Americans need an environment that supports building financial security

Millions of Americans are one unexpected expense away from financial distress, as evidenced recently by the Consumer Financial Protection Bureau’s financial well-being survey showing more than 40 percent of U.S. adults have difficulty making ends meet.

The CFPB’s findings are consistent with The Pew Charitable Trusts’s own research, which finds a third of households have no money they consider savings, and 40 percent do not have the cash on hand to handle a $2,000 expenditure.

{mosads}As a result, Pew’s data show that more than half of people hit with a significant but not uncommon financial shock in 2014 and 2015 — such as a health emergency or losing a job — ended up having trouble meeting their financial obligations.

Yet, most consumers have access to savings accounts, and Pew’s data clearly show a strong desire to save. So why are so many people saving so little?

First, traditional savings accounts, unlike checking accounts, are designed to hold money for long periods and are often required by statute and regulations to restrict the number of withdrawals. These traditional savings accounts also penalize consumers with added fees for low account balances, hurting those who draw down savings just when they’re needed most.

Saving is also difficult because the onus of establishing separate checking and savings accounts, and juggling money between them, is on the consumer. The default position for most consumers is that paychecks go directly into a checking account and get spent; more than half of households report they spend all or more than they make each month.

So what’s the solution? One option starting to get attention in policy circles would be to route some income directly into an account designed for savings, separate from one for spending — instead of placing both spending money and savings in a checking account.  

Such a savings account, known as a sidecar account, could be accessible when needed and replenished automatically each payday, using the same payroll system that employers use to direct money into their employees’ retirement accounts. For example, there has been discussion in California of potentially including a sidecar savings account component in the state’s new Secure Choice retirement program as a way to help consumers build short- and long-term savings at the same time.

Another form of sidecar account integrates saving into everyday financial behaviors — such as making a loan payment. For instance, Pew’s data show that owning a car is a risk factor for a financial setback.

So a product is being tested in which a small amount added to each car payment goes to a liquid savings account, building resources for inevitable but often unforeseen car repairs. A similar strategy — with a contribution to a sidecar savings account generated automatically with every mortgage payment — could give households a buffer in the fragile first years of homeownership when equity is low.

Sidecar accounts are easy to set up and minimize burdens on both consumers and account providers — and are just as easy to suspend, with the money readily available to the account holder. But they do not fit neatly into the existing state or federal financial regulatory framework.

So policy that clarifies the status of sidecar accounts, whether attached to retirement savings and integrated with payroll systems or linked to auto or mortgage payments, might lead to wider availability of these accounts — and provide the opportunity to test whether the accounts deliver on their potential to benefit consumers.

There are other ideas too: although building a rainy day fund is crucial, people also need tools to help them anticipate and respond to financial shocks. Helping families recognize when they can afford to save and when it may be advisable to tap into savings — or seek out fair and affordable credit — is essential.

Americans need an environment that supports building financial security. And financial markets, state governments, and nonprofit organizations want to build, experiment with, and bring to market new products that address consumer problems. Trying new approaches to savings is the right place to start.

Clinton Key is a research officer for The Pew Charitable Trusts’ financial security and mobility project. Katy Davis is a managing director at the nonprofit design and consulting firm ideas42 where she focuses on improving financial health with behavioral science.