Academic journal article Review - Federal Reserve Bank of St. Louis

Toward Healthy Balance Sheets: Are Savings Accounts a Gateway to Young Adults' Asset Diversification and Accumulation?

Academic journal article Review - Federal Reserve Bank of St. Louis

Toward Healthy Balance Sheets: Are Savings Accounts a Gateway to Young Adults' Asset Diversification and Accumulation?

Article excerpt

Young adulthood is a period often characterized by financial fragility. Young adults earn the lowest incomes of their careers while making decisions about obtaining postsecondary education, living independently, finding and changing employment, and repaying educational debt (Bell et al., 2007, and Mishel et al., 2012). They may also have limited assets on which to draw during times of financial need, given that half of young adults through age 40 lack sufficient accumulated assets to sustain themselves above the poverty line for three months without regular income (Rank and Hirschl, 2010). One study finds that the average savings account balance of young adults is generally low, from $639 to $1,881 between 16 and 35 years of age (Friedline and Nam, 2014). This low average suggests young adults may have limited savings for even daily, lower-level financial needs such as groceries, bills, rent, or auto repairs, let alone needs arising from educational debt or independent living that persist for several months or years.

It is generally agreed that balance sheets consist of assets, debt, and net worth (Boshara, 2012; Key, 2014; Mishkin, 1978), with an underlying assumption that saving, diversifying, and accumulating assets lead to healthier balance sheets (Carasso and McKernan, 2007). Young adults with lower accumulated liquid assets may have fragile balance sheets when healthy balance sheets are most needed. If young adults enter this period of life by accumulating reserves and liquid assets through financial products such as savings, stock, and retirement accounts, they may have the financial resources to better weather unexpected changes in employment or living situations or to further invest in their futures. Their savings and liquid assets help to create a healthy balance sheet that likely sets them on a path to financial security from which they can benefit throughout life. Understanding the savings and liquid assets of today's young adults as part of their balance sheets lends some insight into their balance sheets when they are older, particularly with regard to factors that set them on a path to financial security and, eventually, mobility.

In this article, we attempt to provide an understanding of assets as one component of the balance sheets of todays young adults-that is, understanding the starting point for young adults to acquire lifetime financial security. Given that savings accounts are one of the most basic products available from mainstream financial institutions and are hypothesized as a starting place or gateway to asset diversification and accumulation (Friedline and Elliott, 2013; Hogarth and O'Donnell, 2000; Sherraden, 1991; Xiao and Noring, 1994), this articles seeks to provide a better understanding of the role of savings accounts in young adults' balance sheets, particularly with regard to a diverse portfolio and the accumulation of liquid assets.

A SAVINGS ACCOUNT AND THE FINANCIAL HIERARCHY OF A DIVERSE PORTFOLIO

Xiao and Anderson (1997) draw on Maslow's (1948,1954) human needs theory to show how the financial products acquired by young adults may ascend a hierarchy based on the needs the products are designed to meet. Human needs are assumed to be hierarchical, with the achievement of higher-level needs conditional on the achievement of lower-level needs (Maslow, 1948,1954). These assumptions have been applied to the acquisition and use of financial products as they relate to lower- and higher-level needs (Xiao and Anderson, 1997; Xiao and Noring, 1994; Xiao and Olson, 1993). Notably, lower-level needs are referred to as "survival" and higher-level needs are referred to as "growth" (Xiao and Anderson, 1997),1 labels that also provide some indication of the achievement of financial security. From this perspective, a savings account is one of the first and most common financial products acquired because it is lower risk, easily liquidated, and designed for the achievement of daily, lower-level needs. …

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