By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]
This post is part of an ongoing series to support our annual upcoming three-day learning event. The Personal Finance Virtual Learning Event will be held June 5-7 and this year will focus on the soft skills financial professionals need to effectively meet the needs of their clients and students. Learn more and register for sessions here.
Personal Financial Management (PFM) program personnel often counsel families with irregular incomes. While a service member’s pay might be consistent, that of a spouse or a sideline job might not. Income instability is the theme of The Financial Diaries by Jonathan Morduch and Rachel Schneider.
The book describes a year-long study of 235 households in five states. From almost 300,000 cash flow records that were collected, the book paints a picture of family financial instability that is difficult to see in studies that measure one-time income “snapshots.” A major cause is jobs with unpredictable pay and irregular hours.
According to the authors, “the instability of families’ incomes has risen faster than the inequality of families’ incomes.” Difficult choices often have to be made as a result (e.g., paying bills late, borrowing money from friends, and payday loans). An overriding theme of the book was respondents’ desire for financial stability.
Below are insights from The Financial Diaries for professionals who counsel people with volatile incomes:
- Standard Budgeting Techniques Don’t Work- Morduch and Schneider note that “volatility wreaks havoc with all the standard advice on how to manage finances. How do you create a realistic budget-and stick to it- if for half the year your income isn’t close to average?”
- Income Dips Have Negative Effects- Income dips can lead to delayed or forgone medical care, missed bills, late fees, utility disconnections, evictions, and damaged credit. Another negative impact is that coping with a volatile income saps time and attention (i.e., mental bandwith) from parenting and relationships.
- Income Volatility Affects Eligibility for Safety Net Programs- Families may qualify for food stamps, health insurance subsidies, and Medicaid at certain points in time but not at others, necessitating frequent applications for benefits. Lost health benefits can cause interruptions in care for chronic health conditions.
- Poverty Can be Temporary– Some families in The Financial Diaries moved in and out of poverty, a phenomenon that is not uncommon in America. U.S. Census data indicate that 90 million people, nearly one-third of all Americans, experienced poverty for two months or more between 2009 and 2011.
- Appearances Can be Deceiving– Many Diaries households were middle class on paper but were clearly financially stressed. In addition, they lacked less visible markers of middle income financial stability including peace of mind, financial “breathing room,” and adequate savings for emergencies and retirement.
- Tax Refund Savings is Tough Sell- It can be difficult to persuade people to save part of their tax refund because many already know how they are going to spend it- and long-term savings isn’t on the list. Instead, people plan to pay for long-delayed urgent needs and arrearages on debts and household bills. Tax refunds are a key component of a process the authors call “Smoothing [consumption] and Spiking [income].”
- Relationships Drive Financial Decisions– Relationships can help or hurt. The book describes savings groups where people build a “pot” to help each other out. Some people were also expected to lend money to others. One joined an IDA program to “lock up” her money and have an acceptable excuse to say “no.”
- Planning is Illusive- People with volatile incomes don’t have the luxury of developing long-term financial plans. Instead, their planning time horizons can best be described as “now, soon, and later.”
- Automated Savings and Payments are a Tough Sell-Automatic savings plans will not work for those with volatile incomes who will resist strategies that involve regular payments or deposits that won’t allow them flexibility to “juggle” expenses when needed.