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Spikes, Dips, and the Perils of Predicting Income and Expenses

by Julie Siwicki of the Financial Access Initiative

Some Americans don’t think twice about how often they’ll get paid, or how much their paychecks will be, because the differences are negligible—a day here, a few dollars there. Others find it much harder to predict money coming in and even going out of the household. People who live at lower incomes, the group the U.S. Financial Diaries focused on, tend to put themselves in this second group of Americans, as shown in chart 2.2 below.

We can learn more about the difficulty of income prediction by comparing households’ annual income estimates with their observed cash flows. Chart 2.3 illustrates that cash flow income tends to be higher than self-reports in the USFD sample. The difference is likely due to the cash flow approach of financial diaries. The methodology explicitly tries to capture all income, including resources from family and friends and other income streams that households might not think of as income, or account for in a one-time survey.

Month-to-month volatility in both income and spending needs represents another factor that hinders people’s ability to predict their finances. USFD has the ability to track these spikes and dips, which we define as months where income or expenses are 25 percent above or below a household’s average. As shown in chart 2.9, we find that households experienced an average of 2 income spikes and 2 spending spikes during the study year.

Income spikes don’t necessarily offset spending spikes: Over half of the spending spikes captured by USFD were not accompanied by higher income in the same month. Chart 2.10 shows examples of this mismatch.

Months when income drops pose another problem. On average, USFD households experienced two months of income dips during the study. Overall they had a 20 percent chance of experiencing an income dip in any given month. The probability increases up to 27 percent for those living below the poverty line, as shown in chart 2.11. Digging into the cause of this trend, chart 2.12 illustrates how jobs with unsteady hours were more often held by lower income households. Though any income source could be the cause of a dip, from government benefits to help from informal networks, it appears that job earnings do play an important role: Poor households in the USFD sample were both more prone to income dips and more likely to have irregular work.

We’re currently looking more closely into the spending ups and downs experienced by USFD households. Stay tuned for further insights.

This is part of a series explaining initial findings from the US Financial Diaries. The project is lead by principal investigators Jonathan Morduch (NYU) and Rachel Schneider (CFSI).  Julie Siwicki was a field researcher with the project and is now a research associate. The views expressed therein are those of the author, and not necessarily of the USFD project or its funders.