A six-figure income may not shield consumers from a shock

(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)

Liquid assets

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.

The institute also measured for an even worse storm, to see if households had liquid assets to meet the challenges posed by the 90 percentile of "adverse income and spending fluctuations" measured. The high-earning households could meet that demand, too, but they'd be covering that extreme exposure by a thin margin. The cash cushion needed was $13,800; the liquid assets on hand, $13,500.

That $13,800 is what a relatively well-heeled Chase client would need if he or she got hit with a double whammy in one month, with income going down as expenses rise. The institute measured that after finding that within a given month, there was very little correlation between income and spending. So the chances of income going down while spending went up became part of the "stress test" the institute ran on household finances.

"A big gap exists between the volatility almost all Americans are exposed to across four of five income quintiles in our database and the liquid financial buffer they have," said Diana Farrell, the institute's president.

The picture isn't as grim for everyday volatility, but many consumers barely have enough to make it through those less-severe swings in their finances. In a test of the higher end of volatility that the think tank sees in Chase's consumer database, the median household had to come up with $4,800 but had only $3,000 in liquid assets. At the more typical level of volatility, a household of people between 45 and 54 needed $3,200.

Paying big medical bills had a lasting impact on financial stability. Many families have to turn to credit card debt to cover big medical payments. "A year after the extraordinary medical payment families still have 9 percent more revolving credit card debt and 2 percent lower cash reserves than baseline levels," according to the report.

That shows how intertwined physical health can be with financial health and the stark trade-offs many American families face today.

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