Profitwise News and Views

January 2004 Issue

• Chicago Community Ventures Launches Community Development GIS Website
• Around the District
• Savings Account Usage by Low- and Moderate-Income People in the Chicago Metropolitan Area
• A Discussion and Display of Innovations: The Second Annual Illinois Asset-Building Conference
• Beyond Financial Education: Changing Financial Behavior A Portfolio of Applied Research Projects
• An Informed Discussion of the Earned Income Tax Credit—Milwaukee
• Calendar of Events
• January 2004 Issue (PDF,209KB)

Savings Account Usage by Low- and Moderate-Income People in the Chicago Metropolitan Area
By Robin Newberger

Introduction
Holding a savings vehicle with mainstream financial institutions carries several benefits including asset building opportunities, secure storage of income, a cushion against unforeseen financial events, and the ability to establish or maintain a positive credit history. To better understand the demand for savings products among low- and moderate-income (LMI) people, the Federal Reserve Bank of Chicago sponsored a series of savings behavior questions in the 2001-2002 Metro Chicago Information Center's annual household survey.¹ Our findings offer evidence that lower-resource consumers accumulate savings, identify specific savings goals, and add to their savings on a regular basis. As such, they demonstrate demand for savings products. We also observe that relative to moderate-income respondents, the lowest-income respondents are less likely to hold savings accounts and to identify a savings goal.

Savings Account Ownership
Perhaps the most important finding from the survey is that three- quarters of low- and moderate-income respondents kept their savings in either a formal or informal savings vehicle. By comparison, 90 percent of middle- and upper-income respondents, "non-LMI" individuals, reported the use of a savings vehicle. Consistent with other studies, we find that people of modest means do save.²

The most common savings vehicle for both the LMI and non-LMI respondents comes from the formal sector in the form of savings or money market accounts.³ About 60 percent of the LMI sample held a savings or money market account. Almost 30 percent of the LMI respondents had a 401(k) or other investments, and close to 22 percent possessed an IRA account. Fourteen percent of LMI respondents saved in an informal instrument, a category comprised of extra-institutional and "other person-held" instruments.⁴ The preponderance of respondents who saved through informal mechanisms did so in combination with formal vehicles.

Relationships with financial institutions tended to start at an early age. Almost half of the LMI respondents and over 70 percent of the non-LMI respondents opened their savings accounts before they were 18 years old. Moderate-income respondents were more likely than low-income respondents to open accounts before they were 18. Few respondents from any income group opened their savings accounts after age 45. For respondents who did not open their checking and savings accounts at the same time (but had both), we find that savings accounts were most likely to be opened first. In contrast, the largest proportion of respondents who owned a checking but not savings account opened their checking accounts after the age of 18. This suggests that obtaining a savings account may be an important first step for individuals interested in establishing a relationship with mainstream financial institutions.

Identification of Savings Goals
Another indicator of savings activity among LMI respondents is their identification of diverse savings goals. As reported in Table 1, nearly 64 percent of LMI respondents and 83 percent of non-LMI respondents reported putting money aside in the past year for a particular motivation or goal. The most common savings goal reported for both groups (respondents were not asked to rank their goals) was to feel more financially secure. The second most popular motive for the LMI sample was saving for unexpected expenses. Retirement and saving for appliances/ furniture were tied for third. Among the non-LMI sample, the second most popular goal was saving for retirement and the third was unexpected expenses. Forty-five percent of the lowest- income respondents within the LMI group listed no motive, compared to 30 percent of moderate-income respondents.

Money Held in Savings
The survey also attempted to gather information about the amount of money held in savings accounts. Seventy-seven percent of the respondents who reported having a savings vehicle provided information about the amount in their savings accounts. (The survey did not ask about dollar amounts held in other savings vehicles). Table 2 shows the amounts held by the LMI and non-LMI groups. As expected, a greater proportion of the non-LMI sample reported higher levels of savings. About 34 percent of the LMI sample held over $5,000 in a savings account compared to 51 percent of the non-LMI sample. Importantly, however, respondents in the LMI sample reported having accumulated savings. Nearly 60 percent of the LMI sample held $1,000 or more in their savings accounts at banks⁵ or credit unions. Thirty-four percent held over $5,000 in savings and 17 percent held over $10,000 in savings. Savings levels at banks tended to be higher than those at credit unions for both LMI and non-LMI respondents.

Observing the amount saved by age category, we see that half of low- and moderate-income respondents with household savings over $5,000 were more than 60 years old (Table 3). Almost two-thirds of the LMI respondents with household savings above $10,000 were also more than 60 years old. Among the lowest income respondents, more than 80 percent with household savings above $10,000 were more than 60 years old. At the other extreme, nearly 30 percent of LMI respondents with household savings of $1,000 or lower were under 30 years old. We also see a relatively high percentage of 45 to 60 year-old LMI respondents with household savings at $1,000 or lower- similar to the under age 30 cohort. In addition, we find a marked drop-off in the proportion of household savings above $10,000 for those 60+ years of age and the 45 to 60 age group.

Frequency of Saving
The majority of LMI respondents with savings accounts saved regularly, at least once a month, either in their savings accounts or in another savings instrument. Nearly half of the lowest-income respondents also saved at least once a month. Thirteen percent of LMI respondents with savings accounts reported they had not saved at all in the past twelve months. Of those LMI respondents who had not saved at all, 42 percent were over 60 years old, about 30 percent were between 45 and 60 years old, 21 percent were 30 to 44, and 7 percent were under 30 years old.

Preferred Features of Savings Accounts
To get a better understanding of what consumers want from a savings account, the survey asked: (1) what is the most important factor in deciding where to open a savings account, and (2) what an institution could do to provide a better way to keep money in a savings account. The first question was asked only of respondents who already had savings accounts. As shown in Table 4, the LMI and non-LMI respondents gave very similar answers. About 40 percent of both groups cited convenience as the most important factor. Next in importance was safety and security, followed by earning interest. The only significantly different response between the two groups was "to encourage savings," which was more frequently cited by the LMI group as the most important factor. Both low- and moderate-income respondents demonstrated little sensitivity to the costs associated with having a savings account and were even less likely to choose this factor than their non-LMI counterparts.

The second question, "What an institution could do to provide a better way to keep money in a savings account" was asked of the entire sample. Respondents were allowed to give multiple responses to this question. The most common recommendation given by LMI respondents was to do "nothing" (Table 5). The second most frequent answer was to improve the rate of interest offered, followed by the recommendation to lower the costs of the account. In comparing the LMI to the non-LMI respondents, we find that a significantly greater proportion of non-LMI respondents would like financial institutions to pay higher interest, while a significantly higher proportion of LMI respondents desired institutions to lower minimum balance requirements and fees. Not surprisingly, the non-LMI sample focused more on the return for their money, whereas the LMI sample were more concerned about fees and other charges. Comparing the popularity of answers within the LMI group, however, we see that a much higher number of LMI respondents cared about interest rates rather than fees. The same was true for the lowest-income respondents.

Responses to other questions in the survey relating to personal financial management skills show that few people had trouble managing their savings accounts. Ten percent of the LMI group and 5 percent of non-LMI respondents with savings accounts reported difficulty in managing this type of account (Table 6). For the few who reported a difficulty, the overwhelming response among the LMI group was "maintaining a minimum balance"-a difficulty that is likely driven by liquidity constraints and a sensitivity to fees and other charges.

Respondents Without a Savings Account
Thirty-eight percent of the LMI sample and 16 percent of the non-LMI sample did not have a savings account. Nearly a quarter of LMI respondents and 9 percent of non-LMI respondents reported no savings vehicle whatsoever, formal or informal. Of the LMI respondents without a savings account, about half did not own a checking account either. LMI respondents without a savings account tended to be younger, have fewer years of education, a higher rate of employment, lower incomes, and be members of a minority group compared to their LMI counterparts with a savings account. LMI respondents who were under 60 years old and did not have a savings account also tended to have fewer years of education, lower incomes and were more likely members of a minority group, but they were less likely to be employed.

When LMI respondents without savings accounts were asked to answer why they did not have a savings account, sensitivity to the issue of fees and charges became more apparent. The majority of LMI respondents cited costs as their main reason for not having a savings account (Table 7). More than four times the number of LMI respondents answered "costs" than the next most-cited reason, "did not need or want one." The lowest-income respondents were more likely to give costs as a reason relative to moderate-income respondents. Compared to the non-LMI respondents, a significantly higher proportion of the LMI sample also gave costs as a reason for not having an account. A significantly lower proportion of the LMI sample explained their decision not to hold a savings account in terms of their money being placed into other investments or that the interest rate on savings accounts was not competitive.

Access to Financial Services
Thirteen percent of the LMI sample gave "failing" or "needs to improve" ratings to the question of access to financial services (Table 8). Of these, 65 percent did not have a savings account, 45 percent did not have any savings instrument, and 36 percent were unbanked. Additional investigation into the underpinnings for these responses could further our understanding of consumers' perceptions about access to financial services.

Conclusion
The ages of low- and moderate-income respondents ranged from teenagers to nonagenarians, and our findings about how much and how often LMI people save, as well as their opinions about savings accounts, clearly have different implications across this wide age spectrum. We might expect that many of the under-30-year-olds will cross over to the "non-LMI" category as they advance to the next life cycle stage. In the meantime, their relatively high educational attainment (they were more likely to have a college degree relative to LMI respondents over 30 years old) and the relative frequency at which they added to savings suggest many financial marketing opportunities over this cohort's life-cycle. In contrast, LMI respondents between the ages of 45 and 60 were less likely than any other LMI age cohort to report a savings motivation. They also reported particularly low levels of saving in their savings accounts and they were not more likely than their younger counterparts to hold other instruments besides savings accounts. These respondents would most likely benefit from a targeted financial education outreach program.

Age considerations notwithstanding, having comparatively fewer resources seemed to matter most for the lowest-income respondents in the LMI group. The lowest-income respondents were less likely to hold a savings account or to report a savings goal relative to moderate-income respondents. Almost half of this segment was between 30 and 60 years old. For the lowest-income respondents without savings accounts, they were more likely than moderate-income respondents to report costs as a factor in why they did not own one. Our findings suggest that the majority of low- and moderate-income people in the Chicago area actively save through financial institutions, and they are satisfied with the services provided with their savings accounts. Other LMI consumers, particularly the most financially vulnerable, might have an interest in lower-cost savings products, financial education that helps consumers identify savings goals, and outreach that begins at an earlier age.

Robin Newberger is a research analyst in the Consumer and Community Affairs division, Federal Reserve Bank of Chicago. Ms. Newberger conducts research and writes on matters related to the savings behavior of low- and moderate-income people. She holds a B.A. from Columbia University and a Masters in public policy from the John F. Kennedy School of Government at Harvard University. She received a Chartered Financial Analyst designation in 2001.

These views are those of the author and do not necessarily reflect the opinions of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Notes:
¹ Metro Chicago Information Center is a nonprofit research organization located in Chicago, IL. The majority of the survey data was collected in a telephone survey of households selected through a random-digit-dialing sampling technique. Face-to-face surveys also were conducted to include information in the sample from households without telephones. Interviews were given in Spanish to accommodate Spanish-speaking respondents.

² See Dunham, Constance R., "The Role of Banks and Nonbanks in Serving Low-and Moderate-ncome Communities, "Changing Financial Markets and Community Development: A Federal Reserve System Research Conference held in Washington, DC, April 5-6, 2001; Kennickell, Arthur B., Martha Starr-McCluer, and Brian J. Surette, "Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances, "Federal Reserve Bulletin, January 2000, pp. 1-29; and Hogarth, Jeanne and Jinkook Lee, "Use of Financial Services and the Poor, Working Paper 00-13, Center for Social Development, Washington University in St. Louis, 2000."

³ Our definition of formal vehicles covers savings or money market accounts (hereafter referred to as a savings account), CDs, IRAs, savings bonds, and
401(k)s/other investment instruments. The survey treated 401(k)/stocks/bonds as a single category.

⁴ This category includes cash/jewelry/gold, uncashed checks, another person's bank account, savings circles, gifts/loans to other people, and other valuables.

⁵ "Banks" includes savings and loan companies.