Financial Diaries in consumer finance

What we currently recognise as the financial diary method was pioneered in the late 1990s by a group of researchers with expertise in economics, finance, anthropology, development, and architecture.

In the late 1990s, David Hulme (credited with the diary idea), Stuart Rutherford, Jonathan Morduch, Daryl Collins, and Orlanda Ruthven developed a financial diary method that involved returning to households at intervals (usually every two weeks) to collect data.

Using questionnaires and observations, the researchers recorded households cash flows in the intervening period, including where their money came from, their spending and saving patterns, and the financial instruments they used to manage their money.

In their book Portfolios of the Poor, the researchers explain why the diary method is such a powerful tool:

finance is the relationship between time and money, and to understand it fully, time and money must be observed together. (2009, p.187)

The financial diaries method has since been applied by numerous social scientists working in different parts of the world. The method has proved useful for understanding households in wealthy nations as well as in poor ones (such as the U.S. Financial Diaries), and has proved useful for commercial projects as much as ones with non-profit goals (see the case studies in this section).

Depending on a research project's goals and resources, the financial diary method is adaptable and can be used to collect any range of data, from small, exploratory studies to large, statistically representative ones. The case studies in this section give examples of two very different kinds of implementation.

What is Financial Diaries

  • Qualitative / quantitative
  • Combines self-reporting with interviews
  • Face-to-face or remote data collection

Financial diaries are a method of collecting data on financial behaviours by using a "diary" to record transactions. Financial diaries are not technically diaries in the way we normally understand them. Respondents do not simply write down their thoughts, but rather are given a structured set of questions that record both qualitative and quantitative responses.

Questions are generally designed to elicit the reporting of both formal and informal financial activities and how these fit into the context of a participant's life. They can include open questions and closed questions, thus producing both qualitative and quantitative data. Financial diaries can also be combined with other methods, such as different kinds of interview techniques, observations, or even field experiments.

A standard approach to using financial diaries is to choose a sample population of households or individuals, design a financial diary that suits the research questions, and apply the diary at regular intervals (e.g., every week or two weeks). While the data collection period varies from study to study (usually between a month and a year), all financial diary studies capture participants' changing financial behaviours over time.

Participants may fill out the diary themselves, or an interviewer may fill it out for them (especially in cases where literacy might be an issue). Diaries may be recorded on paper, using a mobile application, or directly into a laptop database. They can be implemented in person or using online programs.

Depending on a research project's goals and resources, the financial diary method is adaptable and can be used to collect any range of data, from small, exploratory studies to large, statistically representative ones.

Strengths

Shows range of financial product use

Financial diary studies can yield insights into financial management by individuals and households everywhere, and of all levels of financial means. However, they are best known for transforming our understanding of money management among poor families in "developing" countries.

One of the most striking findings of the financial diary studies described in Portfolios of the Poor is it demonstrated that poor people use a wide range of formal and informal financial products. This insight, now confirmed by multiple studies, contests the assumption that poor people are not active money managers. This insight can potentially lead to new policies and interventions.

Commercial work can also benefit from financial diary studies. It is often useful for financial services providers to find out how customers use their own products and those of competitors. New financial products and services are developing rapidly around the globe, and keeping up with customers' changing preferences and use patterns can assist companies to adapt their products to these changes.

Track financial behaviour over time

Financial diary studies are carried out over a period of time, usually ranging from a few weeks to a year. Because participants are generally asked the same questions at intervals over the entire time period, it is possible to observe how individual households or families address many different kinds of needs, opportunities, and challenges. These observations can include coping with crises, spending on a major event, or investing in capital.

Record information creatively

The diary format makes it possible to build in creative ways for respondents to answer questions. This is particularly the case for self-reported diaries. Respondents can be asked to provide an array of low-tech or high-tech information types, including written answers, numerical answers, choosing from a scale, drawing pictures, generating maps, adding photos and videos, and attaching documents such as bank statements.

Increase financial awareness

A potential side-effect of financial diaries is that they may help participants to become more aware of their financial behaviours, leading them to make changes in their lives. This might be achieved passively, such as when a participant's involvement prompts them to think more carefully about their financial behaviour.

However, further research needs to be undertaken before it can be confirmed that such an effect changes place. Moreover, a potential problem with viewing financial diary participation as having an educational effect is that it rests on the assumption that families were doing something "wrong" to begin with.

Limitations

Representativeness

When researchers carry out diary studies in person, they face constraints on how many diaries they can feasibly collect. This makes it difficult to achieve a representative sample. If a research group wanted to find out about the financial behaviours of, say, Haitians living on less than $5 per day, then they would require an enormous amount of researchers to carry out the study with a representative sample of Haitians. However, If the research focuses on a small geographic area, such as a village, then achieving a representative sample is possible. In practice, most financial diary studies ask questions about broader populations but need to cluster the sample geographically due to resource restrictions. This means that their ability to extrapolate their findings to an entire population is limited.

Self-reporting bias

All research runs the risk of incorporating the biases of the researchers and participants involved. Self-reported data can be particularly problematic because there are fewer opportunities for researchers to control the data collection process.

For example, participants may not understand a question fully, but if a researcher is not present when the diary is filled out then there may be no opportunity for them to check the question's meaning. Whether this compromises a study will depend on the project's aims.

Generally speaking, the more oriented a research project is to collecting data on people's values and opinions, the less such bias will interfere with the results. Self-reporting is generally unreliable in cases where accurate numerical information is required. With more qualitative studies, however, misunderstanding bias often goes away over a few interviews. This is an advantage of diary studies over surveys.

Timing of data collection

One important feature of financial diaries is that they are generally collected at regular intervals. Participants are asked to give responses on particular dates or even at set times of the day. However, when researchers fill out the diaries themselves, they are dependent upon participants being at home or available, and this is not always achievable. When participants self-report, they may be better placed to fill out their diaries on time; alternatively, they may forget or have other core activities that take precedence over their research participation.

According to Julie Zollmann from CGAP, data accuracy is not particularly affected by minor deviations in timing. However, timing issues can strain the research project's resources, since costs increase when researchers have to spend time searching for respondents.

In some cases, data collection can be made more efficient when the target group meet regularly for an important event, such as a meeting or a social activity. Scheduling data collection for times that fit with the participants' collective schedule can be effective, so long as the group are comfortable with the research taking place in that time slot.

Case Study 1 — The "portfolios of the poor" in Bangladesh, India, and South Africa

The Portfolios of the Poor authors developed the financial diary method because they were dissatisfied with the way that studies of the poor tended to overlook many of their financial behaviours. Most studies depicted poor people as having few financial tools available and gave the impression that the poor lived purely hand-to-mouth.

In fact, as the financial diaries showed, poor people often have a greater range of financial tools at their disposal than people who live in wealthy countries. This is because they use a range of informal as well as formal tools.

Part of the reason why knowledge about poor people's use of financial tools was limited was that many studies were undertaken by financial service providers that were only concerned with how their customers used their own products. According to Rutherford, banks in Bangladesh acted as though they worked in a vacuum, as though the poor had no financial partners other than themselves.

In order to address these problems, the researchers set about developing a new method. They explain:

What was needed was a method that would capture the richness and complexity of poor people's financial lives while being systematic enough in its data collection to prevent it from being dismissed as a set of mere 'anecdotes.' (Portfolios of the Poor, 2009, p.186)

The team wanted to retain the richness of data that qualitative research produces, while also generating sufficient quantitative data of high quality to show general patterns in behaviours across their research sites.

Methodology

Between 1999 and 2005, the researchers undertook financial diary studies with over 250 families in Bangladesh, India, and South Africa. Teams of researchers visited the homes of participants every two weeks for the course of a year in each country, recording information about their saving, spending, lending, and insuring practices.

Participants were generally residents of a small number of communities. In order to choose research locations, the researchers made use of national surveys, but they were also guided by practical considerations, such as choosing communities that were within reasonable travel distance.

To choose households in India and South Africa, the researchers used a technique known as "wealth ranking." This involves asking residents to rank the wealth of their neighbours and compare the results. The logic is that people are likely to misreport their own financial position, but in small communities, they often have a good understanding of the financial position of their neighbours. Wealth rankings allowed the researchers to select participants from the bottom, middle, and top of the list. An additional bonus was that it also gave participants a sense of ownership of study. The researchers were not able to use this technique in Bangladesh because people moved around so much that they did not know enough about each other.

Each study began with an initial two interviews that allowed researchers to get to know a household. Then, the researchers returned to the households every two weeks for a year, using a variety of forms to record information on financial practices and new developments.

In order to increase the accuracy of self-reporting, after every visit, the researchers calculated the "margin of error" in responses by comparing incoming and outgoing expenditures. On the next visit, the interviewer would ask further questions to try to find out where the difference had arisen. Researchers explored the emotions that accompanied interviewees' transactions, as well as the characteristics of the transactions themselves.

Interviews often took place while interviewees carried on with their work, such as cooking lunch or feeding cows. Visitors often interrupted them. These conditions were not always favourable for data collection but gave the researchers a chance to observe everyday life. The researchers took care to listen to their participants, but not to offer advice or opinions.

Once data collection finished, the data was analysed using both qualitative and quantitative methods. The results were compiled into "portfolios" consisting of the balance sheets of the households and qualitative data detailing their circumstances and experiences. The researchers also conducted analyses of cash flow and compared data across the three research sites.

Findings

What makes these studies remarkable is that they demonstrate clearly how poor people cope with unpredictability by using a wide range of financial tools. They use different tools in tandem to achieve savings targets and pay off debts. A table of all the formal, semi-formal, and informal financial instruments that the team discovered can be found in Appendix 1 of Portfolios of the Poor.

By visiting interviewees regularly and following up on points that were previously unclear, the team made various findings that they were not expecting. One of these was the habit of "money guarding," a practice of leaving money with neighbours and friends for safe-keeping. Sometimes people chose this option because it was more convenient than storing money in a bank. At other times, people's distrust of banks was the driving factor. One man in Bangladesh had sizeable savings that he used to keep in a bank. However, he eventually gave them to a friend to mind because he had an overdue loan and did not want the bank to know that he had savings.

Another case is that of Thabo, a man living in South Africa. Thabo received money from time to time through his bank. At first, the researchers supposed that someone must be sending him money, but after many conversations, it turned out that these were interest payments on a deposit. Thabo had become retrenched some years previously and had deposited his lump sum payment in the bank. He would usually reinvest the interest he earned, but sometimes he would withdraw it to spend.

Much like with ethnography, the long-term relationships developed between interviewers and interviewees in financial diary studies improved data quality because they enabled the development of trust and provided time to explore research themes. As the authors note,

None of this is peculiar to poor people: in developed economies people may also be unclear about their financial actions and may possibly be even more reticent. But the strength of the diaries approach is that it can, over time, break down much of this reticence and confusion. (Portfolios of the Poor, 2009, p.204)

In many respects, individuals' stories have generated more ground-breaking revelations than having the project's quantitative outputs. Individual cases capture behaviours that are rarely recorded in surveys, bank statements, or one-off interviews.

Applications

Since Portfolios of the Poor was published in 2006, the financial diaries method has been widely used by development organisations and companies working with the poor, especially in the area of microfinance.

Microfinance agencies are most prevalent in countries where levels of formal banking are low, national data collection is scarce, and credit bureaus do not exist. Agencies have therefore found it difficult to assess risk, anticipate how households will spend the money they receive, where else they are getting loans from, and find out what other financial instruments people use that may impact their financial health.

Financial diaries help microfinance agencies to improve client information because they provide a way to collect data on every aspect of a household's financial position. More broadly, financial diaries can help identify a range of household financial behaviours that may otherwise go unnoticed, and they can provide a wealth of recommendations for all kinds of organizations working with poor households.

Researchers at Digital Divide Data and Bankable Frontier Associates implemented the Kenya Financial Diaries, which tracked the detailed cash flows of 300 low-income families for a full year. One of this study's most valuable contributions was to shed light on how poor people use social networks to provide a safety net. While it is well known that poor people depend upon such networks, we rarely have a nuanced view of their benefits and limitations.

In a blog post on the CGAP website, Julie Zollmann points out that many poor people prioritise investment-related saving over short-term liquidity. While this is a sound strategy for improving one's financial position in the long run, it can create cash shortages in the short run, since people's savings might be locked away in savings groups. This means that people need to be able to borrow quickly. This explains why, in Kenya, M-Shwari is so popular despite its short loan period (30 days) and high fees (7.5%).

In another post, Zollmann explains how the financial diaries showed that networks are often inadequate channels to raise money for unforeseen expenses (such as medical costs), may take too long to deliver, and often serve women more than men. Moreover, households that give money away may find themselves short of cash to cover their own expenses.

These findings echo Sibel Kusimba's observation, uncovered through her social network interviews, that Kenyans grow weary of being asked to contribute funds within their social networks, and that they find ways to avoid financial reciprocity (see Case Study 2 in Verbal Interviews in Consumer Finance).

Zollmann provides a number of suggestions for how we may harness these insights to better meet the needs of the poor, including marketing financial services for households that give money away regularly, and improving information flow so that households in need can find support more efficiently.

Importantly, FSDK funded an additional year of work after the study was published to help service providers and funders incorporate key insights into their work. They undertook specific analyses of health and education financing, and these helped providers to think about service options that might be more effective in helping people finance key life needs. With respect to risk, they have been helping providers look beyond insurance, given that people are often unwilling to tie up their funds in purpose-specific risk mitigation.

Financial diaries are equally useful in the commercial world. As the Portfolios of the Poor authors note, collecting data on the financial practices of wealthy people can be just as difficult, if not more so, than collecting data on the poor. Banks can benefit just as much as microfinance agencies from knowing more about their customers' financial practices. This is especially the case today given the rapid changes sweeping the banking and payments industries. Financial diaries can show how people adopt new services and what factors influence their decisions.

Government bodies also stand to learn much through applying the financial diaries method. For example, using financial diaries to learn about the financial behaviour of socially disadvantaged groups may help to show how issues such as financial literacy and decision-making contribute to disadvantage or can help overcome it (see Case Study 1 in Verbal Interviews in Consumer Finance).

According to Zollmann, financial diary studies also suggest that financial literacy programs are not as useful as we may think since they show how people are highly skilled at managing their own money. A lack of resources, not a lack of skills or knowledge, is the real problem faced by the poor. Driving down the costs of banking is one specific way in which financial tools can become more affordable.

Ethics

Financial diaries raise ethical issues similar to those that are found in any other study. These include confidentiality, privacy, and coercion. Indeed, the fact that financial diary studies often involve repeated interviews could exacerbate the difficulties of ensuring the privacy of participants.

Researchers undertaking repeat studies often gain participants' trust to a greater degree than is usual because they return to households on a regular basis and come to know their participants well. Participants may become confident enough to share sensitive information that could work against them if it were widely known.

Extra care must, therefore, be taken to protect participants' identities and data. This includes being aware during interviews that other people may be listening in to the interview and providing interviewees with opportunities to interrupt the interview. After each interview, care must be taken to store data securely.

When reporting analyses, care must be taken to hide participants' identities. This is more difficult than people often imagine since it is relatively easy to identify a person based on very little information. Moreover, funders may apply pressure to share participants' personal stories and information in ways that compromise their anonymity and privacy. According to Julie Zollman, these can in include:

pressure to make the data 'open' including really deep qualitative responses that can compromise confidentiality pretty easily; pressure to do more geospatial analysis, where our funders really want people's GPS points and to make maps that betray respondents' locations—including some who tell us about crimes during the diaries; pressure from funders to add visuals, like photos and videos. It takes a lot of work to ensure images and stories are kept separate. It's much easier to give in to donor pressure, particularly for institutions who don't answer to IRBs [internal review boards]. (personal communication)

For more information on protecting participants' identities, see the guidelines published by the Forum: Qualitative Social Research, or Mark Israel's book Research Ethics and Integrity for Social Scientists.

For more information on this study, see:

Case Study 2 — Online financial diaries: A short-term commercial project

Financial diaries can be used for commercial research as well as in the area of socio-economic development. Given that commercial organizations might have fewer resources to spend on research, and often require fast turnarounds, shorter versions of financial diaries can be particularly useful.

Alexandra Mack, a Research Fellow at Pitney Bowes, conducted financial diaries as part of a study of financial communications management in the United States. Mack was interested in how "financial communications" impacted financial management within a household. She had already used other methods, including interviews and scrapbooking, to collect data on financial behaviour. The financial diaries were an opportunity to dig deeper into some of the issues she had discovered, such as how financial management varies by life stage, and factors that impact attitudes toward new technologies for managing finances.

Methodology

Participants were recruited through a professional recruiting form and were informed that, if they successfully completed the study, they would receive a one-off payment of $150. All participants were over 21 years of age, had household incomes over $50,000 a year, and lived in the United States.

Mack's financial diary was conducted entirely online, using software called Revelation. Participants were able to record their diaries in their own time over the course of a week. The first time they logged in, participants were asked to agree to the terms and conditions of the project, and to choose a screen name and a password.

Over the next week, participants were required to log in to the site each day and complete a variety of activities. These included answering questions, keeping logs of some financial interactions, and having group discussions with other participants. They would also take pictures using their digital camera or camera phone and post them to the project site.

Mack individually emailed participants before the start of the study using her work email address (displaying all her contact information). This email welcomed the participant and told them specifically what to expect from the study. Mack reports that an additional advantage of emailing participants is that participants know who the researcher is, and how to reach them and that they are interacting with a real person.

Each day of the study, Mack sent an email in the morning via a group email, using BCC so that the participants could not see each other's contact information. In that email, she reminds them of whatever daily tasks they should include in their diary. This was a useful way of reminding participants to fill out their diary because they were all using email every day in the course of their everyday lives.

Mack observes that methods to prompt participants may change depending upon the characteristics of the demographic taking place in the study. In some cases, such as where people have mobile lives and occupations, text message reminders might work better. The key point is to remember you are asking them to go to something "new" for the period of the study.

The first question in the diary study asked the participant to talk about themselves. As with the Portfolios of the Poor studies, and indeed most other qualitative research, asking general questions is essential to help researcher and participant get to know each other, and to give participants a chance to communicate their own point of view.

Participants were asked to report every day on communications they received from banks and billers, as well as on financial interactions other than shopping. Other questions asked participants to discuss their use of mobile applications, practices around bill payments, and their experiences with fraud. In group discussions, they were asked questions such as "What annoys or bothers you most about your financial communications?"

Mack tried to give some feedback to their responses daily, whether in the form of a "thank you" note or a follow-up question. She explains:

This lets them know that they aren't communicating into a black hole. Also, the follow-up questions help to get more details and clarify and encourage more engagement and longer answers. (personal communication)

This follow-up technique is similar to that outlined in the Portfolios of the Poor study. However, whereas the Portfolios of the Poor studies used teams of researchers and took place in diverse locations, Mack worked alone. She notes that, while resource-intensive, a reason why this study worked well was that doing the diaries online permitted the recruitment of a greater number of participants than would have been possible if the study were carried out in person.

Mack found people to be quite willing to share information online, although this is at least partly because participants were not asked to share financial details such as bank balances or account numbers. However, the online nature of the study also posted a disadvantage, in that by not being physically present in their space it was not possible to observe their behaviours. This made it difficult to know what other possible questions should be asked.

Findings

Mack found the method to be suitable to draw a broad picture of people's financial behaviours, the products they use, and their financial communications. While not longitudinal, she was able to ask questions about changing practices, and what prompted individual's shifts in their own behaviours.

Because the interactions lasted over several days, Mack could query the subjects on different topics that might have felt disconnected if asked back to back in an interview. What began as a study of financial communications evolved, based on participant responses, into a larger project around financial management.

Applications

Online diaries can be a useful method for targeted data collection on a range of topics not limited to financial research. They allow the participants to engage in their own time, and they provide participants with space for deeper reflection as well as some dialogue with the researcher. They are particularly useful for subjects that might require closer documentation than the participant's memory, as they provide a location to capture information. Online tools can also be used to gather a wide range of feedback from participants, whether in the form of an idea, a picture, or a slogan.

Ethics

Online financial diaries face many of the same ethical issues as diaries collected in person. Mack told us:

As with any qualitative research, it is crucial to have participants' informed consent, and to make very clear to them their ability to stop the study or simply opt out of any parts that are uncomfortable. While online tools are not public in the same way as social media sites or blogs, it is important for participants to understand that their words and pictures may be preserved on a third party server. (personal communication)

Protecting participants' privacy can require somewhat different procedures in online diaries compared to research carried out in person since data is transferred through third-party programs. For more on ethics and data, see Digital Research in Consumer Finance.

More about Financial Diaries

Examples in consumer finance research

  • The U.S. Financial Diaries tracked 235 low- and moderate-income households over the course of a year to collect data on how families manage their finances on a day-to-day basis
  • Microfinance Opportunities used financial diaries in their research in several countries, including Kenya, Malawi, and Zambia, as a learning tool to enhance a savings group program
  • The Southern Africa Labour and Development Research Unit (SALDRU) has information on Daryl Collins's study using financial diaries as a learning tool for a specific MFI (SEF), targeting their clients
  • CGAP's Smallholder Households Financial Diaries Project, also implemented through Bankable Frontier Associates, is examining how smallholder households combine agricultural and non-agricultural sources of income and employ a range of financial tools in three countries (Pakistan, Tanzania, and Mozambique)
  • FSD Kenya with Bankable Frontier Associates undertook a financial diaries project between 2012 and 2013 that took a broad look at the financial behaviour of a diverse sample of Kenyans
  • Researchers from the Australian National University and the University of Burdwan in India used financial diaries to study the financial behaviours of people living on river islands in Bengal