American Incomes Are More Unstable Than Ever – What Financial Firms Should Do to Help

By Scott Burns

Anna works two jobs and is training for advanced certifications through her local community college. She expects to make over $50,000 this year, but finds her income can jump or fall by as much as $1,000 each month. During income dips, she feels squeezed by her rent, car loan and tuition payments.

 Recently, her car broke down and required a repair costing over $600. The stress she felt in scrambling to make payments caused her to miss days of work and class, compounding her money challenges.

 She knows she should save for retirement and bigger purchases, but she finds herself mostly applying additional cash to put away for a potentially lean upcoming month.

Anna is fictional, but her circumstances are shared by millions of Americans, whose incomes have become substantially more volatile over the last 40 years.

Ample research highlights the challenges Americans face while grappling with unstable incomes. Documentation ranges from intimate family portraits in books like The Financial Diaries and $2 a Day, to broad studies from the Federal Reserve, bank research groups and widely cited economists at the Economic Policy Institute. Some of the most striking insights include that, according to the Federal Reserve, almost half of American families would struggle to raise $400 in an emergency and JPMorgan’s research indicates that over 40% of households see their income spike or drop by over 30% any given month.

At the same time, a Gallop survey indicates, Americans continue to be deeply distrustful of financial institutions in the aftermath of 2008’s financial crisis and expect more than ever from the services they purchase.

To stay competitive in an era of disruption, financial services providers must go far beyond table-stakes service and apply available technology to help families stabilize their financial lives.

Offerings that help people like Anna will balance risk and reward while making it easier for her to dedicate any temporary surplus to near-term goals:

Blend Stability Into Investments:

Looking at typical financial products, portfolios largely made up of stocks are probably too volatile for short-term savings needs like Anna’s.

While heavily equity-weighted portfolios may be the best way to save over decades, their volatility in any given year can create distress.  A person invested fully in an S&P 500 index (without fees) may have seen average real returns of over six percent a year over the last 90 years, but also, on average, would have lost more than 5% of her money at least every 5^th year. This would be crippling for someone like Anna, who needs stability in the short-term.

There’s a ‘goldilocks-like’ solution out there that could greatly benefit the millions – one that’s not too risky nor too low-yielding. It would be focused on her goals, with more stability to give her comfort (even if her paycheck movements don’t), but with potentially higher returns than a checking account.

Deliver a ‘Just-Right’ Balance for Clients’ Time Horizons:

A savings vehicle with a 2 or 3 percent yield (still a considerable improvement from typical savings’ account interest rates) could mean hundreds of additional dollars over a five-year period. Including some equity exposure in a savings product for Anna could help boost expected returns, particularly in years further from her goal, with equity share in the portfolio dialed down annually to reduce risk closer to the goal’s end date.

Anna’s ability to bear risk depends on how long she has to reach goals – her investments should fit accordingly.

Make Saving Simple:

To capitalize on related product benefits, Anna also needs help ensuring she steadily puts money away. The successful saving aid she needs would be super easy to use and set up to divert money from many other potential immediate desires -- protecting her future self from impulses to potentially ‘raid’ growing investments. Millions currently rely on analogue versions of such a service, stashing money at hard to reach bank branches or with a trusted partner.

With consumer technology building blocks more powerful than ever, financial firms can and must deliver on products that make it as easy to save as it is to shop online.

Products created to address income instability challenges will do much more to help families reach near-term goals. They will deliver the right blend of stability and reward for families with varying income, make it super simple to save, be appropriate to users’ unique circumstances and driven by a commitment to fiduciary care. Help like this could make once out-of-reach aspirations more accessible for millions grappling with unstable income and uncertain economic situations.

Scott Burns is Head of Analytics and Behavioral Finance, Twine