The New York Times advises that you “Don’t Assume That You Know Your Monthly Spending and Income.” No matter your line of work, it is likely that your monthly income and spending vary more than you think. Entrepreneurs and freelancers know their income varies and are still challenged to cover expenses. However, if you are a salaried employee, you may assume you know your monthly income…but do you really? Unless you have a very detailed budget, you likely do not know how much you spend each month either.
Each month varies in length, so depending on your pay schedule, you may get paid more or less in a given month. And there are so many factors—holidays, family birthdays, car repairs— that can alter your spending from month to month.
When JPMorganChase studied how 2.5 million of its customers spent their income for three months at the end of 2014, they found lots of variation—a little less than half of these households had a 30 percent variation in how much money they took in during this time and well more than half had the same percent variation in how much they spent.
Why does this matter? It matters because “A family might find, for example, that it could not pay the mortgage in a given month even though, on average, the household’s income is enough to pay its bills.”
Liquidity may not be a word you use often but you know what it means when you have enough available funds to cover expenses. The study broke customers into five income brackets and found that “The median household in each bracket did not have enough liquidity to cover the plausible range of variation in income and spending for even a single month.” The study’s authors suggest that people have an accessible emergency fund and not assume they are taking in or spending the same amount each month.