Households without any cash savings are twice as likely to be wealthy as poor | Hacker News Reader

Households without any cash savings are twice as likely to be wealthy as poor

theatlantic.com

62 pointsjseliger51 comments

The analysis misses the crucial factor - access to credit.

A middle-class homeowner can easily borrow tens of thousands of dollars cheaply and easily via credit cards and overdrafts. With a good credit history, you don't need liquid savings to deal with a temporary cashflow problem; Low interest rates mean that it is economically rational to rely on credit in this way, rather than having capital under-utilised in instant access savings accounts.

Credit is vastly more expensive for the poor, especially the unbanked poor (who represent around 8% of the American population). Borrowing $1000 for a couple of months costs just a few dollars if you have a low-rate credit card, but hundreds if your only access to credit is through payday lending. Without the cushion of cheap credit, it is imperative to have a rainy-day fund.

The availability of peer support is also highly relevant; If you have affluent family and friends, then the consequences of cashflow problems are greatly diminished.

The author draws the conclusion that the middle-classes are financially insecure, but I think that the converse is true - they choose to spend to the limit of their income because they are highly financially secure and do not fear short-term cashflow problems.

Credit cards aren't necessarily the best example as they carry horrendous interest rates relative to just about everything else in today's market. That said, they can paper over a very short-term cash flow crunch easily without costing too much. And, as you say, there are often many other sources of credit such as family, HELOCs, etc.

That said:

>they choose to spend to the limit of their income

I'd argue that this is generally not a good idea unless "spend to the limit" includes a budget for savings.

That's a great point. They only looked at the last 25 years, but I bet the story is different in the late 70s and early 80s when interest rates were significantly higher.

Partly this is due to households who are financially well-situated having options for smoothing out transient cashflow issues which are superior to keeping large amounts of cash in non-productive accounts. Depending on your risk tolerance, if you're a millionaire, having $1k in checking might not be quite as insane as people writing personal finance advice for Americans with $30k annual incomes would make it out to be. (Most folks with $30k annual incomes don't have $100k available on plastic or the ability to have $30k wired from their brokerage to checking within an hour of asking for it.)

Would add to your point that having money also allows you to paper over any mistakes that you make using the above strategy.

I was discussing this with my wife with respect to a vacation that we are taking.

After noting that the airline (which we booked months in advance) rejigged the flight and we had to pay extra for seats in better locations on the plane, I said "how about next time we wait until the last minute (or week before) and book the trip?"

My bet is that by waiting we will save money with both the hotel and the airplane.

I could be wrong of course. But my point is that if I bet wrong I can easily cover the extra cost of both items. So I can afford to take the risk whereas someone not in the same financial situation can't afford to do that or it might have a bigger impact on them.

The Brookings paper is extremely wonkish, but their medians (among the 'wealthy hand to mouth') are wealth less than $100,000 and more than 50% of it as housing.

As you say it's very wonkish and it's hard for me, after a relatively quick skim, to see how they're defining "liquid" and so forth. Now, it's easy for me to believe that there are indeed middle-class (because that's how "wealthy" seems to be defined in this paper) households who have bought more house than they can really afford which, combined with educational and other expenses, means that they are really living paycheck to paycheck. I can also imagine many other such households who don't hold a whole lot of cash or money markets but who have a combination of HELOCs, diversified stock and bond mutual funds, and so forth which give them a significant amount of buffer without resorting to liquidating retirement accounts. It's not clear from my read how such a household would be defined for the purposes of this paper.

They spell out the categories in 4.6 (page 22-23 or so).

I can believe there is a degree of financial security associated with having ~ 1 paycheck worth of cash sitting around (if I read it right, their cutoff is something like 1/2 a paycheck). An easy to imagine example is a new home buyer that reached a little bit, at first they are going to be spending most of their paycheck, but at some point things will tip and they will have a lot more flexibility.

Ah, OK. That's a bit broader then. I think it's fair that a first-time homeowner has liquidated their stocks and so forth for a down payment and other costs related to setting up house. It's also fair to say that the same homeowner five years out really ought to have some savings given that they don't have a lot of home equity yet.

https://www.youtube.com/watch?v=kG2rWWIc1SE

this may be a nit, but unless the $30k is in a cash-equivalent like money market wouldn't you have to wait 3 days for settlement of whatever was sold for that $30k?

It depends on a bunch of factors. For the type of folks I'm imagining, that won't be a problem for them. Think "margin." Not only do they not need to wait 3 days to receive the $30k they might never have to sell anything for it at all.

A lot of brokerages will hook banking features up to your trading account, such that "checking" and "trading" essentially become just two parts of that account like "savings" and "checking" are for most standard bank accounts. You do typically still have to wait X time for settlement, but if you have margin or cash in your main account (which can also be put into action trading immediately), you can tap into that via a checkcard or similar.

This article refers to two classes of people, the "middle class" and the "poor". It then goes on to categorize the middle class group as "wealthy".

It's as if words no longer have meaning. Wealthy means you can live off your wealth.

I was sad that they didn't consider the fact that people save or don't save often as a function of their experience growing up. I remember finding vegetables that my wife's grandparents has canned in jars "for later" from the 60's in their basement. They were savers, they had lived through the Great Depression.

Then there were people for whom their whole life the folks that gave them money, their parents or their employers, were always there for them to give them more when they needed it, they haven't saved anything. A lot of them got caught out when the Great Recession hit.

Are their children and people who lived through that more inclined to save again? Hard to say, but it seems like it isn't really relevant to compare the savings behavior of a 40 year old to that of a 20 year old. They had completely different life experiences. And when the 40 year old was 20 it was a different experience than the 20 year old is currently experiencing. As so much of our behavior is driven by our past experience, this sort of cross generational behavior comparison analysis totally falls flat for me.

Article calls out an interesting point by Elizabeth Warren.[1] In this country, it's extremely difficult to access the best schools without expensive housing. That encourages families to overextend and puts them at risk of bankruptcy.

There was a recent This American Life episode that demonstrated the human impact of our absurd system, where hyperlocal property taxes set school quality. I thought it was a particularly strong episode.[2]

[1] The Two Income Trap, http://www.amazon.com/The-Two-Income-Trap-Middle-Class-Paren... [2] This American Life #512, "House Rules" http://www.thisamericanlife.org/radio-archives/episode/512/h...

Oh yes. I remember my favorite bartender who after a divorce kept herself afloat working part-time retail and tending bar. There aren't many alternatives in nowhere rustbelt America. She rented an apartment that was in the only decent school district in town, all other schools were quite like juvie hall. About 75 % of her income must have gone to rent. When her youngest son had finished school she moved.

I cannot fault this decision, education is important, and when you are near minimum wage a support system is important. Moving to where the jobs are isn't the panacea it's made out to be on this website.

Property taxes aren't the big factor they are made out to be.

School quality varies greatly even within a taxing district, yet still highly correlated to location of high-income people.

This is because wealthier neighborhoods have less street crime,

more parental involvement in children's education at home,

more parental involvement in schools,

children who in aggregate are better fit for school success (general health and safety, other factors),

teachers prefer to work with (and burn out more slowly with) better-behaved students.

The way around these issues would be to randomize school assignment (with residential schools (rare), or bussing (common, with its won set of complications)

>In this country, it's extremely difficult to access the best schools without expensive housing.

Where is that not true?

This article is ass backwards. It implies that the upper middle classes are poor because they don't keep cash savings.

But what it actually suggests is that the middle classes are putting their money into property and investments - which is indeed a rational choice that will make their excess wealth work for them.

Not that I'm saying the middle classes aren't being squeezed - by the 1% stretching off into the distance. But this is just not that.

Sure, but in the case of job loss + foreclosure or short sale, all of that goes up in smoke. It's a big risk.

I wonder why one can't sell a house for about 95% of the market value in a month. I mean it sounds like a good deal: the property owner can sell the property quickly to pay off the mortgage, while keeping some of the savings for himself. The real estate investor will make 5% of the value of the house in a few months (minus expenses).

Transaction costs on housing hover around 5-6% generally, and that ignores holding costs. Housing isn't an 'economically perfect' marketplace.

Fair point. Transaction costs for the seller where I live apparently only include the estate agent commission, which can be 3% or even a fixed amount (e.g. 3k€).

What makes you think you can't do that? Unless the housing market is frozen, pricing a home under the fair market value usually results in a pretty quick sale.

However, closing in 30 days might be tough. 60 days is probably the norm.

I didn't say that you can't sell houses sometimes under 30 days, my case was about certainly selling your house in 30 days for significantly (~5%) under the market value. If that's actually possible, then the parents claim "in the case of job loss + foreclosure or short sale, all of that goes up in smoke" is incorrect. If it's not possible, then I wonder why, because the economics seem to make sense.

5% of market value, 4-6% brokerage fees, ~3% transaction fees, ~1% in switching costs (double-rent), adds up to most of the home equity most people have.

Plus, as is probably still the case in a few parts of the US, a given mortgage may well be underwater (i.e. the house, even at market value, may be worth less than you owe). As others have pointed out there are also a lot of transaction costs, especially for a house (don't forget moving/storage/etc. too). If you've largely paid off your mortgage, sure, but then you have a great source of collateral if you need some short-term money.

In the US you can sell a house quickly if you can list it at an attractive price. I did it once - I had to start a new job far away in a relatively short period of time, so I sold my house in 15 days, including escrow. It probably cost me somewhere in the neighborhood of 6% of the total value.

But to do that you need equity. In a short sale or a foreclosure you're leaving the house without any money, which "up in smoke" seems to describe.

Home ownership and kids were the thing for me. While studying I was netting 800€ a month in a 400€ rental apartment and never had worry about money, and had a decent buffer in the bank. Now working and having a 2 + 2 sized family, we net 5000€ month, and pay 1500€ a month for the house (loan + other costs), and and still we have to very carefully budget our every month, often running on fumes when a payday arrives.

(I have no regrets, this was more of an observation.)

I read over the referenced Brookings paper and I can't make any sense of it. The paper doesn't really define what they mean by "wealthy" and "poor" (which is a red flag). It seems like they define "wealthy" as having a nonzero amount of illiquid assets, and "poor" as having a zero amount of illiquid assets. This is crazy - if you have one dollar in home equity, you are wealthy by this definition.

The paper's main conclusion is that 1/3 of people living hand-to-mouth [hand-to-mouth is the paper's term for having no liquid assets] are poor, and 2/3 of them are wealthy. But I couldn't find any data on what fraction of the population is "poor" and what fraction is "wealthy", which makes it impossible to interpret this result. Are "wealthy" people more or less likely to live hand-to-mouth than "poor" people? I couldn't figure that out from the paper.

The Atlantic article also seems to be totally wrong in interpreting the paper, saying the "wealthy" have at least $50,000 in illiquid assets. The paper, however, says "the [wealthy hand-to-mouth households] typically hold sizable amounts of illiquid wealth: for example, the median at age 40 is around $50,000." Confusing the minimum amount of wealth with the median amount of wealth is a huge, huge error that totally changes the meaning.

If anyone could figure out what this paper is really saying, I'd like to know (not sarcasm).

Link to paper: http://www.brookings.edu/~/media/projects/bpea/spring%202014...

Warning: Cynical poster alert. Modern economics is inextricably entwined with politics. Look at the last line of the conclusion:

> Second, we showed that the model that allows for W-HtM behavior implies that to maximize the aggregate consumption response to scal stimulus payments, the payments should feature more moderate phasing out with household income.

During the economic shock of 2008, there was a fiscal response applied that was pretty much formulated in the wake of the depression: Give money to folks who are very poor (unemployment, welfare, foodstamps), who will then boost the economy a bit because they will not save/hoard the money or go tie up wealth in long-term assets.

The current paper is pointing out: "Hey, there are wealthy people living hand-to-mouth. If you give money (= "fiscal stimulus") to them, you will achieve a boost in the economy as well."

Who knows, maybe the conclusion is right. But god knows how you'd achieve any confidence that the conclusion wasn't a function of the authors' funding.

This is explains all the counter-intuitive formulations and statistical errors in the paper; thank you for highlighting it.

Really, though, this sort of thing happens every single time an _Atlantic_ story is posted.

I skimmed over it earlier. They are reasonably consistent in saying "wealthy hand to mouth", which I think is at least a strange construction, but it is clear enough in describing a particular group (they do define it as you say, having some non liquid assets, but they don't take the next step and say that this makes them wealthy in any unqualified sense).

They put the total number of hand to mouth households at about 1/3 (in the U.S., paragraph 2 of their page 4, pdf page 6).

The last few paragraphs seem to sum it up well enough, they think that this analysis and some of their modeling work point to some changes that could be made in fiscal stimulus programs (to make the programs have a larger impact).

Misleading choice of words in the headline and text. A teacher making $60k a year is "wealthy" by The Atlantic's definition.

Well it depends if that teacher had inherited a property and some income producing assets from a parent or grand parent and have a pension from a former job (say 20 years in the army). They could be very well be wealthy.

> Most poor hand-to-mouth people (the red line) are younger, peaking around 22 years old

Gee, I would be tempted to attribute this to many people graduating from college/university around the age of 22...

The title for this article is "Are the Suburbs Making People Live Paycheck to Paycheck?".

However, the article isn't about suburbs at all. It is about the financial implications of home ownership. Home ownership maybe relegated to suburbs in NYC, but in a large number of cities that is not the case.

Possibly the "wealthy" appear to be living hand to mouth intentionally. Inflation is a highly regressive tax on cash and savings that rewards hard/real assets.

Buying the most expensive house you can (barely) afford is a wealth building strategy. It's not without risk, but you have inflation on your side. Sitting on cash to save up for that down payment is an uphill fight against inflation.

As a parent of a 3.5 and 1 year old, I'm definitely a believer that our public schools are de facto private institutions. You pay your tuition one way or another for a premium product.

I'm not so sure there is such a thing as a premium product. Home schooling outcomes can beat public schools by a large margin (don't always, but can). There's so much room for improvement, I'm not sure I want to spend ANY extra money on a particular public school.

I have access to 12 months of 0% interest up to about $10-15K with a fee of about 3%, $300-500 total due to my credit score.

I think the access to Credit allows people to live paycheck to paycheck.

No discussion of the proportion between poor and non-poor overall?

If you pick a household at random, you're 3x as likely to get a household with over $50,000 in net worth (their cutoff) as you are to get a household with less.

According to this article, if you pick a household with no cash savings at random, that drops to 2x.

Thus, households with over $50,000 in net worth are much more likely to have cash savings. In other words, no shit.

Rich counties are also more indebted as percentage of GDP than poor countries. If you're well off people will lend to you and it makes sense for you to leverage. Classic correlation vs causation.

https://en.wikipedia.org/wiki/List_of_countries_by_public_de...

Friendly reminder... Label your axis people! Especially if you're using them as evidence to prove your point. Though, due to the image quality, I'm wondering if these images were actually taken from the original study rather than produced by The Atlantic.

The world "wealthy" in my opinion means you can live the rest of your life in comfort without working, if you choose. These people are not wealthy.

In my experience, wealthy people will usually define wealth in such a way as to exclude themselves from being categorized as wealthy.

There is more than one definition of "wealth" and "poverty". You could be a senior Silicon Valley engineer making 200k a year and that would make you wealthy compared to some homeless person in Detroit, but you'd still be poor compared to a hedge fund manager in NYC making 500 million.

You are describing "rich", not "wealthy". Income is not nearly the same thing as wealth. Wealth converts to income at ~5-15%/yr. Yet income doesn't quite convert conversely, because living costs money every yeat.

Well on a logarithmic scale, 200k is much closer to 500m than it is to 0.

On a logarithmic scale you don't get close to 0 no matter how hard you try. It's infinitely far away isn't it?

0.001 dollars is essentially 0, isn't it?

Reply on news.ycombinator.com