Look, most Americans are broke.
I don’t think that’s any secret. I mean especially when you consider the student debt burden weighing down one entire demographic.
Now this isn’t to say that people with access to credit and decent jobs can’t weather storms, it’s just to say that if we’re talking about cold, hard reality defined as having enough cash and/or completely liquid assets that can be immediately accessed in a pinch, Americans are in bad shape.
Despite the fact that, ask Bankrate wrote earlier this year, “if you have a car, house or apartment, or a pet or child — shoot, if you’re a member of the human race — something that costs money is bound to go wrong,” only 4 in 10 Americans adults said they would pay an unexpected cost from savings.
As we noted last month in a testament to everything said above, delayed tax refunds had a noticeable effect on Americans’ propensity to use credit versus debit cards:
Well with all of that in mind, we thought the results of a new JPMorgan study were interesting.
The study, conducted by a “think tank” the bank set up in 2015 (for some reason that’s funny to us, although we can’t put our finger on exactly why), sought to quantify “the amount of cash a household would need to weather typical swings in income and spending,” to quote Bloomberg. Here’s the gist of JPMorgan’s research:
Americans across the income spectrum experience high levels of income and spending volatility. We observe that family income and spending both fluctuate by about 30 percent on a month-to-month basis. On the expense side, this is equivalent to spending fluctuations of roughly $1,300 for middle-income households, about the same as adding or subtracting a mortgage or rent payment in any given month. Income and spending volatility is prevalent across all income quintiles. Moreover, this monthly volatility is double the year-over-year volatility we observe (about 15 percent)—the typical perspective offered by existing annual public surveys.
Volatility would be of little consequence for families if expenses typically fell in months when income fell. But this is not the case. The correlation between fluctuations in income and spending within the same month is just 0.1. As a result, families could simultaneously experience an expense spike and an income dip. This is double jeopardy—the monthly “stress test” that any family can experience.
So basically, as long as expenses are falling when incomes fall, everything is fine. Or, more poignantly, if bad sh*t doesn’t happen to coincide with you getting a raise, you may be f*cked.
Just how f*cked (nominally speaking) obviously correlates with income level. That is, if you make $30,000/year, you’re exceedingly unlikely to have a jumbo mortgage and a Maserati payment, so your cash buffer doesn’t need to be as large. That said, that’s “nominal” f*cked-ness. “Real” f*cked-ness is probably a different animal because you know, if you can’t make a payment on a $20 million mansion, what is the bank going to do? Foreclose on it? And then what? Probably have to discount the sh*t out of it if they want to sell it quick. On the other hand, if you can’t make the payment on that 5-year-old Honda Civic, they’ll come get that f*cker the next day and sell it the day after that. End of story.
Anyway, here’s the headline grabbing part of the report (i.e. the chart that tells you how much money you need to weather proverbial storms based on your income level):
The everyday cash buffer necessary to weather typical volatility rises with income and peaks at age 35-44 at roughly $2,400 for middle-income households. We know that most families do not have a sufficient liquid asset buffer to manage 90 percent of adverse volatility, but how much do families need to manage everyday volatility? The answer to that question depends on both a family’s income level and their age (Figure 3). To estimate the typical level of volatility a family could potentially be exposed to in a given month, we sum the median dollar value of changes in income and spending. This is the amount of cash necessary to absorb everyday levels of income and spending volatility. This “everyday cash buffer” generally rises with income levels and peaks around age 35 to 44 at roughly $2,400 for middle-income families. It then drops with age as income volatility also falls.
Middle-income families require a relatively consistent everyday cash buffer over the life cycle, ranging from $2,100 at ages 18 to 24 to $2,400 at ages 35 to 44 and then falling to $1,800 for those over 75. Not surprisingly, the absolute dollar magnitude of the everyday cash buffer scales with income, and peaks among 35 to 44 year olds at $3,300 for the fourth income quintile and $5,300 for the top income quintile.
The greater dispersion in volatility among older Americans discussed above is also evident in Figure 3. Among the youngest group aged 18 to 24 the everyday cash buffer ranges from $1,400 for families in the lowest income quintile to $2,700 for families in the fourth income quintile—a factor of less than two. For families ages 75 years and above, the everyday cash buffer ranges from $600 for the lowest income quintile to $3,600 for the top income quintile—a factor of six.