Main image courtesy of Inc. Magazine.

Our relationship towards money starts at a young age, probably younger than what you may think. Children learn from watching how their parents talk about money, and take those attitudes and perspectives with them to adulthood and into the communities around them. Developing a healthy relationship with money and making appropriate personal financial decisions are something that some communities just do not have access to. 

When a community has historically been left out (such as low or moderate income minority communities) or does not have access to the same financial products and tools of other demographics, we see that their neighborhoods are less financially healthy. 

What do we mean when we talk about financial health, and is that something that a community can come together in order to work on? Glad you asked, because in this article we’re going to cover:

• What is financial health and how does it affect communities?
• Can increased access to financial tools and financial literacy benefit communities?

What is community-created financial health?

Financial health and how it affects communities

Financial health is defined as the overall state of an individual’s financial affairs. To get the big picture of someone’s financial health, you would need to consider your income stream, whether or not you have savings, how much of your paycheck you are actively putting away for retirement, and what is left after all your necessary bills and expenses are paid. If you are able to save, put something away for retirement, and still have some money left over for discretionary spending, you’re probably doing okay when it comes to your financial health.

Everyone’s financial situation is different, and as we know, there are many perspectives when it comes to the best way to manage money. In addition to different levels of income and financial literacy, there are also additional items that can affect your financial health such as debt from credit cards or loans. Although the state of your financial health can change, it is generally accepted that as long as you’re able to maintain a stream of income, have investments that get returns, do not have much change in your monthly expenses, and you are maintaining and growing your savings, you should be in good financial shape.

But what about those communities that do not have good financial health, and either never did or have not for years? Unfortunately, many low and moderate income communities (especially minority communities) have not had access to financial tools such as loans and credit to build their communities and make them stronger. Without access to banks and financial institutions that would approve their loan application, there are less homeowners and less businesses in these communities as a result.

In the absence of individual loans or credit from a bank, many of these communities have turned to community-created financial health. This is when a community of people comes together to lower the risk, so a lender is more willing to extend credit or a loan. While one member of the community may not have the funds to cover a missed payment, there is a greater chance that as a community, someone has the funds and can cover it. Surge is a very real thing in communities, and when people are in something together, they’re more than willing to help out.

The case can be made that by involving a community in loan and credit applications, there is a higher chance that a bank will approve, giving access to these powerful financial tools for investment and growth in underserved communities. When it is communities that apply for and are approved for loans, this means that more and more people are getting access to credit and loans, which can help them get on their way to better financial health and start to grow their wealth. These are new ideas in many communities, but it comes back to the simple concept that we are stronger together than we are apart.

How access to financial tools can benefit communities for generations

Financial health can grow with the help of communities

Lower to moderate income communities today may have greater access to banks through legislation like the Community Reinvestment Act, but access isn’t the only thing they need. They also need to have the financial literacy to know how to use services that can benefit themselves and build their communities. People who are starting to invest in their financial health are also developing a greater sense of financial literacy. This is the process in which you learn not only what kinds of financial tools and products are out there, but how to use them. Financial literacy involves:

• Being able to create and stick to a budget
• Planning ahead for retirement
• Starting and maintaining a savings account
• Managing and paying down debt
• Keeping up to date on your spending

While these are things many people might take for granted, certain communities are just now learning and getting the confidence to take advantage of these financial opportunities. When the community starts to become more financially literate, their financial health is going to increase. These are things that can be passed down to children, and can possibly even start a pathway towards generational wealth. 

It may take consistent community-based loans or extensions of credit for banks and financial institutions to start recognizing that they have a part to play in the bigger picture, which is increasing the financial wealth of those who have not had access to it. 

Neighborhoods and communities become stronger and more stable when their residents have good financial health. Community-based financial health is a great step towards ensuring that this knowledge, understanding, and access to financial tools continues down through generations.