The Problem of Household Income and Spending Volatility: A growing number of studies indicate that significant numbers of American households face wide swings in income from month to month, and insufficient savings or financial assets to cope with it. This is particularly true of people who juggle multiple jobs with highly variable work hours. A similar problem is faced by freelancers and independent contractors with uneven work who are paid by the project, by sales commission, on some other sort of piece-rate basis, and/or who have long and variable delays in collecting payment for their services.
Indeed, approximately 7.1 million Americans, or about 5% of the labor force, split their time among multiple jobs as of April 2015. Another 6.6 million people had settled for part-time jobs after being unable to find suitable full-time employment. Meanwhile, many of these jobs promise little or no wage growth. Research conducted by the Pew Charitable Trusts found that average household income rose by 22% from 1979 to 1999, but only by 2% from 1999 to 2009, and has not budged since then for the majority of working people.
A 2012 economic research paper found that an increasing proportion of households can expect to experience an income decline of 50% or more during any given 2-year period. In the early 1970s, the figure was 7%. By the early 2000s, this number had grown to 12%. On the eve of the 2008 financial crisis, it had declined slightly, to 10%.
A study by the Federal Reserve Board indicated that 18% of respondents in 2013 reported incomes below their usual levels. This was down from 25% in 2010, but still higher than the pre-crisis level of 14% in 2007.
The JPMorgan Chase Study: According to a comprehensive study of 100,000 retail banking clients (a sample drawn from its base of 2.5 million account holders) conducted by JPMorgan Chase, at least 80% of them do not have adequate savings to ride out significant monthly variations in income or expenses. Among these clients, who are diverse demographically and mainly in the middle-income brackets, 40% experience month-to-month income decreases or increases of 30% or more. Compounding the problem, 60% of these 100,000 clients in the analytic sample face monthly variations in spending that equal or exceed 30%.
Given that the typical middle-income household in the study (defined here as having between $40,501 and $63,100 in annual income) has a mere $3,000 in savings, the margin of safety for most is very low. The JPMorgan Chase report estimates that at least $4,800 is needed to offer an adequate financial cushion in the event of unpaid job leave coupled with a large medical or tuition bill. However, given the huge bills presented by hospitals for minimal care, even this figure seems much too low.
Even higher income households in the study have relatively meager savings:
- Median savings of under $7,000 for households in the $63,101 to $104,500 income bracket
- Median savings of about $13,500 for households in the $104,501 to $154,600 income bracket, the highest in the study
Only those in the highest income bracket are judged by analysts in the new JPMorgan Chase Institute, which conducted the study, to have sufficient savings to weather a monthly income or expense shock. Still, this median savings number is rather low, especially compared to income. It indicates an undue propensity to spend among these people.
A key caveat with the JPMorgan Chase study is that it derives its conclusions from client account data, which may not be indicative of clients' total financial pictures, given that many of them are bound to have accounts at, and relationships with, multiple financial institutions. It also is bound to be influenced by imperfections in the aggregation of client accounts into household groupings.
Class Mobility: An interesting sidebar to the JPMorgan Chase study is its analysis of changes in household spending and income from 2013 to 2014. The 5 annual income brackets used in the study are:
- $0 to $23,300
- $23,301 to $40,500
- $40,501 to $63,100
- $63,101 to $104,500
- $104,501 to $154,600
- 15% of those in the lowest 2013 bracket moved up a bracket, and another 7% went up by at least 2 brackets
- 16% of those in the second 2013 bracket went up one notch, and another 5% by 2 or more. Meanwhile, 11% fell into the lowest bracket.
- 17% in the third 2013 bracket went up, and 15% down.
- 12% in the fourth 2013 bracket went up, and 21% down.
- 18% in the top 2013 bracket went down.
- 23% in the bottom 2013 income bracket went into a higher spending bracket.
- 27% in the second 2103 income bracket spent more, and 19% less.
- 25% in the third 2013 income bracket spent more, and 24% less.
- 17% in the fourth 2013 income bracket spent more, and 26% less.
- 21% in the top 2013 income bracket spent less.
As might be expected, the shifts in spending from 2013 to 2014 largely reflect changes in income over the same period.
"Cash Crunch Is, for Many, a Monthly Problem," The Wall Street Journal, May 20, 2015.