Behind the balance sheet:The financial health of low earning households

Defining low earners: concept

Low earners can be defined by their position in the mixed economy. They are:

• Squeezed: often too poor to benefit from the full range of opportunities provided by private markets but too rich to qualify for substantial state support;

• Exposed: living at the edge of their means and therefore vulnerable to changes in circumstances; and

• Overlooked: low earners are not well-defined as a group and the pressures they face are not well understood.

Defining low earners: numbers7.2 million households •28 per cent of all households

14.0 million adults•29 per cent of adult population•7.6 million women; 6.4 million men

3.8 million children•28 per cent of child population

6.8 million benefit units•22 per cent of all benefit units

2.7 million pensioner units•39 per cent of all pensioner units

4.1 million working-age units•19 per cent of all working-age units

Households, individuals and benefit units by income group: UK 2007-08Benefi t-

dependentLow

earnersHigher

earners HouseholdsTota l 7,000 7,200 11,200

With chi ldren 1,900 2,400 3,400Without chi ldren 5,100 4,800 7,800

Individuals within householdsTota l adults 11,100 14,000 23,800

Women 6,600 7,600 11,800Men 4,500 6,400 12,000

Tota l chi ldren 4,600 3,800 5,500

Benefit unitsTota l 8,900 6,800 14,700

Fami ly typePens ioner uni ts 3,300 2,700 2,400Working-age units 5,600 4,100 12,300

Couple with chi ldren 800 1,300 3,600Lone parent 1,200 500 500Couple w/out chi ldren 700 800 4,400Male s ingle w/out chi ldren 1,600 800 2,300Female s ingle w/out chi ldren 1,200 700 1,600

000s

Defining low earners: social class

Over two-thirds of heads of low earner households are in social classes C1 and C2

0%

6%

24%22% 20%

28%

2%

13%

38%

29%

15%

2%

8%

28%

38%

20%

6%2%

0%

10%

20%

30%

40%

50%

A B C1 C2 D E

Distribution of social class of heads of household by income: GB Sep/Oct 2009

Benefit-dependent Low earners Higher earners

Low earners perspectives

I feel like I’m in limbo. We’re just surviving. It’s like Groundhog Day where every day you wake up and it’s the same thing day after day: you go to work, you worry, you go to sleep and then you go back to work. There’s nothing to look forward to.

You fall out of the catchment [for benefits] if you earn more than the threshold. With my wage I earn £11 more than the threshold for benefits so I’m not entitled to anything. I want to say to my employer ‘well you can keep your £11 so that I can get a bit of extra help with benefits’ but they say that’s illegal.

Whenever the Government’s budget comes out it’s always focused on people who claim benefits or people with mortgages. It never talks about the people who are just surviving.

Headlines from our Low Earners Audit

The financial health of low earning households

• Low earner households spend all of their disposable income each week on average

• Income is frequently variable, due to the nature of work patterns

• Low levels of savings - 51% have less than £1500 in the bank - and less likely to have insurance

• Debt levels have increased rapidly in recent years, with a third of low earners struggling with repayments and one in five spending more than a quarter of monthly income on repayments

• Facing higher levels of personal inflation than higher earners since 2008

• Lack access to financial advice

• Experiencing falling left-over incomes during the recession – 56% of low earners reported a drop in income over 2008

Using research

Quantitative Qualitative

Using both quantitative and qualitative research allows us to create a much broader understanding of low-earners. The quant. helps us map the population, giving insight into the general financial trends and features of low-earners as a group. The qual. tells us who these people really are. It gives insight into the cultural and social factors that

drive financial decisions and ultimately determine an individual’s financial health.

Using both quantitative and qualitative research allows us to create a much broader understanding of low-earners. The quant. helps us map the population, giving insight into the general financial trends and features of low-earners as a group. The qual. tells us who these people really are. It gives insight into the cultural and social factors that

drive financial decisions and ultimately determine an individual’s financial health.

Numbers of low earners experiencing a particular issue

Prevalence of particular behaviours or attitudes

Snapshots

Contextual factors that influence experiences, attitudes etc

The reasons behind particular behaviours

Life histories

Building balance sheetsOur qualitative research revealed how difficult it can be to collect household financial information and highlights the inconsistencies that may lie behind certain financial data. For example:

Q. “How much do you earn?”

• Many low-earners do not have formal salaries or contracts• Many low-earners are paid daily or hourly, and work irregular schedules• Overtime, multiple jobs and informal supplemental incomes complicate monthly earnings• There was confusion over whether to include support such as tax credits

Q. “What are your monthly outgoings?”

• Respondents found it difficult to include one-off costs and ad-hoc spending. As such, balance sheets often included surpluses where there were none in practice.• Contributions to funds, such as a pensions or savings, were often not included in thoughts about spending

Getting behind the balance sheet

Who are low earners?

How do they understand their own financial health?

To what extent is their financial health dynamic?

How are financial decisions made within a household?

What are the causes and effects of changes to a household’s financial health?

Are there hidden assets and liabilities that do not appear on a balance sheet?

How should we understand concepts such as ‘risk’ and ‘resilience’ in relation to low-earners financial health?

How do low earners understand their own financial health?

Low-earner household snapshots: SueSue is in her late 50’s.She lives alone in a house bought after a divorce.She works part time as an administrator and teacher in a nursery.Sue has two adult daughters. One lives nearby and still requires some financial support. The other lives in Australia and is planning to get married soon.At one time, Sue lived a very comfortable life, with a wealthy husband. After she divorced she was left without skills or significant income.She admits to having very little financial knowledge. She does not know how to shop cheaply or use financial services. She relies completely on her ex-husband for advice, but his health is deteriorating rapidly.

“Thinking about money is quite stressful for me because I’m very aware that my outgoings are larger than my income. This inevitably means that my savings are gradually reducing – a situation that cannot go on forever.”

Sue’s financesSue lives on a low income, bringing in only £875/month. She has some assets: savings, her house, and a small trust fund. Her ex-husband also gives her a small amount of work as an administrator for his consultancy. She says it is his way of looking after her financially.

Forgotten spending: When Sue fills in a detailed sheet of incomings and outgoings, she appears to have a monthly surplus. But the sheet does not match her daily expenditure. She does not account for the ‘little things’: gifts to her daughter, lunches out, a spur of the moment shopping trip, the need for a new pair of shoes, drinks when she is out, unpredictable, but frequent, dental work etc. In fact, every month Sue needs to dip into her savings, which are declining. She knows that when she retires, her savings will not last long.

Low-earner household snapshots: StuartStuart (39) lives with his wife and 3 young children in a large privately-owned house. He has been hit hard by the recession. He was made redundant by a firm he had worked for for many years when business started to decline. The household has been a ‘low earner’ household for just over a year. The family are learning to live with much less money than before, though their lifestyle still has many of the trappings of wealthier times: a large car, a large house and regular pensions contributions for example.

Stuart is trying to set up a business of his own. He is doing management consultancy for local firms. He has won one or two small contracts, but the family are more reliant now on his wife’s income from her part-time job as a sales rep.

“Luckily a few people who I have known over the years… I have been able to do some work for them in their companies and so I am getting some business. But its taking longer than I expected. I am still getting myself established, its taking me quite a while. It’s a calculated risk.”

Stuart’s financesStuart’s house is a significant asset for the family. The moved in 2002 and when times were good, they invested a lot in the house, building extensions and refurbishing the garden. A lot of this work was carried out by friends and family at low rates. Stuart does not want to move but he knows the house provides a measure of financial security. The cut in interest rates has also helped with the mortgage.

Fostering: When calculating his income, Stuart did not mention another household economic activity which brings in a significant sum. He and his wife are registered foster carers. They have stepped up this activity since Stuart was made redundant and it enables them to realise some of the economic value in their large property. It also utilises the strength of Stuart’s relationship with his wife.

Leyla and DeanLeyla and Dean are in their late forties and early fiftiesThey have lived in the same house for 28 years.Leyla works in the NHS as a phlebotomist. Dean used to work as a gas-fitter but he suffers from heart disease. Two years ago he had to undergo major heart surgery and had to stop working. They have one son who is married with his own daughter and no longer lives with them.

Life for the couple has been tough since Dean stopped working. They had built up debts of over £30,000 when both were earning and their repayment plan became impossible when Dean stopped working.

“We never thought about money. We would go out: spending, eating out. If we didn’t have the money in the bank it was on the card. It was all too easy. We’d go on holiday. Put it on the card. Silly. You don’t realise. When you actually sit down and add up what you owe. We owed £30,000. I felt physically sick when that hit home.”

Leyla and Dean: financesLeyla and Dean have managed to stabilise their finances in the last year.

Confusion and stigma: Shifting from a life of earning, to a life of dependency posed several problems for Leyla and Dean. On top of the fears for Dean’s health, Leyla found it difficult to negotiate competing advice from government agencies and friends about how to maximise help from Dean’s former employer and the state. For a time Leyla gave up work, based on some poor advice. They also feel embarrassed about having to live with government help and avoid talking about it with friends.

Learning a new lifestyle: The couple no longer use credit cards or loans. They have cleared debts and cut spending. Leyla says any spare cash is now solely for her children.

The social dimension of financial decisions

Neo-classical economic models tend to make the assumption that people’s financial decision-making will follow rational, calculated, self-interested lines towards clearly identified goals.

! + @ = £! + @ = £

“homo economicus”

Economists, philosophers, sociologists, anthropologists and more recently, behavioural economists, have challenged these neo-classical assumptions, showing that economic decisions are intimately bound up with other social considerations and that different models are needed to understand the variety of economic motivators.

Go out to work?

Go out to work?

Stay at home for the

children?

Stay at home for the

children?

Modern woman

Financial decision-making: some thoughts…“My wife’s got a pension, but I haven’t, I only think about tomorrow. I live

day-by-day, I don’t think about tomorrow, I would

make myself very depressed.”

Mick (52) Window cleaner

“My wife’s got a pension, but I haven’t, I only think about tomorrow. I live

day-by-day, I don’t think about tomorrow, I would

make myself very depressed.”

Mick (52) Window cleaner

“We’ve always said that one of us would stay at home

while the kids are young. 17 to 2 age range. I’ve been promoted in the last year and half which makes it a

little bit easier...”Bruce (30) heating engineer

“We’ve always said that one of us would stay at home

while the kids are young. 17 to 2 age range. I’ve been promoted in the last year and half which makes it a

little bit easier...”Bruce (30) heating engineer

[on owning so many cats] “I must admit that we don’t help ourselves financially

because they are all rescue cats, that one …was actually thrown out of a moving car at a tree. She looks cute

and dinky.”Gareth (38) I.T.

[on owning so many cats] “I must admit that we don’t help ourselves financially

because they are all rescue cats, that one …was actually thrown out of a moving car at a tree. She looks cute

and dinky.”Gareth (38) I.T.

“But it’s when do I get it [rent payment from

sister’s boyfriend]? A lot of the time its missed or late, and I’ve got direct

debits coming out so I get hit with a £30 or £40 bill

and I should really pass it on. But its my sister. I

can’t.”Chris (27) Construction

“But it’s when do I get it [rent payment from

sister’s boyfriend]? A lot of the time its missed or late, and I’ve got direct

debits coming out so I get hit with a £30 or £40 bill

and I should really pass it on. But its my sister. I

can’t.”Chris (27) Construction

The informal economy is importantThe ‘informal economy’ is a term that refers to economic activities that do not appear on formal or official records. The most common type of informal economic activity in the UK is ‘cash-in-hand’ work but it also includes petty trade at car-boot sales, tips for waiters and waitresses etc. What happens in this informal economy can be just as important for some low-earning households, as what happens in the more formal economy.

For those like Kelvin, a 37 year old gardener, who works on an hourly basis for a larger contractor, finishing quickly and doing extra jobs for some extra cash from the client, can be important.

For Wendy, a mother who has chosen to stay at home rather than go out to work, buying and selling on eBay, going to car-boot sales and growing her own vegetables and herbs allows her to contribute to household finances.

Hidden assets shape long-term financial health

Financial health of low earnersGreat Britain 2004

Healthy, 22%

Has pension and selection of other major financial products

Has sensible combination of products

Has more than minimal savings for age

Mild, 39%

Has one or more of the following symptoms:

Potentially inefficient combination of products;

No pension;

Minimal savings for age

Chronic, 26%

As acute, but with £70k equity

No acute condition, but one or more of the following symptoms:

High debt gearing (debt excluding mortgage of 70-100% income);

High mortgage gearing (payment of 50-70% income);

Usually runs out of money before month end;

Virtually no savings for age

Acute, 12%

One or more of: Highly stressed on debt (debt excluding mortgage >100% income); Highly stressed on mortgage payments (>70% income); Drop in income (job loss, death or divorce); Always runs out of money before end of month

Hidden assets and liabilitiesRespondents in most cases had a strong and sophisticated understanding of their own financial health. Often this understanding was based on economic factors which lay outside of even the most accurate of balance sheets. Sometimes economic assets or liabilities are not quantifiable. They are financial latencies: securities and risks that determine financial decisions. Three examples: Skill-sets, Social networks and health…

Skills (usually an asset) Social networks (sometimes asset, sometimes liability)

Health

Qualifications

Experience

Social skills

Entrepreneurial drive

Advice, help and support from friends and family

Access to informal lending from friends or family

Access to job opportunities

Peer pressures and obligations

The potential costs of long-term ill-health

The cost of care (time and money)

Financial upheaval of sudden ill-health

Hidden assets and liabilitiesAlthough I worry about money, my children have assured me that I will always be looked after and my ex-husband provides me a financial security net. He doesn’t give me

money directly but I know he would be there if I or the children needed

something.

Although I worry about money, my children have assured me that I will always be looked after and my ex-husband provides me a financial security net. He doesn’t give me

money directly but I know he would be there if I or the children needed

something.

Financial security provided by a friend or family member means that financial decisions can be made more confidently or with less worry. This kind of hidden asset is often dependent on social relationships and is not formalised by written agreement or payment

I have a family member who is very ill. At the moment my parents take

care of her – but their own health is not good. Eventually, I will have to

take on the costs and care responsibilities.

I have a family member who is very ill. At the moment my parents take

care of her – but their own health is not good. Eventually, I will have to

take on the costs and care responsibilities.

Long term health problems can present a looming financial problem. Financial decisions made by those who must think about their implications, may be more conservative than their current balance sheets would. The future costs of care like this, are a hidden liability which people themselves may be well aware of despite real costs being hidden.

Housing options affect financial health

Nearly three-quarters of low earner households are home owners

But, rates are much lower among younger low earners

In youngest age group, 43 per cent live in private rented sector

56%

72%

35%

27%

52%

21%

0% 10% 20% 30% 40% 50% 60% 70% 80%

16-29

30-54

55-64

Proportion of households owning their home with a mortgage by age of head of household:

UK 2007-08

Higher earners

Low earners

“The lack of permanent work means I have to live at home with my mum at the moment who rents privately. I’d prefer to be able to move out and live on my own but I can’t afford it at the moment. You have to save up for a deposit and a month’s rent in advance and it’s too expensive.”

Skills can improve financial health

44 per cent of low earners have no qualification above GCSE/O-level.

Employers more likely to invest in those who are already highly-skilled

Government schemes are largely focused on those with lowest levels of skills. Little focus on re-skilling

54%

80%

92%

94%

94%

53%

34%

19%

7%

0% 20% 40% 60% 80% 100%

2-4

5-24

25-99

100-199

200-499

Managers

Admin.

Elementary occs

Machine operatives

Skills training provided by employers: UK 2007

Training provided by number of employess in organisation

Types of employees trained on-the-job in last 12 months (among firms offering it)

“I did an NVQ in childcare but I had to pay for that myself. I had to struggle to find that. Companies won’t pay and if they do they will take it out of your wages”

Risk of declining financial health

Risk of declining financial health

Thinking about risk and opportunity

Existing work around the concept of resilience has been concerned with how people cope with adversity, and how more can be done to ensure the right range of factors are in place (mental wellbeing, social networks and economic assets) to help people navigate difficult times. Our research, shows the need to go beyond ‘resilience and recognise that in moments of change, there is also opportunity. We need to think just as hard about how to encourage people’s entrepreneurial instincts as we do about those things which will make them more resilient.

StabilityStability Change and uncertaintyChange and uncertainty

Resilience can be a protective barrier against negative outcomesResilience can be a protective barrier against negative outcomes

Opportunity for positive

changeOpportunity for positive

change

Improving low earner financial healthBuilding resilience• Skills policy that focuses on re-skilling• Asset-building opportunities for private renters• Working with employers to improve job quality

Building a system that works• Better alignment of tax, tax credits and benefits• Moving away from reliance on economic modelling• Focus on transitions

Building financial capability and agency• Market development of financial services and products for low earners• Roll out of Money Guidance

Thank you

sophia.parker@resolutionfoundation.org

www.resolutionfoundation.org