Can Savings Help Overcome Income Instability?

Read complete document: PDF

PrintPrint this page
Share on Facebook Share on Twitter Share on LinkedIn Share on Digg Share on Reddit
| Email this pageE-mail
Document date: December 01, 2010
Released online: January 24, 2011


Savings can help low-income households cope with income instability and unexpected expenses, according to new evidence presented here. For households with nonelderly heads in the lowest income quintile, modest holdings of liquid assets (amounts up to $1,999) can significantly reduce the probability of hardships with health care, housing payments, food security, utility and phone bills, and basic consumption. Programs to promote saving can help low-income households protect themselves from economic shocks, as income variability, in addition to low income, increases risk of such hardships.

The text below is an excerpt from the complete document. Read the entire brief in PDF format.


This brief explores the role that savings can play in alleviating material hardship for low-income households. We use longitudinal household data from the Survey of Income and Program Participation (SIPP) to examine whether modest liquid assets—sometimes referred to as precautionary or emergency savings, a rainy-day fund, or ready money—can protect against impending hardship for low-income households with nonelderly heads. Such households are at risk of adversity because their monthly incomes are low and highly variable. Compounding this inherent income instability is the likelihood of unanticipated spending needs.

The SIPP is well-designed for such research, as low-income households are oversampled and the members of each survey panel are followed for multiple years. Interviews are conducted at four-month intervals (or waves), and monthly household income is measured at each wave. Detailed information on liquid assets and other components of net worth is gathered approximately every year. Measures of economic well-being are also collected for each panel, indicating hardships related to health, housing, food, and other basic needs.

The analysis here focuses on the following research questions:

  • Do lower-income households experience greater relative instability in their monthly incomes than households in higher income ranges?
  • After controlling for income level, are households at greater risk of material hardship when their monthly income is more variable?
  • When low-income households are able to maintain even a small amount of liquid assets, do they experience less material hardship?

Answers to these questions have important implications for policies to encourage unrestricted savings as a way to self-insure against economic shocks. Such shocks are a major form of economic risk—arguably, the major economic risk—to households already operating just above subsistence-level income. Programs and policies to help households manage these risks need to reflect a well-informed understanding of the underlying short-term dynamics of income, assets, and material well-being.

This brief focuses on savings in the form of unrestricted liquid assets. When low- and moderate-income households have wealth, it is often in home equity, retirement savings, or other assets that cannot readily be liquidated to meet shortterm needs. Avoiding hardship, however, requires the capacity to replace a sudden income drop or cover an emergency expense without delay.

End of excerpt. The entire brief is available in PDF format.

Further Reading:

Topics/Tags: | Economy/Taxes | Families and Parenting | Poverty, Assets and Safety Net

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.

Source: The Urban Institute, © 2012 |