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Messaging matters when it comes to COVID-19 economic impact payments

Watching the unemployment claims continue to rise is deeply unnerving given what we know about U.S. household financial security. It has been well-established that many U.S. households—and low-income households in particular—lack enough in savings to handle even a modest $400 expense without borrowing money, to say nothing of having enough money to weather the economic costs of a global pandemic. The economic relief payments from the CARES Act, which promise up to $1,200 per adult and $500 per child in a household, will provide some temporary support, as may the expansion of unemployment benefits. Much of the discussion around these payments rightfully centers on their amount and eligibility requirements. Less discussed, however, is the role that targeted messaging and financial guidance can play in helping households optimize these payments as they try to balance all their expenses, debt obligations, and financial goals.

Right now, many households are deciding how to balance their financial needs with drastically reduced incomes, others are trying to decide which debts to priorities, and still, others are deciding how much of their economic relief payments to save for an increasingly likely rainy day. There is an opportunity to help these households think through their priorities using behavioral research, which consistently shows that well-designed and well-timed messages can impact a household’s financial behavior. For example, messages highlighting certain benefits of a tax credit, providing timely reminders of financial goals and payment obligations, or delivering brief rules of thumb at the point of a purchase decision can help improve households’ financial situations. To give one example of this, the Social Policy Institute recently tested the use of short financial tips to help low-income tax filers optimize their tax refunds to pay down debt.

In the study, we shared four tips on how to use a tax refund to manage debts:

  • make at least one extra payment on one of your debts
  • pay down your largest credit card debts first
  • pay off your smallest debts first
  • pay off your highest cost debt first

Despite the fact that these messages were simple and brief, they worked. Compared to households not shown any tips, we consistently saw a reduction in the ownership of unsecured debt—credit card debt, payday loans, and negative balances in savings and checking accounts—amongst households shown these simple tips. Further, we found that the tips to use the refund to pay down the “highest-cost” or the “smallest balance” debt first were more effective than the other tips tested.

What does this mean for the current crisis? Messaging matters.

The way policymakers and financial capability practitioners communicate about the CARES economic impact payments and other current or future payments may help guide households to use these benefits in the way best suited to their financial situation. This is important because while some households may use the CARES payments to pay down debt and other households may be fortunate enough to be able to save their payments, others will need these payments to simply make ends meet.

The fact that households will be using these payments for such diverse needs presents an opportunity for organizations like Volunteer Income Tax Assistance sites and financial coaching services, as well as the array of financial technology applications available to Americans, to develop simple, effective communications strategies to help households plan to use these payments.

Service providers are well-positioned to help their customers think through their financial priorities, help develop plans to meet those priorities, and communicate tips to help them stay on track. Some organizations, like budgeting apps that track individual accounts, can even identify when these relief payments hit and provide targeted guidance timed to the receipt of the payment, which may be even more effective than solely providing general financial guidance.

Our findings offer guidance for economic impact payments, but these messaging tips have application into the future, too. After the COVID-19 crisis passes, many households will have lost income and likely taken on debt in order to meet basic needs. It will be important to develop simple, effective ways of communicating with practitioners and their clients to help them develop strategies to cope with this debt.

While behavioral economics interventions will never be enough on their own to address the economic turmoil caused by COVID-19, they can provide a way of increasing the impact of the various programs and policies developed to deliver essential financial support to households. The way we communicate about and structure these payments may be a small part of a broad effort to provide some financial stability to households during this crisis, research consistently shows they are nonetheless an important component in determining the success of policies and programs.

The research referenced in this post is from a forthcoming working paper that examines how different financial management tips can help low-income households best manage their tax refund to pay down debt. The study, funded by Intuit, tested these messages with low-income tax filers, such as those using Intuit’s TurboTax Free File Product, which is part of the IRS’ Free File Program.

DISCLAIMER: Statistical compilations disclosed in this blog relate directly to the bona fide research of, and public policy discussions concerning, financial security of individuals and households as it relates to the tax filing process and more generally. Compilations follow Intuit’s protocols to help ensure the privacy and confidentiality of customer tax data.