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The Almighty Buck Businesses United States

We Tracked Every Dollar 235 US Households Spent for a Year, and Found Widespread Financial Vulnerability (hbr.org) 399

Income inequality in the United States is growing, but the most common economic statistics hide a significant portion of Americans' financial instability by drawing on annual aggregates of income and spending. An article on the Harvard Business Review adds: Annual numbers can hide fluctuations that determine whether families have trouble paying bills or making important investments at a given moment. The lack of access to stable, predictable cash flows is the hard-to-see source of much of today's economic insecurity. We came to understand this after analyzing the U.S. Financial Diaries (USFD), an unprecedented study to collect detailed cash flow data for U.S. households. From 2012 to 2014 we set up research sites in 10 communities across the country. The USFD research team engaged 235 households that were willing to let us track their financial lives for a full year. We tried to record every single dollar the households earned, spent, saved, borrowed, and shared with others. [...] Our first big finding was that the households' incomes were highly unstable, even for those with full-time workers. We counted spikes and dips in earning, defined as months in which a household's income was either 25% more or 25% less than the average. It turned out that households experienced an average of five months per year with either a spike or dip. In other words, incomes were far from average almost half of the time. Income volatility was more extreme for poorer families, but middle class families felt it too.
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We Tracked Every Dollar 235 US Households Spent for a Year, and Found Widespread Financial Vulnerability

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  • Cool Story, Bro (Score:2, Insightful)

    by subk ( 551165 )
    But why is it on Slashdot?
    • Re:Cool Story, Bro (Score:5, Insightful)

      by religionofpeas ( 4511805 ) on Wednesday April 12, 2017 @01:18PM (#54222753)

      Because they expect a big discussion between people saying it's your own fault if your poor, and other people saying it's somebody else's fault. This results in lots of ad views.

      • Re:Cool Story, Bro (Score:5, Interesting)

        by Anonymous Coward on Wednesday April 12, 2017 @07:54PM (#54225671)

        Ironic that this article is in the Harvard Business Review! The Harvard Business School has been source of much of the business policy of the last several decades that pushed risk on workers and away from corporations. Who could have guessed that squeezing worker pay and social safety nets would result in increased economic instability for them!

    • by Kohath ( 38547 )

      People have financial challenges. Why is that a story at all?

      Because agendas need to be pushed on people (to wield power over others), and in order to push an agenda, you need to propose a fantasy world where people don't have financial challenges.

      • by Altus ( 1034 )

        Is it newsworthy if the number of people having financial challenges is going up? Is it newsworthy if the challenges are worse than they were 2 decades ago?

        Or maybe its only newsworthy when we can pin those challenges on H1-B visa holders?

    • Re:Cool Story, Bro (Score:4, Insightful)

      by DogDude ( 805747 ) on Wednesday April 12, 2017 @02:08PM (#54223235)
      It's for economics and sociology nerds, like myself.
  • by Anonymous Coward on Wednesday April 12, 2017 @12:52PM (#54222553)

    tax returns on the side for friends since I like seeing what people make, I've noticed it's more about throwing money away on stupid stuff rather than lack of money that's the problem. At my company, all of the developers make $140k or more a year, and they constantly whine about having no money. No one in the office goes out to lunch any longer because they can't afford to eat. Working through lunch is depressing. You should get out of the office and talk to people. My office mate just wasted $12k on an expensive stove, and he doesn't even cook. My boss spent $130k on a BMW and has since asked to borrow money since he's about $100 short each month. He makes over $200k!

    People are financially vulnerable because they make the decision to be. Personally, I save just over 60% of my income and have since two years after college when I finally learned throwing money in the trash on things like expensive speakers, car models that depreciate badly, expensive home remodels, etc. just aren't worth what they cost.

    • If you don't decide UP FRONT how much is "enough" then it just becomes a horizon line. No matter how much you have, it's never enough.

    • this

      i see people leasing luxury cars, buying expensive crap, eating lunch out every day, eating breakfast out daily, $5 coffee in the morning, it goes on.

    • by DogDude ( 805747 )
      Neat anecdote, but that's not what the article is about.
    • by green1 ( 322787 )

      It's all about balance.

      I don't make 6 digits, or even close, but I bought a house I could afford, and plowed every penny I had in to it until it was paid off. I've never had any debt beyond that mortgage, and I paid it off in 8 years. Since that time I put all my money in to RRSPs and TFSAs (Canadian tax sheltered investments) until I maxed those out. and then I saved some more...

      Then I stopped and had a bit of a life altering realization. Without debt from the mortgage (or anything else), and with my relat

    • This is an interesting observation, but I think it's about a very different set of people than the article is discussing.

      Families making $60K are in a really, really different boat than just about anyone with an engineering job, especially younger folks with fewer demands on their household income. In fact even many families with incomes over $125K (once considered a rather high income) can be very strapped once you account for the cost of homeownership, college, aging, supporting other family members, etc

  • I get paid twice a month (not twice a week). My paycheck period can vary from nine to 12 days, depending on the calendar layout. My monthly budget is set for two 10-day periods. If my paycheck has an extra day or two, the money goes into savings. If my paycheck was short a day, the money comes out of short-term savings.
  • by mrchaotica ( 681592 ) * on Wednesday April 12, 2017 @12:54PM (#54222563)

    The less predictable your cash flow is, the more you need to save. You can only ever rely upon the fraction of your cash flow that is reliable (which is so obviously true that it's actually a tautology).

    That means the fixed expenses + minimum variable expenses in your budget should always be less than the minimum you might get paid in a month, excluding things like bonuses, commissions, or overtime.

    Moreover -- and I realize that people would consider this extreme -- if you can get your bare-bones budget down below the amount of income you'd get from unemployment if you lost your job, that would be even better. For example, in my state unemployment pays the about same as full-time minimum wage and my household has two working adults, so double-unemployment would net about $2,400/month and that's the number I budget around.

    • I used to budget for living only on unemployment benefits. After five years of consecutive rent increases, rent and unemployment are the same number. If I collapsed my budget to the bare minimum, food and other essentials will have to come out of savings.
      • After five years of consecutive rent increases, rent and unemployment are the same number.

        Time to find a cheaper apartment, or better yet, buy with a fixed-rate mortgage so that you're at least somewhat insulated from inflation.

        (Of course, in theory the unemployment benefit amount should have increased over time at the same rate as the rent, but that's a rant for a different day.)

        • Time to find a cheaper apartment, or better yet, buy with a fixed-rate mortgage so that you're at least somewhat insulated from inflation.

          Not an easy thing to do in Silicon Valley. My rent-controlled apartment have kept the rent increases in check for nearly 12 years, but the current corporate owner is very aggressive about nickel-and-diming everyone for everything. Repainting the exterior walls, redoing the landscaping and charging "luxury" rents for a 50-year-old apartment complex is no longer a winning formula.

    • by AmiMoJo ( 196126 )

      Realistically, if they get sick the costs can easily be higher than most people could ever hope to save.

      And when they have kids, it's hard to tell them that they should save that money instead of sending Timmy on the school trip to the museum, because when faced with theoretical future disaster and immediate familial need human nature isn't going to favour long term planning.

      • And when they have kids, it's hard to tell them that they should save that money instead of sending Timmy on the school trip to the museum

        Save up the money before getting kids.

        • by AmiMoJo ( 196126 )

          Unfortunately biology makes that hard for many people, even assuming they earn enough to ever save that much. They could just not have kids, but again biology makes that difficult and a risk most people are willing to take.

          Basically, I think this is an unrealistic solution.

      • by jedidiah ( 1196 )

        Oh puleeeze. A museum school trip isn't going to be diddly. It may be ONE trip to Starbucks or the fast food establishment of your choice. When I got the free lunch, we were able to afford the school field trips.

        Getting REALLY sick is a matter of covering your insurance cap for the year. That cap is on the order of an expensive house or car repair. If you can't manage to get sick, you can't manage to maintain your possessions either.

        Even the working poor can manage this. What's your excuse?

        • That cap is on the order of an expensive house or car repair.

          Maybe for your insurance it is. For mine, the annual out of pocket maximum is $10k (for the family, or $5k/person). $10k would be a big blow to someone on minimum wage.

      • And when they have kids, it's hard to tell them that they should save that money instead of sending Timmy on the school trip to the museum

        No it isn't. I'll do it right now:

        Hey dumbass parents, get your financial shit together before spending money to send Timmy on that school trip! Seeing the museum is way less important for Timmy's well-being than not becoming homeless because the house got foreclosed on, or not having his parents divorce because of financial stress, or not relying entirely on the school

    • The headline is really wrong, they didn't detect vulnerability, they detected volatility. Some months income was above average, some months it was below average. Salesmen are really familiar with this, but that's just how some jobs are.
  • by TWX ( 665546 ) on Wednesday April 12, 2017 @12:54PM (#54222565)

    A lot of people that are good with their money play their cards close to their chests, they do not necessarily discuss or share their financial information with others regardless of how innocent the request seems. This would probably skew results of a long-term survey toward those who don't have as much problem with others knowing their finances, which would more likely be those who aren't so good with money.

    Second, who finds this to be a surprise? There are lots and lots of jobs where monthly income varies, and while a lot of those jobs tend toward labor, there are still plenty of other jobs that would see varying compensation due to things like commissions. Sales jobs can be very high paying one month and almost without compensation the next. Same for many skilled trades, if there's no work then there's no money.

    I would not be surprised to learn that the cushy, regular-income jobs that most people think of are almost the exception, not the rule. Even IT is not immune to this; those who work as consultants may be paid for jobs that run for a few months and then end, or might be paid per billable-hour billed to their regular rotation of customers. That could mean income vastly varies from month to month depending on if anyone needs outside services or not.

  • Income variance is good because it encourages people to live in a smaller house, have less recurring expenses, and then it sometimes feels like "yay, I have more money." Well, that is, if they're not an idiot. Then they'd probably just overspend based on the high number and go into debt.
    • Income variance is good

      I'm not sure income variance is ever good, uncertainty leading to bad decisions.

      Then they'd probably just overspend based on the high number and go into debt.

      Which can be perfectly rational. There are perfectly rational reasons for a lot of behaviors that look stupid from the outside.

  • by rsilvergun ( 571051 ) on Wednesday April 12, 2017 @01:02PM (#54222627)
    to understand is you can't budget what you don't have. I see this a lot, where people are struggling and convince themselves if they could just budget the numbers a bit better it'd all work out. I'm seeing apps that say they'll do it. But fact is we make about 20% less than the boomers did. That's why we're struggling.

    It reminds me of all these stories after the crash of folks who paid off debt by living frugal. The stories always glossed over the $100k+ salaries. It's a lot easier to be frugal when you make that much. It's the difference between a new car and paying rent...
    • by GuB-42 ( 2483988 )

      But fact is we make about 20% less than the boomers did. That's why we're struggling.

      What is this number? 20% relative to what.
      The world was different back then. Some things were cheaper (like housing in dense areas), some things were more expensive (like electronics).

      • by thsths ( 31372 )

        Exactly. The basics where cheaper, much cheaper. Luxury was more expensive, but it was not expected. Nowadays, internet, smartphone etc is all expected.

    • by lgw ( 121541 )

      to understand is you can't budget what you don't have. I see this a lot, where people are struggling and convince themselves if they could just budget the numbers a bit better it'd all work out

      A budget should not be like a diet - it's not a plan. If you try to make it a plan, what always happens is you plan to lean, and eventually binge.

      A proper budget is a spending journal that you review as a family. This is amazingly powerful: at the start of the process, list the things you think you spend money on in order of importance to you (no consulting for couples, each list independently). After a couple of months, list what you spend money on in order of how much. It's very rare for the lists to

  • 1. Never, EVER borrow to pay off borrowing. That's a fiscal death spiral. If you can't pay it back, better to tell them and then take the hit. Maybe they'll settle for less than you owe.
    2. Never borrow to pay for a sunk cost. Only borrow for something that increases in value over time.
    3. Build up a cash hedge over time so you can borrow from yourself.

    • You just outlined the true cause of "income inequality."

      People who follow your rules do well, those who don't, end up on welfare.

      It's that simple.

    • That's all well and good until you realize that almost 2/3rd of bankruptcy are due to medical bills. Financial discipline tends to take a backseat when your life or a family members life is at stake.
      • by lgw ( 121541 )

        If you follow those rules, it's a lot easier to save up 6 months expenses as a cushion. Sick or laid off, you can weather it. Sure, you might be particularly unlucky and have multiple big events hit you at once, can't handle that, but being prepared for 99% of stuff is doing pretty well!

    • The scale of number 3 is vastly understated. People barely have enough extra to put aside for meager existence in retirement and still be able to afford living in society.
    • Re: (Score:2, Insightful)

      by Anonymous Coward

      I beg to differ.

      1) If you can borrow at a lower interest rate than your current interest rate, then borrowing to pay off borrowing winds up saving you a lot of money. It is the wisest thing you can do, when the option is available.

      2) If the interest rate you can get is less than the interest rate you can MAKE on that chunk of money (when properly invested) then you should borrow the money. For example, when you need to buy a car for, say, 20,000, and you have that money...you could either:
      a) just pay up,

    • by Anonymous Coward on Wednesday April 12, 2017 @01:34PM (#54222887)

      Exceptions to all of these.
      1) Credit aggregators can change 21% interest debt to 6% interest debt. That is a better move than defaulting or bankruptcy in many cases.
      2) Food and rent for housing are unavoidable fixed costs and you need both to live, regardless if you have cash now to pay for them.
      3) Only people who have never been poor utter such classist nonsense.

    • Those "rules" are bogus. Things are never so black and white in real life.

      1. If you can trade a high interest rate for a low one, do it.
      2. People borrow money for cars all the time and it can be a reasonable decision. Borrowing money over 8 years to buy a car is crazy, but a 4-year loan? Also, imagine that you have the choice to pay off a student loan or a car loan, which do you choose? It may also make sense to borrow money to keep your cash hedge intact.
      3. I agree.

      Fundamentally, though, the bottom line is

  • by Tony Isaac ( 1301187 ) on Wednesday April 12, 2017 @01:20PM (#54222771) Homepage

    Understanding the differences in income is useful. But what's really important is spending.

    Whether a person makes 15K or 150K a year, if you spend more than you bring in, you're sunk.

    People who never have enough money typically have no idea where they spent it. When you sit down with them and analyze where "every dollar went," people tend to be completely shocked at some of the silly things they spent it for.

    The #1 difference between a person who is well off and one who is not, is not income. It's spending habits.

  • Hm.. (Score:5, Insightful)

    by fluffernutter ( 1411889 ) on Wednesday April 12, 2017 @01:22PM (#54222791)
    How come people say that we need companies to make a profit so that they are encouraged to grow and do things, and that without the profit there is a lack of motivation to enter that endeavor. Yet when the common worker has raises and bonuses taken away, and is negotiated down to the minimum rate, they are expected to work their hardest or they are considered lazy.
    • Because a lot (most?) people mistakenly think companies and people are somehow different.

      Companies are a shell, a paper construct created to allow people to work together; hopefully more efficiently than they would working alone. The laborer employee is able to concentrate on working without having to waste time on stuff outside his field of expertise, like how to calculate payroll taxes and send the payment electronically to the IRS every month. The manager employee directs the output of the workers s
    • by lgw ( 121541 )

      How come people say that we need companies to make a profit so that they are encouraged to grow and do things, and that without the profit there is a lack of motivation to enter that endeavor. Yet when the common worker has raises and bonuses taken away, and is negotiated down to the minimum rate, they are expected to work their hardest or they are considered lazy.

      Total income in the US is about equal to GDP. Total value of all publicly traded companies in the US is about equal to GDP. Total earnings (profits) of all those companies is currently about 4% of their value, though sometimes it reaches 10%.

      80% labor, 20% capital seems like a reasonable arrangement to me. It's usually less than that for the owners in the US, except for the rare successful small business.

      And most CEOs and small business owners work very long hours - it's not like they get to be lazy eith

  • by CrimsonAvenger ( 580665 ) on Wednesday April 12, 2017 @01:38PM (#54222925)
    ...as to the normal period between paychecks in these households.

    My wife gets paid every two weeks, so two months of every year she gets three paychecks instead of the usual two. So a 50% uptick in income two months of every year.

    A weekly paycheck means that four months of the year you'll get five checks instead of four. Note that that frequency conveniently maps to a 25% uptick in income four months of every year without any instability at all.

    Not going to bother running even preliminary numbers for a household with two jobs, one paid weekly, one biweekly, but I expect that most of the income instability they saw could be accounted for that way.

    Caveat: I'm not trying to imply that all the income instability was illusory, but it's certainly possible that a good chunk of it was an illusion produced by monthly spending and weekly/biweekly income....

    • by Ogive17 ( 691899 )
      Many people get paid based on the hours they work.

      I'm salary, I get the same amount every paycheck regardless if I work an extra 10 hours one week. My brother-in-law owns a lawn care company, 3 months out of the year his employees are technically unemployed since they are hourly. I'd say most hourly workers in the country will have varied income.
  • by Solandri ( 704621 ) on Wednesday April 12, 2017 @01:40PM (#54222949)
    Is that income is a rate. Savings is an amount. More precisely, your savings (or checking) account balance is simply the integral of your income minus your expenses. (Or if you prefer, (income - expenses) is the first derivative of your account balance.)

    What this means is that unless you're racking up debt (loans, credit cards), you have to live within your means. The average rate of money coming in (income) has to equal the average rate of money going out (expenses). And (this is the crucial part) that requirement is the same whether you have zero savings or a million dollars saved. In other words, the person with a million dollars saved up has to live by the same constraints as someone living paycheck to paycheck. This realization struck me when I was counseling a co-worker who was having financial difficulty, and when we went over the numbers I realized she made just as much money as I did. Except instead of saving 20% of it like I was (both for retirement and as a buffer against unforeseen expenses or loss of income), she was blowing it all on toys and going out.

    If you're living paycheck-to-paycheck and aren't accumulating debt, you''re already following the first rule of personal finance management - limit your spending to equal your income. All you have to do is lower your expenses slightly and you'll start accumulating savings. That savings will act as a buffer, evening out the dips and spikes TFA describes so that they don't turn into a financial emergency.

    The person with a large savings account isn't necessarily better off than you because they make more money than you. They're better off because having a savings buffer frees them from having to waste time (and pulling their hair out) dealing with spot shortfalls in income or spikes in expenses. Instead of having to pay the electric bill at the last minute because you haven't gotten paid yet, you can just pay it whenever. It all adds up to exactly the same amount of income and expenses at the end of the year regardless of which way you do it. Just the paycheck-to-paycheck way is a lot more frenetic and nerve-wracking, while with a savings buffer you can just pay it, and go on doing things you enjoy instead of worrying. The savings way may even be cheaper as you won't be hit by late fees and penalties.

    I realize many of you already know this. But in my experience talking with friends and co-workers, the majority of them live the paycheck-to-paycheck way. Many of them don't even track their spending - they deposit their paycheck, then spend money until the ATM tells them they have none left. This country really needs to make basic finance management a required course in high school. If you do use the ATM method, open up a free savings account. After depositing your paycheck, take, say, 5% of the amout you just deposited and transfer it into the savings account. Over time, gradually increase the percentage to 10%, 15%, and hopefully 20%. Make ATM withdrawls only from the checking account. If an emergency occurs, you can transfer some money from savings to checking to tide you over. No, your friends asking you to go to a concert with them does not constitute an emergency. But if an item you were saving up to buy next month goes on sale this month, then yes you can tap into your savings to get it now. Just be sure that you "pay back" any money you "borrowed" from yourself for the item on sale or for the emergency, by increasing the percentage you put into the savings account until you've caught back up to where it would've been without the "loan" to yourself.
    • This country really needs to make basic finance management a required course in high school

      That's the easy part. The hard part is actually doing it.

  • Wages are stagnant, but we have no inflation, so no worries! Oh yeah, groceries have really gone up in price, but they don't count! Gas is lower than it was four years ago, but that was a historical high, and the current price is still high, but not record high, so that's ok!
  • by nealric ( 3647765 ) on Wednesday April 12, 2017 @03:46PM (#54224145)
    Instability of income and expenses aren't problems in and of themselves. Think of CEOs who get irregular (but giant) paydays from things like exercising stock options, or highly successful trial lawyers who win a big contingency case. There is only an issue if insufficient savings cause a mismatch between the timing of income and expense, or there is insufficient access to cost-effective credit to smooth the mismatch through borrowing. The linked article mentions that the study did look at how to resolve those issues, but the linked material doesn't really provide any meaningful discussion.

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