May 12, 2017

Economics ›

How Fluctuations in Income Can Affect Your Personal Financial Well-Being: A Review of Research by The Pew Charitable Trusts

We know that hard financial times and issues like credit card debt can add stress to our lives. Now, new research shows that even good times may be stressful for people--especially if our financial situation changes from year-to-year. Two reports recently published by the Pew Charitable Trusts highlight this issue.

Higher income = more financial security

The Pew Charitable Trusts’ research brief, How Income Volatility Interacts With American Families’ Financial Security and survey-report, Survey of American Family Finances provide insights into how financial changes can create stress in our lives, and what we can do to reduce the negative impact of financial ups and downs.

The report noted:

  • Many Americans experience significant financial changes every year. The study found that 34% of American households had a major financial change between 2014 and 2015.
  • Financial changes can happen to anyone. The study indicated that people of all incomes and backgrounds from all over the country are likely to feel financial changes--both upward and downward. It turns out that being rich might be fun, but figuring out how to become rich can be stressful.
  • While anyone can experience financial changes, those with lower incomes experienced the most changes. The study found that people making $25,000 or less experienced more financial change than most.  Those making $25,000 or less were also more likely to see an increase in income, rather than a decline.
  • Variations in income can be significant from one year to the next. In the study, households that lost income saw typical declines of 49% Those that increased their incomes typically saw growth of 56%.
  • Change can be difficult. The study found that people with incomes going down and those with incomes going up both felt stress over their personal finances. The study suggests that those with stable, predictable incomes, year after year, feel less stress about their financial lives than others. The study also reported that those with stable incomes tended to have more savings.

worried about money

Given that income changes can be so stressful, here’s a few things you can do to help avoid or reduce the stress of financial ups and downs:

  • The Pew study notes that using financial technology (FinTech) can help people cope with volatility in their finances, making saving and managing money easier and even fun. From the desktop to your palm, using applications that help you keep track of your money can be a fairly simple way to reduce financial stress.
  • Expanding your personal financial literacy is always a good option. Training on managing credit card debt, saving for a home, or how to prepare taxes can all help you take charge of your money. Knowledge is power, and it can give you a sense of control over your financial situation.
  • Consider starting a small business venture, or maybe two. By creating new income streams, you can have more financial predictability in your life and reduce your financial worries. You might figure out how to become rich, and you don’t even need to quit your day job in the meantime.
  • You can acquire new skills, licenses or certifications. Maybe there is a talent you have that you would like to capitalize on, or a hobby that you could turn into a side career. By acquiring the ability to draw income from more than one work source, you can create a more pleasant and less stressful financial life.
  • Recognize that income changes can often be out of your immediate control. Even if things look tough right now, try to keep a long-term perspective in mind. You will be able to make adjustments today that will make your financial life better and less stressful in the years to come.

We at want to help you acquire the knowledge to make your financial life the best it can be. Check out our other articles and research as well as financial calculators and our full catalog of financial books. Your mission to succeed is our mission too.

John Florio, MBA