A surprising financial ailment hobbling American families

Common wisdom holds that a sudden infusion of income should help a household’s finances, but it turns out it might be more corrosive than constructive.

Large ebbs and flows in household incomes can hurt families both materially and psychologically, making them feel less secure as well as crimping their ability to pay monthly bills on time, according to research from The Pew Charitable Trusts. One-third of Americans are experiencing wide swings in income, which may be tied to layoffs, cutbacks in job hours, or life changes such as marriage or divorce. 

The research highlights the challenges that many families continue to face almost eight years after the end of the recession. 

Even when the money swings were positive and delivered an unanticipated increase in income, families reported lower financial well-being and lower savings than those with stable income, Pew found. In other words, any big fluctuation in income can leave households less financially grounded than those with steady incomes. 

“Families who are experiencing income volatility, whether a gain or a loss, are reporting lower savings and stability,” said Erin Currier, director of Pew’s financial security and mobility project. “Income spikes are not inherently a good thing, and the volatility alone makes it hard for families to plan and can reduce their financial security.”

The research seeks to provide more insight into the challenges facing families’ financial stability. The effects of income volatility isn’t as widely researched, especially the impact of financial gains, perhaps because of the assumption that an increase in annual income should always prove beneficial. 

Income spikes and dips are common across all demographic groups, yet are experienced most frequently by families with incomes under $25,000, millennials, those with a high school diploma or less, as well as Hispanics, the research found. Income volatility is defined as a year-over-year change in annual income of at least 25 percent. 

Lower-income Americans may be more likely to experience wide shifts in income because their annual earnings are so low to begin with. For instance, a family with only $10,000 in annual income would experience income volatility with a loss or gain of $2,500, compared with $20,000 for a family earning $80,000 annually. 

Income volatility can be dramatic, the research found. Households that suffered income declines experienced a median drop of 49 percent, while those with gains saw their income jump by 56 percent. On a dollar basis, that translates to a median loss of $25,000 or a gain of $20,500 per year. 

Families with stable incomes were more likely to have savings and less likely to experience budget shortfalls, the report noted. Seventy-two percent of households with stable incomes said they didn’t experience financial shortfalls, compared with 64 percent of those with income gains and 63 percent of those with losses. 

So what’s causing so many Americans to experience wide income swings? The report doesn’t track the causes, but suggests volatility can be tied to life events, such as childbirth or marriage.

There’s also the question of whether the changing labor market could be adding fuel to the fire, given the rise of the “gig” economy and on-demand scheduling at some employers. Still, previous research has found income volatility has impacted American households since at least the 1970s, so recent employment practices may not be to blame. 

Solutions for helping families deal with income volatility might be found in financial technology services, such as apps that help families set aside money when they can, or help analyze where money could be saved within a budget. Employers could also help by paying employees more frequently than every two weeks, which could provide a steadier stream of income and lessen the chance an employee will turn to payday loans, for example.