Most U.S. households do not have a sufficient “financial buffer” to withstand a large expense, such as a medical emergency, that coincides with a loss in income, according to a new report by the JPMorgan Chase Institute, a newly created think tank that evaluates consumer and economic data.
A typical middle-income household needs a buffer of approximately $4,800 in liquid assets — roughly 14 percent of annual income after taxes — to sustain the typical monthly fluctuations in income and spending observed between 2013 and 2014, the Institute’s report found.
However, those surveyed only had $3,000 in liquid holdings. Similar gaps exist between the buffer needed and actual liquid holdings for individuals across all incomes, except the top income earners, the Institute said.
The Institute’s research drew from detailed transaction information for nearly 30 million Chase customers, constructing a unique data asset of 2.5 million account holders.
The Institute examined income and spending habits on a transaction-by-transaction basis between October 2012 and December 2014 to draw conclusions about fluctuations in earning and spending among U.S. individuals.
“Individuals are dealing with high levels of income volatility and even higher levels of spending volatility. Business leaders and policymakers should closely evaluate these trends when taking steps to advance global prosperity,” said Diana Farrell, founding President and CEO of the Institute. “Potential solutions include analytical platforms that help people track their earning and spending patterns, policy interventions or new financial products to help people smooth income and spending or put these fluctuations to good use, for example, to help them save money.”
The Institute’s inaugural research, Weathering Volatility: Big Data on the Financial Ups and Downs of U.S. Individuals, showed that individuals across the income spectrum saw high levels of income volatility and even higher levels of spending volatility.
Majority of Households Saw Change in Income of 5% or More
Seven in ten (70 percent) individuals experienced an annual change in income of at least 5 percent between 2013 and 2014. More than a quarter (26 percent) of individuals experienced at least a 30 percent change. Only 30 percent saw consistent income between 2013 and 2014.
Spending was even more volatile than income. More than eight in ten (84 percent) individuals experienced monthly changes of at least 5 percent over the course of 2013 and 2014. Only one in six (16 percent) saw consistent spending between 2013 and 2014, while one in four (24 percent) people experienced more than a 30 percent change in annual spending during that period.