Wealth building and wealth stripping solutions

I’m officially old enough to now have an “I remember when …” story. Today’s lookback – hearkening memories of 1999: “I remember when gas was under $1 per gallon.” 

Now, thanks to inflation, I’ll get to add “I remember when gas was above $5” to my story bank. 

With enough time, these are just that: stories. This will level out. But for now, inflation is a very real pain point, especially for those already on tight budgets. 

According to Prosperity Now, 37.5% of Indiana households live in liquid asset poverty, meaning they don’t have enough money to cover the basics for more than three months. So, those who’ve already spent any “extra” they had in recent months – who still need to feed their families, keep a roof over their heads, and get to work – are looking for ways to meet basic needs when costs are increasingly exceeding income. 

This is especially true for the 37.9% of Hoosiers who have no emergency savings.

While credit cards are not an ideal solution – especially with rates on the rise – for too many, the primary option available is even worse: a high-cost, small-dollar loan. 

Payday pain

For example, Hoosiers who can’t afford a $400 surprise expense today and get a payday loan tomorrow will need to repay the $400 plus interest in two weeks. The more common scenario is that they’ll get a new loan the day the other is due to cover the debt. This cycle continues an average of nine times for most payday borrowers. If $400 is reborrowed just seven times, they’ll pay as much in fees and interest as the original loan amount in less than four months. As a result, most experience negative outcomes from payday loans, making this “solution” a wealth extractor. 

One real solution involves policy change: reducing interest rates allowed for these types of loans. According to the Center for Responsible Lending, a 36% rate cap stops this debt trap. States with ballot initiatives as an option have been able to address this issue more readily than states that must go through the legislative process, like Indiana. Hoosier voters overwhelmingly oppose payday lending, with 88% indicating support for a 36% cap. But legislators must adopt reform measures for them to happen in this state, which has been an uphill battle to date. 

A federal policy solution to address this challenge is the Veterans and Consumers Fair Credit Act, which would extend a 36% rate cap to all loans.

Limiting payday interest rates is what we call a downstream solution. It curbs the harm caused for those who had to turn to this option. While it will do so in a powerful way, it’s reactive versus proactive.

To prevent reliance on these harmful products, we must ensure low-income families have opportunities – and reduced barriers – to build assets. Providing affordable, small-dollar loan options will help mitigate the damage. But we need more. 

Long-term aid

Wealth building strategies can be as “simple” as banks providing second-chance bank accounts and as “robust” as guaranteed income programs being piloted in some places to narrow the racial wealth gap. While data is gathered around the newer concepts, we need more options on the table and greater funding for current options now. Homeownership simply cannot carry such exclusive weight as a wealth-building strategy anymore, when families are struggling just to have enough in liquid savings to respond to an emergency. The solutions need to include a blend of savings that is readily accessible and that supports long-range goals. 

Important solutions include individual development accounts that provide matched savings for homeownership, entrepreneurship, and education; child savings accounts, including matching 529 college savings plans; more affordable housing, including down payment assistance to increase homeownership options; worker cooperatives to provide an equity stake in small businesses; standardized financial education for school-age children; and employer-based options, including matched retirement savings plans.

To discuss challenges, solutions, and innovations addressing wealth-building and wealth-stripping concerns, including how they especially impact people of color, Prosperity Indiana is hosting a series of regional events around the state this summer, in July and August. PI is inviting organizations connected to this work through programs, policy or philanthropy to attend. Together, Prosperity Indiana members and partners will be tackling these challenges, with a hope to one day – in the not so distant future – look back and say:

“I remember when … there was a racial wealth gap caused by wealth-stripping tactics and a lack of wealth-building options. So glad that’s now behind us.”