Why Even Full-Time Workers Struggle With Expenses

A new book based on extensive research of U.S. households says income instability is to blame.

Unemployment is low, inflation is historically low and even wages are perking up, leading many observers to believe the U.S. economy is humming along nicely. So why do many Americans say they are struggling?

A new book born of meticulous, years-long research offers a fresh insight into this burning question. Month-to-month swings in income, even for those with full-time jobs, are often the cause of Americans” financial anxiety, claim the authors of “The Financial Diaries: How Americans Cope in a World of Uncertainty.”

For a stunning number of American households, both income and expenses swing 25% or more in either direction on a regular basis, leaving many families scrambling on a month-to-month basis, even if things don’t look so bad annually, the authors argue in their book and a Harvard Business Reviews essay.

Economic data tends to examine broad movements; even at its most micro, it tends to identify years-long trends. Researchers Jonathan Morduch and Rachel Schneider had a sense government statistics were missing things, so they went nano. They spent 12 months getting 235 families to track every single dollar going in and out — 300,000 cash flow events in all. The product of their painstaking research offers perhaps the clearest view yet of why even middle-class Americans find themselves living with deep economic anxiety. The book even offers up a new term — “precarity,” or precarious economic volatility — to describe the plight of everyday Americans.

One of the more bold claims made in the book: Despite all the talk about income inequality, the authors say income instability has risen even faster and is the more immediate problem.

What’s Income Instability? 

Many readers are familiar with the idea that unexpected expenses — like a health scare or major auto repair bill — can derail many households. But the book establishes another reality that might be new to many: income volatility, even among those with full-time jobs.

The book’s opening anecdote cites a research subject who works as a truck mechanic in Ohio. While he works full time, his pay relies largely on commissions and can vary from $1,800 to $3,400 each month. In bad weather, trucks break down more often. That means in the spring and fall months, mortgage payments aren’t made, and the electricity bill goes unpaid. Later, for a fee, the family catches up. (You can see how any missed loan payments may be affecting your credit scores by viewing your free credit report summary on Credit.com.)

This same problem is repeated again and again among the families studied. Morduch and Schneider found that the term “average income” is a bit of a farce, as typical families lived through five months each year with income that swings either 25% above or below “average.”

“This is creating a lot of anxiety and uncertainty that is impossible to see in the usual data,” Morduch said in an interview. About five months out of each year, incomes “weren’t even close” to average.

“Often we see the (financial) problems as a discipline problem, a failure of personal responsibility. What we’re trying to say is there’s something else going on,” he said. “The underlying conditions are really hard. It probably isn’t just about self-discipline.”

Income swings are to be expected among families suffering job loss, the self-employed or those who rely on tips, like waiters. But the researchers found a stunning rate of income volatility even among those with traditional-sounding full-time jobs.

“This was the single biggest surprise (in the research),” Morduch said. “There’s insecurity that’s because you are going to lose your job, but that’s not what’s driving anxiety for these folks … What we see is that when paychecks bounce from month to month, people can be making good financial choices but are still struggling.”

As a result, even earners who are safely in the middle class spent a month or two living as poor or “near poor,” the book says. The problem for many is better described as a lack of liquidity — getting enough cash to pay the mortgage this month — than as insolvency, or a hopeless difference between income and expenses.

“Not balancing on a high wire, driving on a rocky road,” the book says. “(There’s a) distinction between not having money at the right time vs. never having the money.”

While economists might just be becoming aware of this month-to-month struggle, the financial industry has known about it for some time. That’s one reason there are more payday lending storefronts in America than McDonald’s restaurants. (You can find tips for escaping payday loan debt here.)

Trouble Saving for a Rainy Day

The volatility problem is closely related to Americans’ lack of emergency savings. Study after study shows a large percentage of Americans don’t have the recommended three months of living expenses stored in short-term savings. Some studies show even more dire data. A stunning 46% of Americans told the Federal Reserve in 2015 they could not cover an emergency $400 expense without selling something or borrowing the money. Income and expense volatility, combined with no savings, is a perilous combination.

“Households don’t have a big cushion. Into this mix is the reality that levels of income have not risen – the bottom 50% has seen no income growth since 1980 — then you are really squeezed,” said Morduch. As a result, even in good months, earners don’t have any extra left over to build a rainy-day fund – economists say their budgets have no “slack.”

“There is a knock-on effect of diminished slack so when the budget gets hit by a car repair or the house needs a new roof, it’s just that much harder,” Murdoch said.

How did this income volatility come to pass? The authors blame what they call “the Great Job Shift.” Employers are increasingly sharing risk with their workers. That means cutting back hours, often on the spot, when times are slow. Or basing a large portion of pay on commission, as in the case of the truck mechanic. In other cases, workers rely on tipping to top-up wages that otherwise aren’t livable. In one of the book’s more frustrating scenes, as casino blackjack dealer in Mississippi describes how her income relies on events as whimsical as the nearby college football team schedule.

The subjects in the book are anonymized. Their names changes and a few other personally identifiable data points have been obscured, but otherwise, their financial diaries are disturbingly real.

How Do We Fix it? 

When asked for policy recommendations, Morduch leaps to the defense of the Consumer Financial Protection Bureau, which he says is working hard to regulate many of the short-term lending products that have emerged to services workers with volatile incomes. He says there’s also been constructive conversations with large firms about making hourly wage worker schedules more predictable, and moving away from so-called on-call workers. The “Schedules That Work Act” that would have promised some workers two-weeks scheduling notices was considered but tabled by Congress under President Barack Obama.

Other changes would help, too. Many social benefits programs are cumbersome to apply for and don’t offer much help for families who are only occasionally “near poor,” and might need help one or two months per year.

Changes that could encourage saving for short-term events would help, too. Tax-advantaged products like 401K accounts help families plan for decades in the future, but families living on the margins are afraid to use them for emergency savings because of the severe early withdrawal penalties. (You can learn more about withdrawing from your 401K here.) More flexible rules would encourage greater use of retirement accounts, Morduch believes.

“A lot of Americans wisely don’t want to lock up their money,” he said. “There isn’t enough attention paid to shorter-term policies.”

In a larger sense, Americans should probably change the way they think about income and spending, Morduch said, and many could learn from research subjects described in the book.

“The families we got to know, they think a lot about liquidity. They have a lot to tell other Americans. Mainly, prepare for a life of ups and downs,” he said.

If you’re looking for ways to keep your finances in check, we’ve got a full 50 ways you can curb and stay out of debt here

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The 10 Happiest States in the U.S.

Happy Nation?

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How We Chose to Get Out of Debt

For years, even as our jobs were to help people manage their money and invest, we held complete disregard for our own money.

Like many Americans, we always had more month left at the end of every paycheck. Financial emergencies were a precarious threat because we didn’t have the financial means to protect ourselves. That’s because we lived well beyond our means with a lifestyle financed by credit cards.

About 51,000 Bad Choices

Despite living the high life on the outside, we were stressed and upset on the inside. This resulted in us living the “below-life” in a basement apartment buried under $51,000 of credit card debt.

How did we dig this grave for ourselves? We lived the life we thought we were supposed to live and not what we wanted to live. Gay men dress well, drive well, live well and travel well, right? We thought so. We thought this so much that we took 51,000 digs at our financial future.

After we lived a year in our below-ground apartment, we realized we were only digging ourselves deeper into debt. That was when we decided something had to change. This sparked a debate between us that lasted weeks.

The question was, “What is it we most want out of life?”

Choice Correction

When we first asked ourselves this question, we honestly didn’t know the answer. There were lots of things we loved about our lives; at the same time, we were miserable about our financial situation and the prospects of our future.

We loved dining out regularly. We loved dancing at clubs with our friends. We loved having the latest and greatest phones and the newest designer clothes. We didn’t love watching our credit card debt increase or getting past-due notices in the mail. We didn’t like our credit scores. (You can see where your scores stand by viewing your free credit report summary each month on Credit.com.)

What was obvious was that we didn’t know what we most wanted in life. It’s not possible for everything to be No. 1. This isn’t little league soccer. It’s life.

After much deliberation, we whittled our list of wants down to two: travel now and save for retirement for later. Everything else— the fancy jeans, VIP clubs, expensive cocktails — wasn’t what we wanted. We enjoyed those things, but they didn’t add real value to our lives, they added false-value.

False value is when we perceive something as valuable that’s really not, such as a new car with large car payments for 6 years or a mortgage payment that takes all our extra monthly income.

Once we realized what we most wanted in life, everything else fell in place. Stephen Covey recommends in 7 Habits of Highly Effective People to focus with the end in mind. If we don’t know what our goal is, we can’t be effective. Knowing why we wanted to be debt-free and why we went to work every day made all the difference in improving our financial situation and our future prospects.

You, Too, Can Choose

By knowing what we want in life, we’re empowered to make better financial decisions because we know which ones support our goals and which ones don’t. We now have motivation to stick to our goals because we know what we want and we know we can only get what we want with the right financial decisions.

We often ask ourselves, “Do we want a margarita at a bar in Denver or do we want a margarita on the beach in Mexico?” The answer is consistently Mexico.

The best part about this financial tip is that anyone can do it, including you. We all have the power to decide what we want in life, whether with our finances or any other aspect of our lives. We have the power of choice and it’s our choices that really make all the difference.

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