It was a beautiful, clear, blue-sky day when we sat down with Becky Moore in her Ohio home, but she was in a bad mood. She wasn’t sure if she should pay her mortgage, and the uncertainty of that choice was weighing on her. She had the money in hand. But she was worried that her husband’s next paycheck would be — in her words — crap. If Jeremy had an off week, and if she went ahead and paid the mortgage early, then she would have to borrow from her sister to get through the month. Again.
The problem wasn’t that Jeremy worked part-time, or even that he had a variable schedule, as so many hourly workers do. Jeremy worked full-time, on a set schedule, as a mechanic fixing long-haul trucks. For him, the variability was caused by the fact that he was paid on commission. When tires blow out in the summer, and alternators fail in the winter, his commissions are higher. In the spring and fall, when the weather is easier on trucks, his pay is lower.
Everyone’s seen the charts that document yawning income inequalities in the United States. The picture around wealth inequality is worse. But a large and growing number of Americans suffer because of a third gap — between those who enjoy financial stability and those who don’t . In other words, it’s not just a dearth of money that hurts families, but the unpredictability of their cash flows.
We got to know Becky and Jeremy through a study called the US Financial Diaries, in which we tracked 235 families for a full year. The families shared information about every dollar that they earned, spent, borrowed, saved and gave away. Our field team gathered the data in person, so we heard a lot about the families’ lives.
The seasonality was hard on Becky and Jeremy. Becky knows she should save in the winter and summer, in order to prepare for the spring and fall. But she also has four children at home. Saving by putting cash in the bank and not touching it was too difficult, Becky said. Instead, Jeremy used the tax code to save by claiming fewer dependents on his W-4. That way, they could expect a nice, big refund early in the year to pay down credit card debt they accumulated in winter. Meanwhile, Becky watched out for good deals. Her pantry and freezer were full, so she could still make dinner if Jeremy’s paycheck suddenly shrank.
On average, families in the Diaries study had about five months of each year in which they earned at least 25 percent more or 25 less than their average monthly income. In that situation, the idea of setting a monthly budget and sticking to it becomes nonsensical. The standard advice for middle-class families — such as “paying yourself first” by automatically saving a portion of each month’s paycheck — becomes similarly difficult to follow. It’s not surprising that Jeremy has cashed out his 401(k) when he has switched jobs. This month’s bills are a nearer-term problem than retirement.
The volatility of household income from one year to the next has been rising for several decades. Yale political scientist Jacob Hacker draws on longitudinal data to argue that incomes have been “rising and falling much more sharply from year to year than they did a generation ago. Indeed, the instability of families’ incomes has risen faster than the inequality of families’ incomes.” According to the most recent Federal Reserve Survey of household decision-making, 30 percent of American families say they have incomes that vary substantially from month to month. Forty percent of those say that the month-to-month volatility makes it harder to pay the bills on time.
During the year we tracked Becky and Jeremy, they earned $43,000, which makes them roughly middle-class in their part of Ohio. Yet in six months of the year, their monthly income dropped below the poverty level. In those months, Becky did more than ask her sister for help. She signed up for food stamps, and applied for Medicaid for her children. That helped, but it made her feel terrible. She was sure there were people worse off than they were.
Eventually, Becky and Jeremy decided that the strain was too much. Jeremy switched to a new job, still fixing long-haul trucks. The new job had a longer commute and lower annual pay. But he was on salary, with a fixed amount of income each month.
As we’ve shared the findings of our research across the country, we’ve heard different responses to Becky and Jeremy’s story. Some people argue that the couple should have had the discipline to save, or that they shouldn’t give up the extra income in favor of greater stability. Others are impressed by the creativity that Becky and Jeremy bring to financial management.
But their effort to adapt cuts two ways. It shows that families can be resourceful under stress — but it also raises the question of how much more risk they can bear.
Instability makes it even riskier for workers to pursue mobility, to stretch for the job that brings in a little more money or that offers a potential promotion. Yet the safety nets that are available for the inevitable moments when those risks cause hardship — in Becky’s case, borrowing from a family member, turning to public benefits, or using credit cards — bring new hardships themselves, including stigma and the risk of over-indebtedness.
Worse yet, they simply don’t provide much protection. For families to get ahead, they need more help in managing the ups and downs — or, better yet, in avoiding them.
Jonathan Morduch and Rachel Schneider are the authors of “The Financial Diaries: How American Families Cope in a World of Uncertainty.” Morduch is professor of public policy and economics at New York University. Schneider is senior vice president at the Center for Financial Services Innovation.