How Much You Should Save Based On Your Income

New Study Reveals if You Are Saving Enough

How Much You Should Save Based On Your Income
October 15, 2015

There are plenty of generic suggestions about how much money you should have in a "rainy-day" fund to deal with unexpected expenses or an income loss. Typically it is around three to six months income saved in an accessible liquid form such as savings/checking accounts or money market accounts. Ignoring the question of whether most of us actually do that (Hint: The answer is no), does that generic standard really apply to all income classes?

The JPMorgan Chase Institute looked at this issue differently in a recent report. They analyzed a significant sample of their account database to categorize volatility (monthly swings in income and consumption) and the correlation between income and consumption. After breaking the data up into quintiles of income levels, the Chase group calculated a one-month buffer for each quintile of income level and compared actual account balances to the recommended buffer level.

Volatility was found to be quite high. When volatility was arranged in order from the lowest (greatest negative change) up to the highest, the 25th percentile showed swings in consumption nearly steady at -25% for all income levels, and increasing slightly from 26% to 29% as income levels increased. The trends were similar yet smaller in income, with -9% to -15% representing the 25th percentile in incomes and 11% to 16% representing the 75th percentile.

In plain English, that means consumption is more volatile than income, and the amount of volatility is relatively constant across all income groups. Surprisingly, there was very slight positive correlation between changes in income and changes in spending.

The Chase report then used these volatility factors to create an overall worst-case volatility range that an average person in each income quintile should have to be considered a true one-month buffer. In other words, if in one month you get a negative change in your income equal to the 5th percentile of income change in your group and a positive consumption change that puts you in the 95th percentile of consumption in the same month (spending more with less income), do you have the account funds on hand to handle it? The report says no, but that the upper quintile is close enough that they may be able to squeeze by.

Here are the results by quintile for the amount needed, the average amount of assets in liquid form, and the shortfall for a one-month cushion. Remember that the "needed" value represents a change in both directions; so assume half that value represents both the drop in income and the rise in spending for that month.

  • Quintile 1 ($0-$23,300): $1,600 needed, $600 available, shortfall of $1,000.
  • Quintile 2 ($23,301-$40,500): $2,800 needed, $1,400 available, shortfall of $1,400.
  • Quintile 3 ($40,501–$63,100): $4,800 needed, $3,000 available, shortfall of $1,800.
  • Quintile 4 ($63,101-$104,500): $8,200 needed, $6,800 available, shortfall of $1,400.
  • Quintile 5 ($104,501-$153,600): $13,800 needed, $13,500 available, shortfall of $300.

The shortfalls in the first three cases are particularly troublesome since they make up a large percentage of income. Many in this position will have no choice but to fill the gap with credit, making the situation worse in future months.

Remember, this analysis covers only one bad month. What happens if you have two in a row, or more? Turn that unpleasant thought into a positive by reviewing your habits to build up your nest egg as much as you reasonably can. Unless you are in the highest income levels, this study suggests you could benefit from a good review.

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  Conversation   |   30 Comments

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Sarah | 10.15.15 @ 16:01
This is depressing since I know where I stand...
Daniel | 10.15.15 @ 16:02
Have been using tips like these for quite a while, especially starting out seeing it outlined for you is very good
Steffanie | 10.15.15 @ 16:02
Saving has always been a struggle for us.
Erin | 10.15.15 @ 16:02
This is a great breakdown of the reports. Thanks for making it easy to understand.
Elaine | 10.15.15 @ 16:02
I always try to save but it never seems to work out.
Carla | 10.15.15 @ 16:03
This is interesting but kind of scary to see how behind we are due to medical bills.
Sara | 10.15.15 @ 16:03
Sadly we are not able to save what we need to most of the time. But this is good information none the less.
Nancy | 10.15.15 @ 16:04
I had several months for my rainy day fund. Unfortunately, my rainy days lasted almost 4 years. Lesson is that you just never know what the future holds. Be prepared as much as you can.
Beverly | 10.15.15 @ 16:04
It seems most people don't have the means to even save anything so they have a buffer. It does seem that most people prefer to live the life they want rather than live the life they can afford. Everything, including credit, is so easy to get and people forget you have to pay for it at some time.
Britt | 10.15.15 @ 16:05
I try to save at least $100 a month if i can.
Amanda | 10.15.15 @ 16:05
Thanks for the breakdown and easy to understand list. Nice information to get you started. I know I need to do better with savings.
Bobbie | 10.15.15 @ 16:06
Looks like hubby and I are right n track!
steven | 10.15.15 @ 16:07
I think we might have to look at the tips better. I know where we stand is not so great right now and saving is hard.
Kyle | 10.15.15 @ 16:08
Great tips and information for saving.
Jonathan | 10.15.15 @ 16:09
I can guarantee you I'm not saving anywhere near enough!
Angie | 10.15.15 @ 16:09
I have a feeling that there's a pretty significant group of people who experience the "shortfall" each month.
Kailie | 10.15.15 @ 16:10
This is actually really sad because I am no where there... but its great to have as an outline.
trish | 10.15.15 @ 16:11
I know without a doubt we are not saving enough. But hoping one day this will be more of a possibility than the challenge it is currently.
Zanna | 10.15.15 @ 16:21
I squirrel away all that I can, but the unexpected expenses seem to overwhelm us!
Wanda Langley | 10.15.15 @ 16:33
It is very hard for People to have this type of savings when they live from Pay Check to Pay Check.
Kamie | 10.15.15 @ 16:34
I do this, then something that is an emergency happens and I have to use the money.
STOKES | 10.15.15 @ 16:37
The answer: a lot more than I do.
Crystal | 10.15.15 @ 16:45
We live paycheck to paycheck. There's no room to save. It's about survival.
Leslie | 10.15.15 @ 16:53
It's great to know how much to save, but it's darn near impossible these days. It seems like every month is a bad month around here.
Christina | 10.15.15 @ 16:56
Saving was easy for us. Keeping all the rainy days from happening is the hard part.
George | 10.15.15 @ 16:59
Good information. We are working on getting our savings build up.
Clarissa | 10.15.15 @ 17:00
I struggle with saving. These are helpful, but I have more going out than in so it's hard to save.
Heather | 10.15.15 @ 17:11
It's always so hard to save when you are just struggling to make ends meet.
Debbie | 10.16.15 @ 04:13
Good information but at my wages and raising three kids without their dads support I just have none left to save.
Jane | 10.16.15 @ 23:34
This is a very confusing article to read. It would help if some examples with people were given.
$commenter.renderDisplayableName() | 11.27.20 @ 06:37