(Bloomberg) — Here’s a question, as Congress thrashes out the health care bill: How well prepared are you, or your clients, for a sudden spike in expenses from a medical emergency? Or, for that matter, for a lost job or surprise tax bill?
When your cash flow is strong, it’s easy to skate along without paying much attention to how your monthly income and spending bounce around. As long as the checking account looks good, you’re good—until you’re not, because an unexpected expense or drop in income, perhaps at the same time, makes what seemed a perfectly fine cash cushion look alarmingly thin.
It happens to all of us, even those making six-figure incomes, according to a new report from the JPMorgan Chase Institute, a think tank the bank launched in 2015 to do deep-dive economic analysis drawing on its proprietary customer transaction database.
The database shows about a 30 percent median fluctuation in levels of both family income and spending from month to month across income brackets. That determined the amount of cash a household would need to weather typical swings in income and spending.
The greatest amount turned out to be a $5,300 monthly variation, for households of people between the ages of 35 and 54 with household income above $104,600. The $5,300 is the cash that household would need to have on hand if its income declined by 30 percent and its spending increased by 30 percent in the same month.
Most of the volatility in take-home pay (86 percent) is tied to fluctuation in paycheck amounts and how many paychecks come in a month—anyone paid weekly or biweekly on Fridays gets an extra paycheck in some months of the year. The other 14 percent is tied to job loss.
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Health care, auto expenses, and taxes were often behind the spikes the analysts found in spending data. The report notes that “four in 10 families make an extraordinary payment of roughly $1,500 related to medical services, auto repair, or taxes in a given year.” The money for that may come from tax refunds: The think tank found that April is when medical bills were paid most frequently.
Even the highest-income household studies would have a hard time covering unusually bad financial hits with the liquid assets on hand. (Image: Thinkstock)
To judge whether the various households had the liquid assets to cover their fluctuations, the think tank used data from the U.S. census (which don’t match up perfectly with its own age and income ranges). One conclusion: The $5,300 wouldn’t be a big issue for the households with income above $104,600.