Association for Public Policy Analysis & Management

Overview. A growing body of research demonstrates that U.S. households experience a high degree of volatility in their finances (Farrell & Grieg, 2016; Hannagan & Morduch, 2015). This volatility is difficult to predict, costly, and disproportionately affects low- to moderate-income (LMI) households (Leete & Bania, 2010; Pew Charitable Trusts, 2015), a population that often lacks the resources to manage this volatility (Federal Reserve, 2016). Yet even as households experience high degrees of financial volatility and often lack sufficient buffers against this volatility, they also commonly report that they lead comfortable financial lives (Federal Reserve, 2018). These results would seem to indicate something of a disconnect between common measures of subjective and objective financial well-being and speaks to the need for more research to understand the intersection between economic volatility and subjective well-being measures.

To that end, this paper presents one of the first in-depth looks at how individual financial well-being evolves over time. Using a novel dataset that includes a longitudinal survey of low- and moderate-income tax filers paired with administrative tax data, we address the following questions:

(1) How stable is financial well-being in LMI households over the short-term?

(2) What are the key predictors of short-term changes in financial well-being in LMI households?

(3) What factors characterize LMI households that experience large short-term increases or decreases in financial well-being?

Methods. This paper uses data from the longitudinal 2017 and 2018 Household Financial Surveys (HFS), which asks LMI household respondents questions about their financial situations when they file their taxes and six months later. Across these years, 12,988 households responded to both waves of the survey. To assess the stability of financial well-being and the key predictors of changes in financial well-being, we will use basic statistical approaches as well as fixed effects panel regressions. To assess the factors that characterize LMI households that experience large increases or decreases in financial well-being relative to households with relatively stable financial well-being, we will use multinomial logistic regression models.

Preliminary Results. We find that financial well-being is very stable over the short-term for the general LMI population, changing from 48.5 at tax filing to 49.0 six months post-filing. We also observe that most household characteristics are not associated with large changes in financial well-being, although we do observe interesting patterns in financial well-being changes by race/ethnicity, employment status, and access to emergency resources.

Implications. In conducting the first large-scale analysis on how financial well-being evolves over time, our research can help to validate the scale by examining its stability in LMI households. Further, by examining the factors that drive changes in financial well-being, this work will also help shed light on the factors that can increase households’ vulnerability (or resilience) to declines in financial well-being.