility and/or spikes in expenses. Some amount – at least a month of usual expenses – ought to be held in savings to deal with financial uncertainties such as a job loss or a car repair.

But is it necessarily a bad thing when LMI households just use their savings accounts as “hold cells” and don’t build assets? Donna’s strategy is a good way to set aside money, even if it doesn’t meet the formal definition of saving. An educator and mother of a child with a serious and chronic illness, she is using this “hold cell” to make sure rent is paid on time – a smart method given what we know about present bias and the devastating impacts of evictions on families and children.

But is it necessarily a bad thing when LMI households just use their savings accounts as “hold cells” and don’t build assets? Donna’s strategy is a good way to set aside money, even if it doesn’t meet the formal definition of saving. An educator and mother of a child with a serious and chronic illness, she is using this “hold cell” to make sure rent is paid on time – a smart method given what we know about present bias and the devastating impacts of evictions on families and children.

Of course, the “hold cell” strategy takes a lot of effort to use on a consistent basis given the cognitive burden of poverty. Fortunately, apps like Dave, Even, and EarnUp help individuals stay on top of their income and expenses to pay bills and make loan payments on time while avoiding expensive overdraft fees.

While rent is paid on time, however, assets aren’t being built.  Building assets requires finding slack – i.e. income that exceeds expenses. For those who can find slack, making savings automatic is important; this can be done via split paycheck deposits or checking-to-savings account transfers. Financial incentives for LMI households such as EARN can certainly help. But the barrier to automatic savings is many households have highly irregular income, and they need help identifying slack:  for this, they can use apps like Digit.

Saving is hard for just about everyone, but especially so for LMI households. And when saving isn’t really saving, but is managing cash flow, it is still important for households to have assistance identifying slack in their budgets.

Saving is hard for just about everyone, but especially so for LMI households. And when saving isn’t really saving, but is managing cash flow, it is still important for households to have assistance identifying slack in their budgets.

To read more on these themes, see the Center for Community Capital’s other work on savings and low-income families. The CCC has published more about the role of financial technology in helping low-income families save in a report titled “Catalyzing Inclusion: Financial Technology and the Underserved” and more about the difficulty of meeting savings goals in a recent report titled “Housing and Financial Capabilities: Integrating and Enhancing Services for Residents.”