Income volatility is a term that refers to monthly and annual income dips and jumps. With the rise in the gig economy, the sine wave of volatility is even whipping down to a weekly basis.
The Problem of Income & Expense Volatility, from DailyPay Users
The JPMorgan Chase Institute recently published a report of their own customer’s income and expense volatility called Weathering Volatility. In this report, they analyzed detailed transaction information for nearly 30 million customers to determine how income and consumption fluctuate on monthly and yearly bases.
They found volatility to be much greater on a monthly basis than year-to-year, and that there was only a slight positive correlation between shifts in income and shifts in spending. This means that there were months when income dipped below financial obligations.
What’s worse is that the “typical household did not have a sufficient financial buffer to weather the degree of income and consumption volatility observed.” Sudden spikes in expenses exceeded liquid savings by $1,800 on average. The conclusion to draw from this? One of the most important financial disciplines for any individual to assume is consistently accumulating liquid savings to buffer from these unpredictable but inevitable spikes in expenses.
“Moreover, that individuals in every income quintile experience significantly more volatility in consumption than in income suggests that managing consumption shocks is critical to financial resilience.
“While some of these changes may be expected and predictable, other life events, such as sudden illness, are often unplanned and can disrupt stability, especially if the immediate cost far exceeds income.”
Less than half (47%) of respondents to The Pew Charitable Trusts’ 2015 Survey of American Family Finances said they had consistent and predictable household bills and income month to month.
Aspen Institute’s Expanding Prosperity Impact Collaborative (EPIC) is another of the very few institutions paying close attention to the growing problem of income volatility. In addition to findings that reflect those already mentioned, EPIC found that, compared with similar households with relatively stable income, lower-to-middle-income households who experience consistent income volatility,:
- Are three times as likely to report using payday loans.
- Are more likely to skip medical care, prescriptions, and mental health care.
- Are 288% more likely to skip housing payments.
- Associate recent volatility with increases in food insecurity, housing hardship, having credit cards declined, as well as a significant decrease in ability to access $2,000 in an emergency.
The Volatility Ripple Effect
There’s no reason to spell out why income and expense volatility cause financial stress. It is a major — if not the most major — reason for financial stress.
But how does this affect them as employees? And how does that affect your business? We’ve written about it before, but it bears re-emphasizing.
Pension Consultants Inc. have done a great job of distilling statistics around financial stress in the workplace. Of these findings, they include:
- Unscheduled absenteeism costs $3,600 per year for each hourly worker.
- 70% of all job absenteeism is tied to stress-related illnesses, of which one of the leading causes is financial distress.
- On average, a financially-stressed employee will spend 20 hours per month dealing with financial issues at work. The estimated cost of this lost productivity is $7,000 per year for each stressed employee.
- Fatigue-related productivity losses are estimated to cost $2,000 per employee each year.
- “Present-eeism”, where a worker is physically present but mentally absent due to distractions about financial concerns or loss of sleep from worrying, steals away six hours of productivity per month per employee.
- 40% of all workplace turnover is due to stress, and the cost of replacing those employees is at least $3,500 each.
From the above statistics (plus others that we left out so as not to overwhelm our readers) Pension Consultants Inc. predicts that, for a company with 1,000 employees, workforce stress costs $5,665,500 per year.
How DailyPay Solves the Ripple Effects of Income Volatility
DailyPay’s commitment is to give your employees their first steps to financial stability. We’re constantly working on new, intuitive ways to deliver on our mission. But we believe our core product offering to be the most potent way to smooth income volatility for employees who don’t yet have the savings buffer necessary to weather any storm.
By offering the ability to withdraw earned but unpaid wages at any point during the pay period, DailyPay gives people a lifeline to settle the smaller weekly and monthly shortfalls. It’s these shortfalls, though, that prevent people from saving more so they can withstand larger instances of volatility.
The average American pays $1,000 per year in overdraft and late bill pay fees. If they have the flexibility to get the money they’re owed when they need it, rather than when it’s most convenient for their employer, that’s how much they could stand to gain per year.
For instance, according to the Consumer Financial Protection Bureau, people tend to incur a median overdraft fee of $34 on debit card transactions of $24 or less, but deposit money to cover the charge within three days. That’s the equivalent of taking out a loan with a 17,000% APR.
That doesn’t sound like a big deal if it happens every once in a while. But only 8% of customers at the nation's largest banks incur nearly 75% of all overdraft fees, according to the same study. To put that in context, the nation’s largest banks raked in $34.4 billion in 2017 with overdraft fees alone.
It’s no surprise that lower-income Americans pay three times as much for a checking account due to the array of fees that are forced upon them.
In 2017, underserved consumers spent $173.2 billion on fees and interest across five financial product categories (Center for Financial Services Innovation).
Big banks and alternative financial institutions — like payday lenders — make some of their biggest profit gains when people are already suffering from income and/or expense volatility. DailyPay is out to stop that.
And recently we’ve gone one step further by letting employees allocate money to go directly into their savings account. This is money that they will never see in their DailyPay Available Balance for early withdrawal. Instead, it’ll be where it needs to be when the waters get rougher than a single pay period can help with. With DailyPay, the effects of weekly, monthly, and annual volatility can all be effectively buffered.
Additional Reading: HOW FINANCIAL WELLNESS IMPROVES EMPLOYEE ENGAGEMENT