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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.
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.
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.
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.
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!