Analysis Of The Book Financial Diaries: How American Families Cope In A World Of Uncertainty By Jonathan Morduch

Financial Diaries: How American Families Cope in a World of Uncertainty looks at the unstable incomes of American families and how this volatile income is used over time. A research was done across five states with two hundred and thirty-five families to better understand the volatility of income in the United States of America. It is believed that in order to have a better life in the United States of America, saving, hard work and luck was all that was needed. According to Morduch, though the American economy is one of the most successful economies in the world, there are some inequalities some American families suffer or go through. Low-income families tend to spend more and sometimes live like middle-income families when in reality they are not. Also, being employed full-time does not guarantee a stable income in America. Incomes, especially those that are earned through commissions are volatile; that is they increase and decrease over time. To have a steady wage, jobs that pay by the hour are best choices. It was again observed that rich families sometimes experience poverty. It was observed that most American families were more concerned with income instability than income inequality; they would prefer being financially stable to cater for their families and the future. Some families also spend less on items but end up spending more later. For instance, you can buy a cheap car with a lot of car problems or a house which needs more fixings. It was also observed that earning more does not mean you would have a volatile or stable income.

Moreover, the research showed that it is hard for the poor to make long term plans because they are faced with the payment of debts, utility bills, housing, education, emergencies, just to mention a few. There is a link between spending and one’s income. Individuals spend less when there is an income dip and spend more when there is an income spike. A spike is defined “as a month in which income was 25 percent or more above average…” Sometimes, there were income spikes which gave families the opportunity to pay all debts owed and save money for a rainy day. When there is an income spike, families spend carefully. Furthermore, consumption smoothing is economizing what one has and making sure the family has enough for the future. Individuals make sure their families get what they need all the time whether or not there is money. To do this, families ration food when there is no money and save money in the bank. Consumption smoothing means saving, borrowing and shopping on a budget. Consumption smoothing helps individuals use their volatile income to take care of their necessary needs. Consumption smoothing is all about managing money. Poor families are able to “smooth consumption” through safety net programs like food stamps, Medicaid, housing assistance and Temporary Assistance for Needy Families (TANF). These safety net programs are however unstable. There are also families who experience income volatility and whose incomes are higher but cannot qualify for these safety net programs. To “smooth consumption”, families utilize the services of financial institutions such as credit cards, insurance policies and savings accounts. But most of these financial institutions do more harm than good. They mostly target the rich; hence, making it difficult for the poor to utilize their services. For instance, high interest rates on their loans. To survive, these poor families rely on borrowing and storing food items. Families spend more when there are emergencies, impromptu bills to be paid, family vacations, just to mention a few. Sometimes smooth spending involves a spending spike.

In conclusion, the families in South Africa, India, Bangladesh and America all experienced the same problems. There was also income volatility with the poor families in South Africa, India and Bangladesh in Portfolios of the Poor: How the World’s Poor Live on $2. Both America and these developing countries experienced income spikes and dips. Again, just like in the developing countries, families in America also saved their monies and paid their debts.