Association for Public Policy Analysis & Management

Volatility in and shocks to income and consumption are of particular concern because households in the U.S. carry only small reserves of liquid savings to help them smooth consumption over time without tapping into credit, liquidating longer term assets, or turning to family, friends, or public institutions for support. This paper uses data from a new survey to describe the impact of financial shocks and volatility in income and expenses on household balance sheets and financial security in a representative sample of over 7,800 American households. Households are asked about their finances broadly and about major types of unexpected shocks to income or consumption they may have experienced in the past year, and the impact of those shocks on their finances.

Households who have experienced volatility and shocks in the past year are significantly worse off on a variety of indicators of financial well-being. Over half of respondents indicate that unexpected expenses make it hard to save at least some months, including 26% who say that is the case most months or just about every month. Emergent needs make it hard for households to build savings, and may also force households to tap into the stores of savings they have built.

Nearly 60% of respondents report having suffered a major economic shock in the year prior to the survey. Most households that experienced a shock reported that the event made it difficult to make ends meet. This is consistent with both low levels of liquid savings and low levels of slack in income observed in the survey. Among households whose shock made it difficult to make ends meet, almost half reported that the financial turmoil from the shock continued to impact their household finances at data collection, while only five percent indicated that their finances returned to normal within a few weeks. Even among households with a shock and incomes over $85,000 per year, thirty-five percent reported their most expensive shock made it hard to make ends meet.

Financial shocks were also associated with having experienced shortfalls in the past year. Forty-six percent of households with a shock reported at least one bill or regular expense they had been unable to pay, compared with only twelve percent of households without a shock. This suggests that financial shocks can translate to material deprivation that may be more palpable and bear greater human cost than changes in a balance sheet ledger.

Our findings show that many American households are not sufficiently prepared to weather unexpected expenses or losses of income. Similarly, we demonstrate that households who experience shocks have financial difficulty that continues to negatively affect financial stability even as time passes. These findings suggest the need for further investigation into programs and policies that help households to build precautionary savings, weather financial shocks, and regain firm financial footing after challenging events.

Pre-release findings. Please do not cite or distribute.