08.04.24
Key Findings: Financial Health
How Does Unconditional Cash Affect Financial Health and Well-being?
As the unconditional cash transfers were nearing an end, we conducted the fifth round of qualitative interviews with participants. During this round we covered a range of topics including asking participants what the idea of “financial security” meant to them. The responses ran the gamut, from having “$20 million in my bank account tomorrow” to simply “meaning I would not have to live paycheck to paycheck.”
What is apparent across the array of responses is that financial security is not just the objective state of one’s financial situation. Financial security extends beyond one’s income or credit score; it is also the subjective experience of financial well-being and the general sense of control over one’s financial situation. Certainly, the objective conditions are important, as we heard participants describe:
“Financial security would just be I guess not in any debt with money saved up, with everything paid for, like your house and car and all that.” Ammon, recipient
“Financial security is someone who has a job with a home…a home and food to eat and your bills paid. They don’t need to ask someone for anything, they have everything they need…But also being able to provide for your child but also extracurriculars for your child.” Nathan, recipient
But just as often we heard participants talk about a more subjective experience of financial security—peace of mind, a better ability to enjoy life, and not having to worry about a major unexpected expense leading to financial ruin. For example:
“Not having to worry about anything. Like being able to make enough to where it would not at all be a problem to, you know, pay our bills and go out and do things, and to not have to worry about money.” Giselle, recipient
“Freedom to do what I need to do and what I wanna do in life.” Nyah, recipient
While an extra $1,000 each month is not enough for most people to feel fully financially secure, it did lead to improvements in recipients’ financial security in meaningful ways. We find that recipients experienced improved financial well-being, an increased ability to weather financial shocks, and reduced spending volatility, as well as small gains in credit access. One takeaway from this is that unconditional cash transfers can improve financial health across both objective measures, such as credit scores, and more subjective measures like self-reported financial health.
Improved self-reported financial well-being
We measure financial health using the Consumer Financial Protection Bureau (CFPB) Financial Well-being Scale. The CFPB defines financial well-being as “having financial security and financial freedom of choice, in the present and in the future.”1 Importantly, they recognize that because individuals’ values differ, financial well-being is highly individualized and traditional measures like net worth do not fully capture this subjective experience.
Financial well-being scores range from very low to very high along a six category scale. At the time of enrollment, the average financial well-being score for both recipients and control participants fell into the “medium low” range. Consider the scale as a six-rung ladder. The average participant was on the third rung. Comparatively, 25% of U.S. adults fell into this range during 2020, with the average U.S. adult falling into the “medium high” range—the fourth rung—slightly more financially secure than the average participant.2 While experiences vary, according to the CFPB this “medium low” range tends to capture people who have minimal savings, some credit concerns, and almost always find it somewhat or very difficult to make ends meet.3 The unconditional cash resulted in statistically significant improvements to recipients’ self-reported financial health—a 3.7% increase compared to the average score for control participants across all time periods. Additionally, recipients’ financial well-being category was 18% less likely to be “low” or “very low” than control participants.4
Looking at the individual items that make up the overall financial health score, the largest effects are seen on items related to recipients’ current financial circumstances:
- I could handle a major unexpected expense (5% increase)4
- Giving a gift for wedding, birthday, other occasion would not strain my finances (6% increase)4
- I have money left over at the end of the month (5% increase)4
- I can enjoy life because of the way I am managing my money (6% increase)4
- I am behind with my finances (4% decrease)4
- Because of my financial situation, I will never have the things I want in life (3% decrease)4
We do not see a significant effect for items that are focused on longer-term financial circumstances such as the extent to which a participant feels “concerned that the money I have or will save won't last.”
This suggests that the unconditional cash improves financial well-being and reduces vulnerability in the short term but does not appear to reduce long-term financial anxieties. Additionally, though the overall financial health score improves significantly for recipients in the first two years of the study, the effect fades in year three. There was a nearly 8% increase in financial well-being for recipients in year one, which reduced to 6% in year two, and then was near zero by the third year.
The visualization below shows descriptively how recipients’ financial well-being changed on the six category scale throughout the transfer period. Even at year three, when there is no longer a statistically significant positive effect of the cash, we can see that the percentage of recipients in the “very low” and “low” categories is less than at time of enrollment. Similarly, the percentage of recipients in higher categories is greater at year three than at time of enrollment, indicating that throughout the transfer period more recipients moved up the financial well-being ladder.
Differences in financial well-being by income level
In 2022 the Consumer Financial Protection Bureau (CFPB) published a report on Financial Well-being in America looking at changes from 2017 to 2020. They found distinct differences in financial well-being by demographic characteristics, especially with regard to income level. The largest increases experienced during this time were by those with higher incomes. Among the U.S. adults who saw a decline in financial well-being during this time, 40% of those individuals had incomes of less than $25,000.2 We also explored the effect of the cash on financial well-being by income level and found signs of differences. We find that households with lower incomes at the time of enrollment appear to experience larger improvements to financial well-being as a result of the cash compared to the overall average and to recipients with higher household income.
The visualization below shows descriptively how financial well-being changed over time for both recipient and control participants, broken down by income level at the time of enrollment. Financial well-being improves significantly for all recipients in year one, but the greatest improvements are seen for lower income recipients. Although the effects fade for all recipients by year three, the effect on financial well-being remains positive, though non-significant, for both the lowest and highest income recipients. Pooling all time periods, the cash significantly increased financial well-being for the lower income recipient group by 5%, middle income recipients by 3.5% and higher income recipients by 4%. Though this analysis is exploratory, evidence suggests that, with regard to financial well-being, the cash benefited the recipients who likely needed it most—those with the lowest household income at enrollment.
Overall, the unconditional cash improved financial well-being at the start of the study, giving recipients an increased sense of financial security and freedom of choice. Then in year three, it’s possible that the knowledge that the transfer was coming to an end left recipients feeling less secure about their financial futures which is why these effects did not last. It’s also possible that recipients were using the unconditional cash to respond to an increased number of financial shocks throughout the three years, as discussed in the section below. The cash may have helped them weather these financial shocks during the study, but resulted in a heightened awareness of potential future financial precarity.
Increased ability to weather financial shocks
Recipients of the $1,000 had a greater occurrence of financial shocks, such as a lost job, a pay reduction, or a health emergency. Compared to control participants, recipients reported about 12% more financial shocks.4 At the time of enrollment, the average number of financial shocks for both recipient and control participants was a little over 1 during the past year. In year three, recipients experienced an average of 0.65 shocks and control participants experienced an average of 0.57. It does seem that people who experienced at least one financial shock were more likely to experience multiple shocks; among those who reported at least one shock, the average was 1.6 for recipients and 1.5 for control participants in year three.
Descriptively, there does not appear to be large differences in the types of financial shocks experienced by recipients compared to control participants. For both groups the most common shock experienced was job loss, followed by pay reduction and then both partner job loss and pay reduction. Descriptively, 1% more recipients experienced foreclosures and business difficulties compared to control participants. This could be related to the cash enabling recipients to move more or become more entrepreneurial. The most notable differences are in incidences of health problems and partner health problems—recipients reported slightly more incidences of these types of shocks. The one category that was lower for recipients was divorce. In future analysis we will explore the effects of the cash on intrahousehold dynamics.
In contrast to our findings of increased financial shocks, recipients reported a roughly 2% decline in running out of money between paychecks or before the end of the month, though this effect was not statistically significant. Although recipients may have experienced more financial hardship events, this suggests they were better able to weather these financial shocks due to the unconditional cash improving their financial well-being.
We also find that the unconditional cash resulted in more stable monthly spending, which provides further evidence that recipients may have been better able to weather financial shocks such as changes to income or expenditures. We find a 20% reduction in deviation of monthly spending for recipients compared to control participants; this is mostly driven by reduced volatility of spending on items such as food, bills, and personal items.4 These are the types of expenses most vulnerable to change due to financial shocks. The cash appears to have allowed households to better avoid fluctuations in spending from month to month.
Small improvements to credit
Finally, we find small but positive increases in both available credit limit and total credit limit in the past three months, with overall credit limit rising almost 7%. Though both estimates are non-significant, we do find a statistically significant increase in credit scores equivalent to about 6 points—a 1% increase compared to control participants.4 Though modest, these findings suggest the cash transfer made it possible for recipients to obtain small gains in credit access, another indicator of improved financial health and well-being.
What do we take away from this?
Though the effects on financial well-being faded in year three—possibly a result of the transfers ending—the cash appears to have helped recipients meet current and ongoing financial obligations during the transfer period. Even recipients who did not feel financially secure by the end of the study period often told us they felt their financial situations would have been far worse without the cash. This sentiment was especially true for those who experienced financial shocks during the study.
To help illustrate this, consider the experience of one recipient, Desiree. At the time of enrollment, Desiree was a stay-at-home mother. Her household income came from her husband’s job, and his hours had recently been reduced, causing financial strain. They were paying bills late and borrowing from friends and family to help cover their mortgage payments. One of Desiree’s goals was financial security, which to her meant being debt-free and able to pay bills on time without borrowing or sacrificing elsewhere. At that time, she felt that an extra $1,000 per month would positively impact her long-term future.
During the initial years of the study the unconditional cash helped Desiree make progress toward her financial goals. She used it to catch up on bills, pay down credit cards, and enroll her children in extracurricular activities. At the end of 2022, however, her husband lost his job. Although he was able to secure a new job, the lapse in income created significant financial strain. Desiree had to pause payments on some of their bills and made arrangements with their utility companies to reduce payment amounts. She also sought out community resources like food pantries and applied for SNAP benefits. As we found in our survey data, the unconditional cash helped Desiree and her family weather the shock of her husband’s job loss, using the cash to pay their mortgage. “It kind of kept everything afloat,” she told us.
Yet subjectively Desiree felt worse about her financial situation in 2022 than she had at the time of enrollment, despite the objective circumstances—paying bills late, borrowing money—being similar if not better (she now had a higher credit score and had less credit card debt). Having achieved greater financial stability with the help of the cash transfer during the initial years, the experience of suffering this financial shock and losing the progress she had made left Desiree feeling more financially vulnerable than if she had never experienced any financial security. Though she told us she probably still wouldn’t be in her house if it were not for the cash, her realization of how much she relied on the cash to endure financial hardships made her fearful of how she would get by once the payments ended.
This experience helps illustrate why the effect of the cash on financial well-being might decline over time. Desiree explained, “When you asked if an emergency came up, where would the hundred dollars come from? And I said, the EDC money, well, that'll end soon. So, once that emergency comes up, there'll be no money to pull from. So, that is definitely not being secure, not yet.” For Desiree, the knowledge of the transfer ending, in combination with the financial shocks she experienced during the study, resulted in a heightened awareness of her financial precarity at the end of the transfer period.
Though this is only one participant’s narrative, similar experiences and sentiments were shared by many qualitative participants. Narratives such as Desiree’s can help us contextualize our quantitative findings to better understand how participants perceive and define financial well-being for themselves and their families, and how they used the cash to improve their financial security.
In sum, the unconditional cash led to improvements in recipients’ self-reported financial health during the first two years of the study, an increased ability to weather financial shocks and reduce spending volatility, as well as small improvements in credit access. Taken together, these findings provide evidence that unconditional cash transfers lead to improved financial well-being, at least in the short term.