Agape as a motivator for financial health

Grandparents co-sign for grandchildren’s student loans. A single mom working overtime takes in a nephew she barely knows, and the expenses and time that come with that. A working couple makes sure their kids have braces on their teeth and travel basketball opportunities while foregoing many comforts of their own. And ultimately in these cases, debt mounts, credit scores suffer and predatory lenders gain the most through all these altruistic efforts.

This year, my work with Appalachian Community Federal Credit Union (ACFCU) has brought me the privilege and challenge of providing financial coaching to more than two dozen individuals and couples. As relationships have taken root and people have shared personal details, one common thread that often has emerged is a tendency to spend on others. That’s not terribly surprising. Research bears out a psychological reason for people’s desire to help others.

This ho ho horrible option (279.5 percent interest) can appeal to
borrowers' longing to give to others.

If “prosocial spending” produces more happiness than spending money on oneself, how should a financial coach address overspending’s cumulative effects on a client’s life? This question seems particularly relevant during the Christmas season, when it is easy to spend more than we plan to or should spend.

Recognizing a client’s desire to sacrifice for others and track record of doing so is a good start. Most clients have made some regrettable decisions, and those decisions haven’t been made solely for altruistic reasons. High-interest lenders may exploit the consequences of those decisions, but they don’t force people into situations in which they have become the only option for credit. Yet with many clients, there are strong undercurrents of sacrifice for family, extended family or friends, including working overtime, taking second jobs and doing without.     

Repeatedly recognizing and affirming that sacrificial approach can build trust and appreciation on a personal level. It can also make clients more receptive to the cold facts. Here’s an example based on the need/desire to help a loved one with $1,000 each year:

If you use a “flex loan” line of credit at 279.5 percent interest to access that $1,000 and pay it back over eight months, you’ll pay $286 per month and you will pay the lender $1,290 in interest.

If you use an unsecured personal loan from a high-interest lender at, say, 36 percent, and pay it back over 12 months, you’ll pay $100.46 per month and pay the lender $205 in interest.

If you put $100 per month into a separate account for 12 months, you’ll have $1,000 to give your loved one – just not right now – and you’ll have a $200 nest egg. You won’t have helped make a lender even wealthier. The next time, you can give your loved one even more help, or you can attack other high-interest debt, freeing up ever more cash flow for saving and investing in others.

This example is simplistic. The principle it contains applies not just to helping others but to helping ourselves. As coaches, operating within our mission-driven credit union’s overall approach, we constantly search for keys to motivate clients, because you’d better believe those who benefit from people’s financial vulnerabilities are expert motivators and manipulators.

The sacrifices many coaching clients make for others are humbling and moving. The stress and lost opportunity they experience from financial ill health are grievous. The agape love that represents this season’s ultimate truth is contained within these clients’ desires to bless others. There is a strong root there – one that won’t have an axe laid to it, but rather one that bears good fruit and can bear it even more abundantly. I hope that somehow in 2019, that root can be nurtured and those with whom we work can find greater joy as they become more financially healthy and their ability to bless others is multiplied.    

 (Jeff Keeling is director of community relations for Appalachian Community Federal Credit Union.

Smoothing income and saving starfish

This predatory lender charges 279.5 percent interest for the
"flex loan" product that's advertised here.

“Income volatility, which drives financial instability, is threatening the social mobility and independence of working families, and neglecting this issue will only lead these families further into debt.”

Restructuring the EITC: A Credit for the Modern Worker

Dylan Bellisle and David Marzahl, Center for Economic Progress

Could tax refund-based “income smoothing” help prevent the stories I’m about to convey?

Don and Danielle (not their real names) have already taken out an advance on their 2018 tax refund. As so many low and moderate-income families who receive large refunds do, they’d come to the end of the calendar year in desperate need of funds. The multi-billion-dollar tax company that provided the advance based on their pay stubs (with a 4.5 percent fee and at 36 percent interest) was only too happy to oblige.

Janelle (also not her real name) is working on a monthly budget right now. She has three kids and brings home about $1,800 a month, but she gets a tax refund of around $7,000. Janelle has faced the same cycle – get a big refund, get caught up on delinquent debt, buy some essentials, live a little less hand to mouth for a few months, then start the slow descent into not making ends meet.

A graphic from the Center for Economic Progress shows the outsized
role debt plays for low-income taxpayers at refund time.

Very often, the families in these situations – families that Appalachian Community Federal Credit Union (ACFCU) provides financial coaching and free tax preparation for – turn to high-interest predatory lenders to get by until the next tax refund. Rent-to-own shops, “buy-here-pay-here” vehicle lots, payday lenders, “flex loan” lenders charging 279.5 percent interest – even Fortune500 companies that are seeing their bread and butter business eaten away by theInternet as great equalizer get in on the act, as Don and Danielle can attest.

The stories above are true. I know because I am coaching both these families. They are working families with children. They don’t make much money, but they earn what they make. As I pointed out last week, the large refunds they receive are in part thanks to one of the most popular bipartisan programs in the country, the Earned Income Tax Credit.

How do we put a dent in this trend of three or four good months followed by eight or nine lean ones that has created such a booming industry? The high-interest options so many people turn to are legal. Whether that should change or not, it’s the current reality.

At ACFCU, a mission-driven financial institution using financial coaching to help people decrease their financial stress and meet financial goals, we’re continuing to strive for an answer. One key is income smoothing. As the Center for Economic Progress’s Dylan Bellisle and David Marzahl pointed out in this paper: “Many working families are filling the gap between their monthly income and expenses by going without necessities, using high interest credit and predatory short term loans, and borrowing from family and friends.”

Another graphic from the Center for Economic Progress reveals that many
Americans in the bottom 40 percent of income spend more than the earn.

I’ve spoken with these coaching clients about escrowing large parts of their refunds and paying themselves monthly to smooth income. That doesn’t work without the willingness to form a realistic budget and follow it, so coaching is key as well. But it does offer a path forward until things change. We’re fortunate to have a great Volunteer Income Tax Assistance (VITA) partnership with Tusculum University.

Until things change, we’ll take the approach of the proverbial kid who walked along the seashore at low tide throwing starfish back into the water so they wouldn’t be burned up in the sun. When informed that with thousands of those starfish along the beach, he wouldn’t be able to make much different, the boy said, “It made a difference to that one!”

 (Jeff Keeling is director of community relations for Appalachian Community Federal Credit Union.

EITC and tax refunds as life changers -- credit where it's due

The Tax Policy Center's new database is a great tool.

In an informative post on the Tax Policy Center’s TaxVox blog, Richard C. Auxier touts the benefits of the Earned Income Tax Credit. Auxier praises the EITC while introducing the TPC’s new database “that makes it easy to access information about the EITC and to tailor that data for specific geographic and political communities.

It’s great to see facts and data being compiled about programs like the EITC. Also encouraging is thisarticle from The Economist highlighting the EITC’s bipartisan appeal and its cost effectiveness to taxpayers. Studies such as thisone from economist Jacob Bastian, on which The Economist based its article, lay the EITC’s effectiveness out in black and white.

"Both and" -- Financial Coach Adam Taylor, left, helped Leslie Brady
strategically utilize her Earned Income Tax Credit.

At Appalachian Community Federal Credit Union (ACFCU) and its Volunteer Income Tax Assistance (VITA) partner Tusculum University, we see those good effects firsthand. This is particularly true in the lives of people who have combined our tax prep with financial coaching – people like Leslie Brady, whose story is below.

Another important ACFCU partner, Family Promise of Greater Johnson City (FPJC), introduced us to Leslie in late October 2017. Leslie was late on her rent. ACFCU had established an innovative secured loan program with FPJC, and Leslie got a low-rate personal loan secured by FPJC. The loan was contingent on Leslie working with our financial coaching department to help insure a sustainable path forward, and she began meeting with Financial Coaching Specialist Adam Taylor.

VITA volunteers from Tusculum University help a client in 2018.

Leslie got current with her rent, but an array of additional financial hurdles remained. She had a $9,000 balance with a predatory “buy here pay here” car lot on a car worth less than $5,000, and two predatory loans with a total balance above $900. Those three loans together were costing her $492 a month. Leslie also had a bit of old debt. Enter VITA and the EITC.

Adam directed Leslie to ACFCU’s VITA program, which completed 736 returns last year. The year before, Leslie had paid $300 for tax prep in 2017. This time she saved that money, and an EITC of nearly $3,500 contributed to a refund of nearly $7,000.

Leslie let the buy here pay here car go and took Uber to work and back during a two-month car buying process. She got a secured ACFCU VISA credit card to help her build her credit score. She paid off old debt, put some money in a sinking fund, and held the rest for a vehicle down payment.

Leslie consulted Adam heavily during the car-buying process. He built a spreadsheet with a dozen prospective purchases. James Reeves, a mechanic with whom ACFCU has a relationship, vetted those prospects. Leslie found a good vehicle for her with a $181 monthly payment.

Leslie hasn’t been late on any debts in 2018 and her credit score has increased from 561 to 631. She got a raise at work and is working an extra job through the holidays with her eyes on the American Dream. She’ll use VITA for taxes again in February 2019 and at that point she’ll have begun the journey toward homeownership in earnest. She’ll be able to pay off her FPJC loan and a personal loan at a separate credit union, as well as a short-term ACFCU “quick cash” loan that the credit union offers as an alternative to short-term predatory loans.

Leslie plans to use that extra cash flow (more than $300 a month) to prepare for homeownership. By Christmas 2019, the ACFCU team is hopeful that Leslie and her kids will be living in their own home. Leslie’s financial goals have changed from being reactive (avoid homelessness) to being proactive through her relationship with ACFCU. The Earned Income Tax Credit has played a key role in this progress.

(Jeff Keeling is director of community relations for Appalachian Community Federal Credit Union.