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We Tracked Every Dollar 235 US Households Spent for a Year, and Found Widespread Financial Vulnerability (hbr.org)
Income inequality in the United States is growing, but the most common economic statistics hide a significant portion of Americans' financial instability by drawing on annual aggregates of income and spending. An article on the Harvard Business Review adds: Annual numbers can hide fluctuations that determine whether families have trouble paying bills or making important investments at a given moment. The lack of access to stable, predictable cash flows is the hard-to-see source of much of today's economic insecurity. We came to understand this after analyzing the U.S. Financial Diaries (USFD), an unprecedented study to collect detailed cash flow data for U.S. households. From 2012 to 2014 we set up research sites in 10 communities across the country. The USFD research team engaged 235 households that were willing to let us track their financial lives for a full year. We tried to record every single dollar the households earned, spent, saved, borrowed, and shared with others. [...] Our first big finding was that the households' incomes were highly unstable, even for those with full-time workers. We counted spikes and dips in earning, defined as months in which a household's income was either 25% more or 25% less than the average. It turned out that households experienced an average of five months per year with either a spike or dip. In other words, incomes were far from average almost half of the time. Income volatility was more extreme for poorer families, but middle class families felt it too.
The part were they track everything you do.
I can understand a poorer household having variable income if working hourly, but I don't understand fluctuations of that size on a household with a real job, that gets paid salary....?
Light travels faster than sound. This is why some people appear bright until you hear them speak.........
tax returns on the side for friends since I like seeing what people make, I've noticed it's more about throwing money away on stupid stuff rather than lack of money that's the problem. At my company, all of the developers make $140k or more a year, and they constantly whine about having no money. No one in the office goes out to lunch any longer because they can't afford to eat. Working through lunch is depressing. You should get out of the office and talk to people. My office mate just wasted $12k on an expensive stove, and he doesn't even cook. My boss spent $130k on a BMW and has since asked to borrow money since he's about $100 short each month. He makes over $200k!
People are financially vulnerable because they make the decision to be. Personally, I save just over 60% of my income and have since two years after college when I finally learned throwing money in the trash on things like expensive speakers, car models that depreciate badly, expensive home remodels, etc. just aren't worth what they cost.
The less predictable your cash flow is, the more you need to save. You can only ever rely upon the fraction of your cash flow that is reliable (which is so obviously true that it's actually a tautology).
That means the fixed expenses + minimum variable expenses in your budget should always be less than the minimum you might get paid in a month, excluding things like bonuses, commissions, or overtime.
Moreover -- and I realize that people would consider this extreme -- if you can get your bare-bones budget down below the amount of income you'd get from unemployment if you lost your job, that would be even better. For example, in my state unemployment pays the about same as full-time minimum wage and my household has two working adults, so double-unemployment would net about $2,400/month and that's the number I budget around.
"[Regarding the 'cloud,'] ownership was what made America different than Russia." -- Woz
A lot of people that are good with their money play their cards close to their chests, they do not necessarily discuss or share their financial information with others regardless of how innocent the request seems. This would probably skew results of a long-term survey toward those who don't have as much problem with others knowing their finances, which would more likely be those who aren't so good with money.
Second, who finds this to be a surprise? There are lots and lots of jobs where monthly income varies, and while a lot of those jobs tend toward labor, there are still plenty of other jobs that would see varying compensation due to things like commissions. Sales jobs can be very high paying one month and almost without compensation the next. Same for many skilled trades, if there's no work then there's no money.
I would not be surprised to learn that the cushy, regular-income jobs that most people think of are almost the exception, not the rule. Even IT is not immune to this; those who work as consultants may be paid for jobs that run for a few months and then end, or might be paid per billable-hour billed to their regular rotation of customers. That could mean income vastly varies from month to month depending on if anyone needs outside services or not.
Do not look into laser with remaining eye.
to understand is you can't budget what you don't have. I see this a lot, where people are struggling and convince themselves if they could just budget the numbers a bit better it'd all work out. I'm seeing apps that say they'll do it. But fact is we make about 20% less than the boomers did. That's why we're struggling.
It reminds me of all these stories after the crash of folks who paid off debt by living frugal. The stories always glossed over the $100k+ salaries. It's a lot easier to be frugal when you make that much. It's the difference between a new car and paying rent...
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1. Never, EVER borrow to pay off borrowing. That's a fiscal death spiral. If you can't pay it back, better to tell them and then take the hit. Maybe they'll settle for less than you owe.
2. Never borrow to pay for a sunk cost. Only borrow for something that increases in value over time.
3. Build up a cash hedge over time so you can borrow from yourself.
"We receive as friendly that which agrees with, we resist with dislike that which opposes us" - Faraday
Because they expect a big discussion between people saying it's your own fault if your poor, and other people saying it's somebody else's fault. This results in lots of ad views.
Very few people bother to account for this stuff despite the fact that there are no secrets here. Americans are encouraged to spend like there's no tomorrow and many of them do just that. They refuse to save. They push themselves so they have no margins and then inevitably they have problems. This even goes for people who make six figures in flyover states.
A Pirate and a Puritan look the same on a balance sheet.
Understanding the differences in income is useful. But what's really important is spending.
Whether a person makes 15K or 150K a year, if you spend more than you bring in, you're sunk.
People who never have enough money typically have no idea where they spent it. When you sit down with them and analyze where "every dollar went," people tend to be completely shocked at some of the silly things they spent it for.
The #1 difference between a person who is well off and one who is not, is not income. It's spending habits.
How come people say that we need companies to make a profit so that they are encouraged to grow and do things, and that without the profit there is a lack of motivation to enter that endeavor. Yet when the common worker has raises and bonuses taken away, and is negotiated down to the minimum rate, they are expected to work their hardest or they are considered lazy.
Laws are rules for the court, but merely a bottom bar to hit for life. Think beyond laws in your actions always.
That tripe? I know people much poorer than you that blow their money in stupid ways and go out of their way to make the worst financial decisions possible. Oddly enough they even manage to deal with the odd hiccup too. They aren't nearly so much in need of your pity than you might think.
A Pirate and a Puritan look the same on a balance sheet.
My wife gets paid every two weeks, so two months of every year she gets three paychecks instead of the usual two. So a 50% uptick in income two months of every year.
A weekly paycheck means that four months of the year you'll get five checks instead of four. Note that that frequency conveniently maps to a 25% uptick in income four months of every year without any instability at all.
Not going to bother running even preliminary numbers for a household with two jobs, one paid weekly, one biweekly, but I expect that most of the income instability they saw could be accounted for that way.
Caveat: I'm not trying to imply that all the income instability was illusory, but it's certainly possible that a good chunk of it was an illusion produced by monthly spending and weekly/biweekly income....
"I do not agree with what you say, but I will defend to the death your right to say it"
Is that income is a rate. Savings is an amount. More precisely, your savings (or checking) account balance is simply the integral of your income minus your expenses. (Or if you prefer, (income - expenses) is the first derivative of your account balance.)
What this means is that unless you're racking up debt (loans, credit cards), you have to live within your means. The average rate of money coming in (income) has to equal the average rate of money going out (expenses). And (this is the crucial part) that requirement is the same whether you have zero savings or a million dollars saved. In other words, the person with a million dollars saved up has to live by the same constraints as someone living paycheck to paycheck. This realization struck me when I was counseling a co-worker who was having financial difficulty, and when we went over the numbers I realized she made just as much money as I did. Except instead of saving 20% of it like I was (both for retirement and as a buffer against unforeseen expenses or loss of income), she was blowing it all on toys and going out.
If you're living paycheck-to-paycheck and aren't accumulating debt, you''re already following the first rule of personal finance management - limit your spending to equal your income. All you have to do is lower your expenses slightly and you'll start accumulating savings. That savings will act as a buffer, evening out the dips and spikes TFA describes so that they don't turn into a financial emergency.
The person with a large savings account isn't necessarily better off than you because they make more money than you. They're better off because having a savings buffer frees them from having to waste time (and pulling their hair out) dealing with spot shortfalls in income or spikes in expenses. Instead of having to pay the electric bill at the last minute because you haven't gotten paid yet, you can just pay it whenever. It all adds up to exactly the same amount of income and expenses at the end of the year regardless of which way you do it. Just the paycheck-to-paycheck way is a lot more frenetic and nerve-wracking, while with a savings buffer you can just pay it, and go on doing things you enjoy instead of worrying. The savings way may even be cheaper as you won't be hit by late fees and penalties.
I realize many of you already know this. But in my experience talking with friends and co-workers, the majority of them live the paycheck-to-paycheck way. Many of them don't even track their spending - they deposit their paycheck, then spend money until the ATM tells them they have none left. This country really needs to make basic finance management a required course in high school. If you do use the ATM method, open up a free savings account. After depositing your paycheck, take, say, 5% of the amout you just deposited and transfer it into the savings account. Over time, gradually increase the percentage to 10%, 15%, and hopefully 20%. Make ATM withdrawls only from the checking account. If an emergency occurs, you can transfer some money from savings to checking to tide you over. No, your friends asking you to go to a concert with them does not constitute an emergency. But if an item you were saving up to buy next month goes on sale this month, then yes you can tap into your savings to get it now. Just be sure that you "pay back" any money you "borrowed" from yourself for the item on sale or for the emergency, by increasing the percentage you put into the savings account until you've caught back up to where it would've been without the "loan" to yourself.
I would say the Slashdot community leans more libertarian (note the small 'l' there) than anything else. You'll probably stumble across just about every political philosophy here at some point, but I'd say that a majority (or at least a plurality) fall into the classical liberal category more so than anything else. I mean look at all of the recent wage gap articles and tell me that the community is socialist based on the comments that are posted and upvoted there.
The site ownership may fall into a different camp, and really they're the ones controlling what stories are put up. I don't think the community really would have wanted this.
This is exactly it I'm sure. Even as a salaried employee I see quite a bit of variability.
As a ploy to pay me less, my employer moved a large portion of my regular pay to a "performance bonus" that is payed out once a year, contingent on the company meeting specific metrics (which it conveniently never does, no matter how successful).
That bonus is a big spike once a year that roughly triples one of my paycheques (though the official math says it should more than quadruple it)
Additionally, in my country, employment insurance, and the government pension plan are deducted from paycheques, but have a cap that I hit about 3/4 of the way through the year, after the cap is reached, my paycheque goes up by the amount of the deductions (roughly 15-20% increase)
I'm not sure how they calculated the twice yearly 3 paycheque months, but most people are paid bi-weekly, rather than monthly, so that adds variability to each month as well.
Now all of that is just for a salaried employee. They quoted "full time", not "salary", a full time hourly employee is likely to have overtime pay that varies by a large margin depending on various factors. There are also specific industries that have different variabilities (for example teachers often don't get paycheques during the summer break, but the pay they would have gotten then is spread out over the rest of the year instead. Nurses, police, and paramedics are often paid shift premiums for night time or weekend shifts, and don't work the same number of those on any given paycheue, sales people often get a commission on top of their base pay, serving staff, hair stylists, and taxi drivers often have tips). Additionally some companies don't pay vacation time, but instead top up the rest of the paycheques by an equivalent amount and then give the vacation time as unpaid.
There are all sorts of ways that full time employees end up with variable salaries.
It's for economics and sociology nerds, like myself.
I don't respond to AC's.
Paying for a Win10 license will cause a period of financial vulnerability all by itself.
"When information is power, privacy is freedom" - Jah-Wren Ryel
actually no. This is a slashvertisment plain and simple.
I really tried to read the article because I can relate to the premise in the article, but really the article is a infomercial to purchase the book about the study.
Instability of income and expenses aren't problems in and of themselves. Think of CEOs who get irregular (but giant) paydays from things like exercising stock options, or highly successful trial lawyers who win a big contingency case. There is only an issue if insufficient savings cause a mismatch between the timing of income and expense, or there is insufficient access to cost-effective credit to smooth the mismatch through borrowing. The linked article mentions that the study did look at how to resolve those issues, but the linked material doesn't really provide any meaningful discussion.
Is it newsworthy if the number of people having financial challenges is going up? Is it newsworthy if the challenges are worse than they were 2 decades ago?
Or maybe its only newsworthy when we can pin those challenges on H1-B visa holders?
"In America, first you get the sugar, then you get the power, then you get the women..." -H. Simpson
Major dip every year in December. Xmas shopping, annual fees on certain accounts. Secondary dip in june - bi-annual insurance bill.
Tertiary dips in odd months as various home or health maintenance services have to be paid for.
Random dips - the fridge or water heater dies, cat gets run over and rushed to vet. Bart needs a ton of expensive sports equipment. Little Maggie catches pneumonia (or did you really think that US insurance plans keep you from having to hit your wallet even when they'll - eventually (hopefully) - pay for it?
Some of these can be factored in and budgeted by those rare people who have their financial act together. Some come out of the blue. No such thing as an "average" month's expenses, just averaging expenses over the months and hoping that you don't get that back-breaking surprise.
"More than almost any other country, America taxes income far more than consumption"
True, all state and federal taxes should only apply to wealth in excess of the per capita domestic median. Producing is good for the national economy, spending is good for the national economy, building and hoarding excess wealth is not and 60% of our national economic output goes into that bucket.
Taxing consumption alone is a big free pass for wealth hoarders. Show me anyone in the top 0.1% by wealth and I'll show you someone who costs more and contributes less than a homeless man who just doesn't want to work and exploits every welfare program we have with deliberate fraud.
I mean sure - for me, that's fine. For the average American, the idea of "putting a few months worth of pay checks into savings" is just ludicrous. It would take them several years to be able to save that much, since everything has to be spent on the basic necessities of food, shelter, clothes and bills.
Ironic that this article is in the Harvard Business Review! The Harvard Business School has been source of much of the business policy of the last several decades that pushed risk on workers and away from corporations. Who could have guessed that squeezing worker pay and social safety nets would result in increased economic instability for them!