To assist low-income households with making more informed financial decisions, this brief proposes the implementation of a data-assisted case management/financial coaching model using a set of financial ratios and indicators. Incorporating household financial data in guiding financial decisions will inevitably lead to the professionalization of the field and will generate a real demand for structured training of new cohorts of financial coaching experts. Over time, this will create a pathway to build upon the collective knowledge base of all practitioners and present an opportunity to standardize definitions, facilitate communication among experts, and track improvements in financial well-being using objective measures of data. It can also lead to a more effective segmentation of the market, a key element in improving the delivery of programs and services to low- and moderate-income (LMI) communities.

Financial indicators and ratios introduced here are part of a framework known as the Equilibrium Model of the Household (EMH). EMH treats households as evolving economic units. Financial indicators are used in EMH in order to assess performance and financial health of the household, both in the short, and long runs. This essay only discusses short-term indicators which mainly focus on the household cash flow status (see Table 1). It is argued that if indictors listed in Table 1 are used in a systematic way by financial coaches, they may help identify the state of financial well-being of households on a continuum that covers complete “financial distress” to an “upwardly mobile” state of well-being. Knowledge of the financial condition of the household is critical in helping financial coaches to determine the proper coaching strategy for their low-income clients. In what follows, a total of seven distinct states of financial well-being are defined based on the financial indicators in Table 1. These categories can be used as a basis for segmenting the financial coaching market.

1. Distressed Household: Household experiences negative cash flow and has limited ability to improve its cash flow by trimming monthly expenses in the short run. In most cases, the family has experienced a sudden and significant drop in income. Families facing credit insolvency and low liquidity rates are candidates for financial counseling and debt consolidation services.
2. Dissaving (Near-Distressed) Household: Household experiences negative cash flow but has the ability to somewhat improve its cash flow situation by trimming expenses. However, depending on household debt and liquidity levels the household might be considered as near-distressed and be referred to financial counseling. Otherwise, the financial coach can help clients to create a new household budget and improve cash flow.
3. Fragile Overleveraged Household: The household experiences negative cash flow, but can easily improve cash flow deficit. However, the family is credit insolvent (pays too much to service past borrowing). Possible options include trimming household budget, and lowering monthly debt payments if possible. Referral to debt consolidation service is not a recommended strategy for this household.
4. Fragile Household: The household experiences negative cash flow, but can easily improve cash flow deficit. Unlike overleveraged households, the family is not credit insolvent. However, savings rates are close to zero and further trimming of the household budget to help increase savings rate to over 5 percent is difficult. The coaching strategy should focus on helping the family to increase income and continue to find ways to cut back unnecessary expenses and increase savings in the medium term.
5. Financially Stable/ Near-Stable Household: The household enjoys positive cash flow. However, savings and household liquidity rates are low. The household should accelerate monthly savings. Depending on the household liability rates, the financial coach could offer alternative strategies combining savings and debt reduction.
6. Financially Stable Household: The household enjoys a positive cash flow balance and savings rates are satisfactory. The household has saved enough to support expenditures for two months in case of a complete interruption of income. However, monthly payments on existing debt remain high. The coaching strategy should focus on helping the family to lower debt payments or increase income. Reallocating assets to generate passive income will also help lower debt rates.
7. Upwardly Mobile Household: The household enjoys a positive cash flow balance and existing savings meets the desired liquidity rates. The household may consider reallocating assets by increasing retirement savings, or other long term investments. The client should be referred to a financial planner to explore other options to better allocate assets and liabilities.

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Data assisted financial coaching could be an effective strategy to help improve financial well-being of lower income households. However, it will require financial coaches to receive additional training and embrace a possible professionalization of the field.