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Housing and Economic Insights Report – April 2022

Data Science team • April 28, 2022

Every year the U.S. recognizes April as Financial Literacy Month. It’s an opportunity to take stock of financial knowledge and habits in order to improve one’s finances. 

At Esusu, we recognize that financial literacy (the ability to comprehend and use financial skills such as budgeting and investing) in the United States is low and access to financial education is not equitable. Access to tools that help renters build credit and wealth is only one part of the solution, we’re also focused on pairing these tools with educational resources. While there are several factors contributing to the wealth gap, differences in financial literacy play a role in the ability of different groups to be able to build wealth.  

 

Examining financial literacy research in the U.S. 

Several studies have shown the impact of financial literacy on household wealth accumulation.  Every three years, the National Financial Education Study is conducted in order to measure the financial capability of Americans. In the last survey, researchers found that the amount and quality of financial education is correlated with better financial outcomes including being:

  • More likely to save
  • Less likely to overdraw checking accounts
  • Less likely to generate fees from credit cards or use non-bank borrowing methods such as pawnbroker loans 

Financial education often comes alongside other wealth privileges, like attending and completing college, but access to wealth should not indicate access to education. 

Source: The State of U.S. Financial Capability: The 2018 National Financial Capability Study

 

Source: The State of U.S. Financial Capability: The 2018 National Financial Capability Study

 

The Federal Deposit Insurance Corporation (FDIC) has also analyzed the impact of financial education training and found that after taking a financial education course, participants were more likely to:

  • Open deposit accounts 
  • Save money in a mainstream bank product
  • Use and keep a budget
  • Have increased confidence in their own financial abilities

These positive behaviors were maintained even six to twelve months after completing training.  

Better financial literacy is also tied to making decisions that are likely to generate greater financial returns. Researchers through the National Bureau of Economic Research (NBER) have found that those with low financial literacy are significantly less likely to invest in stocks (van Rooij, Lusardi, and Alessie, 2007). 

Another study out of NBER (Behrman, Mitchell, Soo, and Bravo, 2010), shows that financial literacy directly translates into higher wealth. After controlling for other factors such as education, family background, and personality traits, a .2 standard deviation increase in a measure of financial literacy would induce increases in pension wealth, other wealth, and housing wealth above $10,000. In other words, even a small increase in the amount of financial literacy that an individual receives could impact their wealth by more than $10,000. 

 

Approaching financial education in a rapidly changing economy

Given the uncertainty in the economy and world events, it’s more important than ever to have a strong understanding of personal finance topics. What is happening in the world is impacting the wallets of renters and property owners and operators alike.

Inflation is at a 40-year high with the March Consumer Price Index up 8.5% from a year earlier.  The Federal Reserve System (often referred to as “The Fed”) is currently trying to curb inflation without triggering a recession. As we discussed in our March report, inflation means monthly expenses that once felt relatively flat are rising. Both renters and property owners should plan for how to mitigate challenges that may come with paying rent and bills on time.

The invasion of Ukraine has also caused prices to skyrocket. The war is expected to continue to increase them due to escalating sanctions against Russia and additional supply chain constraints. March energy prices are up 32% with gasoline prices up 48% from a year earlier.  And while prices have begun to ease slightly since early March highs, seasonal demand is expected to keep pressure on energy prices.

Source: U.S. Energy Information Administration

 

What steps can Americans take to best prepare themselves financially for the uncertain road ahead? 

First, remember that it’s rarely advised to make significant changes to personal finance strategies because of economic changes. Instead, we recommend a three-step educational process of:

  1. Auditing
  2. Education
  3. Seeking advisement

Anyone who wants to take steps toward financial security should start by auditing spending, savings, investments, and personal goals. Having a good understanding of your individual position in a changing economy is essential to this preparation. 

When it comes to education, there are a lot of reputable and free tools to leverage, regardless of experience or past financial education. Banks, credit unions, employers or 401K advisors can all be sound (and free) places to turn for financial advice. Another free option to explore is the pro bono work of the Foundation for Financial Planning, which offers its services to the financially vulnerable, including wounded veterans, communities of color, at-risk senior citizens, and cancer patients.

Stay tuned next month for our latest takes on housing, the economy, and their impacts on owners, operators, and renters. To learn more about how Esusu and rent reporting can help improve portfolio health and the financial stability of your renters, check out our offerings for owners and operators.