RESEARCH Weathering Volatility

Big Data on the Financial Ups and Downs of U.S. Individuals

In this inaugural report, researchers from the JPMorgan Chase Institute analyzed proprietary data from JPMorgan Chase & Co. to determine how income and consumption fluctuate on a monthly and a yearly basis.

To draw conclusions about fluctuations in earning and spending amongst U.S. individuals, our findings are summarized into three key points…

Finding One: Individuals experienced high levels of income volatility and higher levels of consumption volatility across the income spectrum.

Volatility was even greater on a month-to-month basis than on a year-to-year basis. The highest income earners experienced as much volatility in both income and consumption as the lowest income earners. Some of the drivers of monthly volatility included months with five Fridays, when employees may be paid three times instead of two, tax bills and refunds, and the year-end shopping season.

Finding Two: Income and consumption changes did not move in tandem; there was only a slightly positive correlation between changes in income and changes in consumption between 2013 and 2014. Three behavioral groupings describe the link between income and consumption changes.

Income and consumption changes did not move in tandem; there was only a slightly positive correlation between changes in income and changes in consumption between 2013 and 2014. Three behavioral groupings describe the link between income and consumption changes.

Finding Three: The typical individual did not have a sufficient financial buffer to weather the degree of income and consumption volatility that we observed in our data.

The typical individual did not have a sufficient financial buffer to weather the degree of income and consumption volatility that we observed in our data.

The typical household did not maintain enough liquid savings that could be accessed immediately in the event of a large, unexpected expense sustained at the same time as a loss in income. While many in the field of consumer finance have long advised that consumers maintain an emergency fund, our research into income and consumption volatility shows that a financial buffer is a more important consideration for individuals across the entire income spectrum than is generally understood. We find that not only was volatility high for income and consumption, but also changes in income and consumption did not move in tandem. This creates the risk that people might experience a negative swing in income at the same time that they incur a large, potentially unexpected, expense. Based on our findings, we estimate that a typical middle–income household needed approximately $4,800 in liquid assets — roughly 14% of annual income after taxes — to have sustained the observed monthly fluctuations in income and spending but they had only $3,000. Required levels of liquid assets, however, were largely unavailable to most individuals across quintiles, except top earners.

Conclusion

We conclude from these early findings that, given how noisy and unpredictable financial lives are, most individuals would benefit from innovative tools to better understand and manage their bottom line. These tools could include analytical platforms that help people track their earning and spending patterns as well as the sources, magnitude, and timing of fluctuations in income and consumption. In addition, financial service providers, employers and policy makers can help individuals reduce and manage volatility, better match income and consumption changes, or put these fluctuations to good use to help them save money. Potential solutions include new insurance and credit products to help smooth income and spending; technical solutions, such as making deposited funds more immediately available to banking customers; and products or automated transfers that allow people to save during naturally occurring upswings in income, such as on five-Friday months and tax refund season.

Authors

Diana Farrell

President & CEO

Fiona Greig

Director of Consumer Research