Why Managing Expenses Is Not an Easy Task
February 9, 2017
Monthly expenses can hit a family budget hard, especially if they fluctuate a lot—and it turns out they do. For US families, expenses vary each month by roughly 30 percent—the equivalent of adding or subtracting a housing payment on a monthly basis. Four in ten US families find themselves making an extraordinary payment of roughly $1,500 each year on medical services, auto repair, or tax payments. It’s a large cost to absorb, especially when it is unexpected, but it can also be hard to recover from. These are some of the learnings from our latest report on the volatility of consumer expenses.
Based on our analysis of de-identified account data of roughly 250,000 Chase checking account customers, Coping with Costs: Big Data on Expense Volatility and Medical Payments outlines how consumers’ expenses vary over time and how their financial behavior changes when faced with extraordinary medical payments.
In this new report, the Institute uncovered that many Americans make extraordinary payments, such as medical payments. How do households manage these payments? According to our data, families acquired over $900 in liquid assets before making a major medical payment. In addition, these extraordinary medical payments were more likely to occur in months when families had higher incomes and specifically during March and April – with an income increase stemming mostly from tax refunds.
Still, it takes families more than a year to recover from the impact a big medical payment has on their bottom line. This is particularly worrisome for older Americans who see the highest incidence of extraordinary payments, often while managing against a fixed income.
The key findings below and the full report underscore the critical role emergency savings play in the financial resilience of American families and the important connections between financial and physical health.
- Finding One: Expenses fluctuate by nearly $1,300 or 29% on a month-to-month basis for median-income households, or $7,391 year-to-year.
- Finding Two: Expense volatility was high across the income and age spectrum. While older families typically had less volatile incomes, they exhibited a larger range of income and expense volatility.
- Finding Three: Almost four in ten families per year—particularly middle-income and older families—made an extraordinary payment over $1,500 related to medical services, auto repair, or taxes.
- Finding Four: Extraordinary medical payments were more likely to occur in months with higher income and specifically during tax season.
- Finding Five: Prior to a major medical payment, families garnered significant liquid assets but did not recover financially within 12 months after the payment.
These findings indicate a need for products and interventions that help families manage expense volatility and increase their financial resiliency – strategies that could ultimately improve both their financial and physical wellbeing.
Diana Farrell is the founding President and Chief Executive Officer of the JPMorgan Chase Institute. Previously, Diana was the Global Head of the McKinsey Center for Government and the McKinsey Global Institute. She served in the White House as Deputy Director of the National Economic Council and Deputy Assistant to the President on Economic Policy.
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