The Financial Industry’s Role in Income Volatility

By definition, volatility means rapid change or unpredictability. It’s not a term you want to be associated with as it relates to anything of consequence and especially not your financial well-being. While not always given a lot of attention in economic news, income volatility is more common than many realize. More than one-third of U.S. households experienced a 25 percent or more change in income year-to-year between 2014 and 2015, according to an analysis by the Pew Charitable Trusts (The Pew Charitable Trusts).

Having an unpredictable income impacts a long list of life’s daily activities—one being that individuals and families aren’t able to follow conventional financial planning strategies and may be unable to use helpful savings tools and techniques. The question isn’t if the financial sector can help ease the pains and frustrations associated with income volatility – it’s how.

Income Volatility Doesn’t Discriminate

Those in lower income brackets, or with unstable jobs, aren’t the only ones susceptible to experiencing cycles of income increases and decreases. This type of financial hardship reaches across demographic and socioeconomic groups and impacts everyone at some point or another. According to research conducted by the Harvard Business Review, even those with long-term, “steady” jobs can’t count on financial stability due to the volatility and unpredictability of their incomes, expenses and spending patterns (Harvard Business Review).

For lower-income families, this volatility means a sudden loss, or delay, of incoming funds; but for wealthier families who may take on extra work to pay for unexpected or more substantial expenses, it can mean a timing issue related to an infusion of cash. Regardless of the circumstances, both scenarios can cause a decrease in financial stability. Families whose incomes swung up or down by more than 25 percent in a year are more likely to report financial shortfalls such as missing a rent payment or utility bill or overdrawing on a checking account balance (The Pew Charitable Trusts).

Regardless of the amount on a paycheck, without sufficient savings and a dependable safety net, the sudden loss of a job can render an entire household paralyzed. As families across the country struggle to gain a more stable financial footing, they are looking for resources to help them plan, save and achieve financial goals.

Traditional Financial Advice Doesn’t Apply

Some American families have the financial ability to follow traditional financial advice from experts. These families are able to follow best practices including making purchases without going into debt, maintaining a low credit card balance and still managing to contribute a portion of their monthly income into a savings or 401k plan. However, families with unpredictable income streams find it challenging to follow conventional financial advice, such as what type of house or car they can afford. For example, most housing or car affordability tools and calculators assume a stable income. And it’s not just big purchase decisions that can alienate those who face income volatility. Those with unstable, inconsistent incomes often can’t access benefit programs that are designed to help those facing financial hardships. Because previous take-home pay often determines eligibility, these programs don’t take into consideration that what a person made over the last six months is not reflective of what they will earn for the remainder of the year.

Contrary to what many may believe, families dealing with income volatility don’t necessarily seek upward mobility. Among almost 8,000 respondents in a 2017 survey, 90 percent said they’d rather have a steady income than upward mobility (The Pew Charitable Trusts). When faced with an unstable income, households look for ways in which to mitigate the personal anxiety and budget their finances in ways that are practical and relevant to their reality and a point in time situation.

How Account Providers Can Help Mitigate Income Volatility

Unpredictable incomes don’t just put a strain on individual households – income volatility causes ripple effects felt by the nation’s economy, and in turn, the global economy. In a May 2018 report by the Washington Center for Equitable Growth, researchers found that consumption of nondurable goods such as food and clothing drops by 6 percent after people lose their jobs then stabilizes at that level while they’re receiving unemployment insurance, and furthermore, it falls by an additional 13 percent after unemployment benefits run out (Washington Center for Equitable Growth). The widespread impact of income volatility makes it a relevant issue for everyone, especially those providing financial services to a broad spectrum of consumers. This important topic should garner more attention and mitigation efforts across the board. So, where can we start?

Those in the financial industry can help individuals and families experiencing income volatility once they understand and respond to their needs. Currently, some fintechs seem to be leading the way when it comes to developing products to help users cope with financial instability and establish a foundation for control and insight. However, there is still significant room for improvement from account providers that have the opportunity to develop new products for people with volatile incomes. Companies should consider using solutions like DailyPay that help streamline the payroll process and enable an employee to receive their hard-earned money in advance of the weekly or bi-weekly pay cycle. This would allow an employee to receive their pay in real-time and avoid missing a payment or being unable to buy critical household goods that are a daily necessity. In addition to enhancing advanced payment solutions, implementing financial education programs and doing more to encourage face-to-face interaction with customers (for certain segments of consumers) can help make them feel more secure in their financial well-being, not to mention empowered to identify and use the resources they need to stabilize incomes to the best of their ability.

At a time when income volatility and financial insecurity is widespread, the financial industry has an opportunity to bring a sense of stability to their customers. Conventional advice and tools are sometimes ineffective for those living paycheck to paycheck, but with advancements and innovation in technology, along with a focus on financial literacy, the industry can play a more visible and meaningful role in stabilizing the cycle of income volatility.

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