Think a big surge in income will make your life better? Not always, according to a new study released this week.
Turns out it’s stable, predictable pay that’s most associated with financial well-being. Households with stable income were more financially secure than those with volatile income, according to a new report from The Pew Charitable Trusts. Pew returned to the same respondents from a 2014 survey to ask them about any changes in their income and overall financial well-being a year later. As expected, a drop in pay is, of course, very stressful. But though seemingly counter-intuitive, volatility in the opposite direction — a jump in income — can also prove difficult to manage.
“Large income swings may make it challenging to plan and budget and may make it hard for families to feel financially secure,” according to Erin Currier, director of financial security and mobility with Pew, during a briefing on the report.
Granted, most of us would much rather experience this “problem” of higher pay. But Pew found in examining those big swings in income — of 25% or more — that millennials, those who were single, and those earning less than $25,000, were among the most likely to report a gain in income with the median rise exceeding 75%. And income volatility (gains or losses) was not just associated with perceptions of well-being, but showed up in two key measures of the capability to withstand an economic hit. First, of those with stable income, 72% reported no financial shortfall in 2015 (defined as not missing paying a bill, foregoing medical care or tapping a retirement account,) compared with 64% of those with income gains and 63% with losses. At the same time, those with stable income reported significantly higher savings: $5,500 compared with $3,000 among those who reported an income gain and $1,500 among those who said they had a drop in pay.
“They are features of households of any income volatility whether losses or gains,” Currier notes.
Millennials in particular may be experiencing these pay jumps that are often associated with a new life stage as they enter a growth phase of careers. Also, on a percentage basis, anyone earning $25,000 or less, will feel the benefits of a $10,000 raise more than someone with a salary of $40,000. Plus there are many other sources of unexpected, additional income that can include tax refunds, overtime, bonuses, more hours or even higher combined household income that usually follows marriage or a decision to live together.
In addition, there may be a new factor at work as unpredictable income and volatility is also a feature of the so-called gig economy as more of us are increasingly responsible for smoothing out the economic ride for ourselves.
How to do so? These techniques can help:
- Stop Tax Refunds: Of course I’m not suggesting that you reject any refund owed to you. But if you are withholding too much because you like receiving a big deposit from Uncle Sam every year, (and chances are you might given the average refund of roughly $3,200,) we would all be better off correctly estimating taxes and saving any surplus in an account that could boost emergency funds for those economic downturns that do come.
- Save More Tomorrow: This idea from behavioral economics is tried and true: as Richard Thaler and Shlomo Benartzi discovered it’s easier to commit to saving more in the future. So if you are fortunate enough to expect to earn more this year, make a plan to salt that “extra” income away.
- Make It Automatic: Thanks to the ever-expanding fintech universe, find a good match in a type of account like Digit that will “scan” your funds searching for surplus income and tuck it away before you can spend it.
- Work With Your Boss: Savvy employers understand financial stress is bad for business; so take advantage of the financial benefits your workplace already offers (including commit to reviewing appropriate benefits) and suggest new ones if you find them lacking. Some forward-looking companies promote rainy day savings.
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