Living with credit

Most people still don’t save enough

Kelly Dilworth

If you frequently use your credit cards to pay for unforeseen expenses, you may want to take a closer look at your monthly budget. According to a study released Thursday, the inaugural output from the J.P. Morgan Chase Institute, many people endure significant fluctuations in their monthly income and expenses, but fail to adjust their monthly spending when their income temporarily recedes. As a result, they typically fall short when faced with unexpected expenses and have to borrow the money instead.

Most people still don't save enough

“Getting a sense for one’s bottom line requires a full accounting of not just consistent, recurring income and expenditures, such as regular paychecks and monthly expenditures on rent and groceries, but also anticipated but nonrecurring income and expenditures, such as end-of-year bonuses and holiday spending, and unpredictable income and expenditures, such as a roof repair or job loss,” wrote study authors Diana Farrell and Fiona Greig in the May 2015 report.

The problem is many people don’t take the unexpected into account when deciding how much to spend each month, nor do they set enough aside enough in emergency savings to weather frequent changes. Many people also have trouble sticking to a monthly budget, the study found, making it even more likely that they’ll come up short when hit with an unexpected expense.

“Individuals from across the income spectrum experience high levels of both income and consumption volatility,” wrote the authors. For example, out of 100,000 Chase customers included in the study, 89 percent saw their average monthly incomes change by more than 5 percent in a single month, while roughly 41 percent saw their average monthly income either swing up or down by more than 30 percent.

Meanwhile, people’s monthly spending habits fluctuated even more sharply, the study found, suggesting that “very few individuals follow a consistent monthly budget that sets strict parameters on spending.”

Because so few people adjusted their monthly spending habits when their incomes also changed, many of the people in the study put themselves at considerable financial risk, said the authors. “Individuals needed a significant financial cushion — roughly $4,800 among middle-income earners — to weather the degree of volatility in income and spending observed in our data. Yet, few individuals maintained this type of buffer.”

According to the study, the vast majority of households don’t have enough savings set aside to absorb a significant change in income and expenses. That’s especially true for low income and middle class households that make less than $100,000 a year.

For example, among the households in the study, those that made between $23,301 and $104,500 a year could have probably made ends meet without taking on additional debt if their income changed significantly, but their expenses stayed the same, said the authors. “But if they, for example, had needed to take a month of unpaid leave from their job and pay a large medical or tuition bill in the same month, they would have had difficulty doing so and would have likely needed to take on debt or liquidate other assets that are costly to access.”

The authors came to their conclusions after analyzing the transaction history of 100,000 Chase Bank customers. Individuals included in the study owned at least one Chase credit card and made at least $500 in deposits each month and at least five transactions.

Your bottom line
Consider more than just your basic expenses when drawing up a monthly budget. To really be prepared for an unlucky month, set aside money for occasional expenses, such as home and car repairs, as well as for adverse events, such as medical emergencies.

To give you a sense of how much you should have stowed away in an account, the authors of the study came up with some general estimates for how much to save in order to cover a month’s worth of typical fluctuations in income and expenses. For example, if you make between $0 and $23,300 a year, you should try to set aside at least $1,600 in an emergency fund, the authors estimated. If you make between $23,301 and $40,500, you should set aside at least $2,800 and if you make between $40,501 and $63,100, you should set aside approximately $4,800.

Higher income earners need to set aside even more to avoid charging most emergency expenses to their cards. For example, if you make between $63,101 and $104,500, you should aim for setting aside at least $8,200 in an emergency fund. If you make between $104,501 and $154,600, try to set aside a minimum of $13,800.

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  • Dave

    I am glad to see someone getting away from suggesting saving up a minimum of 6 months of expenses. Most people find that unreachable and figure, what the heck, I can’t do that so why save up anything. Saving up a month of expenses is a much more practical goal, and once someone has done that they likely will be able to continue saving.