Despite your best planning, your finances can be anything but stable. There’s plenty that changes from month to month, year to year and even day to day.
A JP Morgan Chase study found that Chase banking customers over a two-year period had their expenses fluctuate on average 29% from month to month and 15% from year to year. The national average was a $1,300 swing in expenses. That’s almost a full house payment difference in a month.
Income, not just expenses, also fluctuated, while spikes in income were usually greater on average from tax returns and similar things, dips in income were more frequent, but for less money. Financial stability is usually impacted negatively by changes in income or expenses, but positive fluctuations are always a nice thing to have.
Financial stability depends on a few factors. First, were the decisions made in people’s discretionary spending. Four major categories were responsible for a lot of the volatility if you exclude hotels and travel spending which should probably just count for vacation spending and not normal expenses.
The four major discretionary categories that impacted expense volatiliy were:
- Restaurants and entertainment
- Retail (clothes, etc.)
- Durable retail (home furnishings, appliances, etc.).
Combined those four categories accounted for almost $600 of expense volatility month to month.
Do you have an extra $600 in your budget for an expensive dinner, concert tickets, new clothes, a carpet cleaning, and a new rice cooker? Probably not, but if you’re saving for periodic expenses, you would be prepared. That $600 doesn’t have to come from money saved for other purposes or worse be put on a credit card.
Saving for what is probably coming at some point is always a good idea and can help with the second major cause of income and expense fluctuations — a major expense.
JP Morgan Chase called it an “extraordinary payment.” It may sound like you’re lugging a check to the mailbox, but they categorized it as a payment of more than $400 that was equal to or greater than 1% of your annual income.
These extraordinary payments came in three main categories medical (average expense was $1,143), car repairs ($953) and taxes ($2,142). Congratulations to taxes on being one of the biggest reasons for income and expense volatility. The tax man giveth and taketh away. Here’s a good spot for a reminder, if you don’t have a plan to manage your taxes they will be a cause for a major headache at some point in the future because of how much they can change depending on your filing status and other choices.
No matter why you’re paying a large sum of money, extraordinary payments have a long-term effect on your finances if you aren’t prepared. Looking at medical payments specifically, households saved money up to six months in advance for medical care and increased income in order to be prepared for it. Even with six months to prepare, 12 months later they still weren’t back to their baseline from before. Over that time, their credit card balances also increased on average. In addition, households either delayed payment or medical care until they were better suited to pay.
There are a few lessons we can learn from these extraordinary payments and how prepared we really are to be financially stable.
1. Don’t put yourself in a spot where you have to delay medical care because of money. Emergencies happen, but if it’s something that can be taken care of right away don’t be forced to put it off for six months because of money. Have health insurance and know how it can help when you need medical care.
2. Last minute financial preparation only helps so much. Spending six months prepping for a major expense and not being recovered 12 months later is bad news. That’s 18 months worth of worrying about or trying to catch up financially because of not being prepared in the first place.
3. Even after the extraordinary payment, a household’s credit card balances continued to increase by up to 9% on average a year later. Even if the major expense was paid for without credit, the household finances weren’t able to handle missing that amount of money over an extended period of time.
4. An extraordinary payment can affect your finances for 18 months. On average, they occur every three years. If you’re the average person, half the time you’ll be saving or paying for that major expense. Take advantage of the other 18 months to make sure you’re better prepared for whatever may come next.
5. Finally, extraordinary payments increase in frequency as you get older, especially medical payments. Even non-discretionary spending increases as you age, so you have less flexibility in your finances. Plan to be prepared for what you’ll need as you age. Your future self will thank you.
Now for the big picture.
There’s really only one way to be prepared for income or expense volatility and that is having savings at the ready. An emergency fund is a good start. Specific savings for periodic expenses is another great way to be prepared for what may come. Whatever you know will someday be a major expense start saving for it: taxes, car repairs or registration, vacations, home repairs, or major appliances.
Those short-term specific savings did the most to help households be financially stable. Managing fluctuations in your expenses can be difficult, but don’t think credit cards will be the answer. Plan to have money at the ready so you won’t have a 12-month hangover from a surprise bill.