Lauren Walker is 29 years old. She lives with her four-year-old son Riley in a small eastern Mississippi town and works as an administrative assistant for a construction firm. Lauren’s average income is $297.66 per week, $1,2500 per month, $15,000 per year. While many of us count down the days for the next federal holiday, Lauren dreads it because that means she will not get paid and cannot pay off her bills for the week. This, in turn, means being in debt for the month. Holidays are not the only reason her income fluctuates throughout the year. Tax refunds, changes in work hours, and emergency expenses throughout the year all cause fluctuations in her yearly budget (more on this later). Some months Lauren earns more than she spends, some months she earns less. She tracks every dollar that goes in and out of her wallet. She lives paycheck to paycheck, along with 49% of America.
Lauren is just one of many Americans who is sweating through financial insecurity. Recent data show that wages are stagnant for many Americans, annual income volatility has risen since the 1970s, economic mobility varies widely, wealth inequality is increasing, and the middle class is shrinking.
In the past, data sets have largely focused on assessing a family’s annual income. Because of the additional time required to track monthly or weekly expenses, much of our research on poverty in America uses yearly measurements of income and spending. While these numbers can tell us about wages and wealth, it is missing an aspect of personal finance that is causing individuals the most anxiety — the ebbs and flows of cash availability someone on the poverty threshold experiences on a week-to-week basis. These fluctuations lead to debt accumulation and loan buildup, income insecurity and financial turbulence. And these fluctuations explain why citizens of a country with a 4.3% unemployment rate feel economically handicapped.
The U.S. Financial Diaries is a research study attempting to explain, among other trends, income insecurity and income volatility. Conducted by industry experts and academics, it is a collection of personal stories and financial data from 235 low- and moderate-income households across California, Eastern Mississippi, Ohio/Kentucky, and New York. Because the study tracks a household’s weekly cash inflows and outflows, the rich data offers rare micro-level insights on poverty in America.
Lauren Walker is one of the 235 households surveyed since 2014. Another example is a California family of three with a total income of $42,000. Their income is above the poverty line but varied an average of 48% from one month to the next.
Research from the JPMorgan Chase Institute confirms a trend of significant income volatility. By looking at average income fluctuations of people who bank at JPMorgan, researchers found that income swings are largest among the poor and the rich. The difference between the rich and poor is that rich people are not living paycheck to paycheck. When a deal goes well, investments pay off or bonuses are doled out, income will fluctuate; however, these fluctuations do not determine whether one gets to pay the electricity bill or water bill. For the poor, that is the stark reality.
The reasons for financial volatility in low-income households are varied and complex, involving many social layers. The US Financial Diaries is an attempt to look through this complexity and, while analysis on the data is not yet complete, the study draws out three significant factors leading to severe fluctuations in income and expenses.
Tax Refunds. In the U.S. Financial Diaries study, 68% of households received a tax refund. For 23% of them, the tax refund equated to greater than 200% of an average monthly income. Households do not know how much to expect back which causes great uncertainty and, at times, disappointment when the refund is minimal or nonexistent.
Emergency Spending. 63% of Americans do not have enough savings to cover a $500 emergency. If a water pipe bursts, a child breaks her arm or a relative loses his job, a majority of Americans would have to seek out formal (credit) or informal (friends and family) loans to pay. If a household lacks emergency savings, the likelihood of a retirement fund existing is slim to none. Such immediate and long-term financial insecurity is a recipe for more health problems, higher crime rates, and fewer opportunities for a household’s dependents. It is the cause of a series of America’s symptoms.