Building on its inaugural 2015 report exploring financial volatility experienced by American families, the JPMorgan Chase Institute today published new research evaluating incomes and expenditures of six million de-identified accounts over a 75-month period from 2013 and 2018. The research shows that income and spending volatility remained relatively constant during this period, with the average family experiencing significant income swings—spikes or dips of more than 25 percent of their median income—in five months out of the year, despite a period of real wage growth and low unemployment. Families with the median level of volatility experienced a 36 percent change in income month-to-month during the prior year.

The report, “Weathering Volatility 2.0: A Monthly Stress Test to Guide Savings,”  also shows that families need roughly six weeks of take-home income in liquid assets to weather a simultaneous income dip and expenditure spike, though 65 percent of families lack a sufficient cash buffer to do so.

For example, empirically-grounded savings recommendations for middle-age families include:

• The average middle income family needs about $5,000 to cover concurrent income and spending shocks, but has only $2,000, leaving a gap of $3,000.
• Low-income families need about $2,500, but have $700, leaving a gap of roughly $1,800.
• Families in the highest income quintile need nearly $15,000 in cash buffer. They have, on average, $9,000, leaving a savings gap of $6,000.

“Despite low unemployment and a sustained period of economic growth, the reality is that most American families continue to experience financial volatility,” said Diana Farrell, President and CEO of the JPMorgan Chase Institute. “The idea of saving three-to-six months of income—a common guidance—may feel unattainable for many families. Understanding the inconsistent cash flow reality for most American families is a critical first step in developing practical, empirically-based savings targets.”

The report upends the conventional wisdom that families are best-positioned by saving a flat percentage of income each month. This savings strategy may actually leave families with an inadequate cash buffer, exacerbating financial distress in months with an income dip and resulting in under-saving during months in which they experience an income spike.

Rather, families should save more aggressively during income spikes. The report shows a strong seasonal pattern of income spikes, which tend to concentrate in February, March, April, and December—around end of year bonuses and tax refund time. Income spikes in December and March are so likely, that families have a 30 percent chance of experiencing an income spike in those months. The strong seasonal pattern of income spikes has important implications for designing savings strategies, in that families should aggressively harvest the savings opportunities presented by months with income spikes.

The report includes six key findings:

• Finding 1: Income volatility remained relatively constant between 2013 and 2018. Those with the median level of volatility, on average, experienced a 36 percent change in income month-to-month during the prior year.
• Finding 2: There is wide variation in the levels of income volatility families experience, both across families at a given point in time and also for a given family across time.
• Finding 3: On average, families experience large income swings in almost five months out of a year. Income spikes are twice as likely as dips and most common in March and December. Families with the most volatile incomes experience swings that are larger but not more frequent than families with less volatile incomes.
• Finding 4: Income volatility is greatest amongst the young and the high income. However, downside risks, as measured by the magnitude and frequency of income dips, are greatest among low-income families.
• Finding 5: The trend of spending volatility was flat between 2013 and 2018. While the level of spending volatility was also high, it was 15 percent lower than that of income volatility, except among account holders over the age of 75 and those with the largest cash buffers.
• Finding 6: Families need roughly six weeks of take-home income in liquid assets to weather a simultaneous income dip and expenditure spike. Sixty-five percent of families lack a sufficient cash buffer to do so.