Association for Public Policy Analysis & Management

Previous Pew research has demonstrated that financial concerns are top-of-mind for many families. For example, in 2014, over half of households reported worrying about their finances during the previous year. And among those that indicated that they worried, 71 percent worried about not having enough money to cover expenses and 83 percent worried about a lack of savings—concerns that families often discuss. Further complicating these matters is income volatility, defined in this analysis as a year-over-year change in annual income of 25 percent or more. Such fluctuations may make it difficult for families to plan, pay regular expenses, save, or pay down debt.

To date, little research has investigated and compared the impact of changes in year-to-year income on diverse American families, including those of different incomes, races, education levels, and ages. Moreover, data dividing volatility into gains and losses are scarce, making it difficult to examine how families adapt to these different experiences; the research that does exist has focused largely on income loss because it is so detrimental to family financial health.

This analysis aims to fill that gap by exploring what, if any, differences exist between families that experienced income volatility and those that did not, as well as between those that had income gains and those that had losses, and by examining the relationship between income volatility and overall family financial security.

This analysis illustrates that: (1) year-over-year income volatility is common; (2) income volatility exists across demographic groups but is particularly acute for certain populations; (3) the magnitude of income swings up and down is dramatic at the median; and lastly, (4) families that experience income volatility—whether a gain or loss—report lower financial well-being and less savings than those with stable income.

Taken together, these findings demonstrate that although income volatility is more prevalent and the swings are larger among certain households, changes in annual income can affect all types of families, and despite an improving economy, many Americans still feel financially precarious.

Understanding the factors that create and affect income volatility will lead to better programs and policies to improve short-term economic stability and, in turn, improve household financial security. The research outlined here suggests the need for more data documenting the prevalence and severity of income volatility across diverse households to help policy advocates, researchers, and organizations develop solutions to help families cope with unstable annual income.

This paper uses data from Pew’s Survey of American Family Finances (SAFF), which was first conducted in 2014, and then followed up with the same respondents a year later. The data are unique because they allow an exploration of household finances in conjunction with perceptions of households’ financial situations across time for more than 5,600 respondents. This paper represents the first analysis drawing on both sets of these survey data. In addition, data from qualitative interviews across seven U.S. cities will be highlighted to put the SAFF data into context.