Here's How Much Money You Should Save Based On Your Income

Spoiler: you probably don't have enough

Photographer: Jill Battaglia

If the threats of random car repairs, reduced work hours or an emergency hospital visit keep you up at night wondering how you'd make ends meet, you're probably not alone. Americans across the income scale don't have enough saved to weather earnings and spending shocks, according to a new report from JPMorgan Chase & Co.

Except for the richest, households in every other income quintile lack the liquid assets needed to cover just one month's worth of swings in earnings or spending, according to data from the bank and the Survey of Consumer Finances. Liquid assets include things such as cash or money market deposit accounts that can be accessed at little to no cost.

The poorest families had just 37.5 percent of the $1,600 they need on hand to cover one month's volatility, according to the report. Middle-income earners, who need $4,800, held 62.5 percent. (The highest earners were within $300 of the recommended amount, so the bank deemed them close enough to cover the swings.)

Source: JPMorgan Chase & Co.

That means most families may have to take on debt or tap into illiquid assets such as a house, car or long-term bond or certificate of deposit to meet their financial obligations. That often comes at a cost -- either interest paid, or the lost opportunity of putting money to work in a market.

Part of the problem is that most households experience fairly large swings in both income and spending, the bank found using a sample of its customers. These included fluctuations like a month with five Fridays, when people were paid three times instead of two, or the holiday shopping season, where savings go to die.

The funds needed to "buffer individuals against typical volatility can represent a very large percent of average incomes, constituting liquidity levels largely unavailable to the most individuals," authors Diana Farrell and Fiona Greig wrote in the report. "Better tools to help individuals understand and better manage their bottom line amidst these financial fluctuations are needed across the income spectrum, as are measures to increase predictability in income and consumption and match income to expenditure over time."

The bank also drew one shocking conclusion. It found that there's a pretty weak correlation between income and spending. For every 1 percent increase in earnings, individuals boost their spending by just 0.1 percent. 

To get this data, the bank looked at 2.5 million of its customers who maintained an active checking account every month between October 2012 and December 2014. These people also had a monthly minimum of $500 in deposits and at least five withdrawals, in addition to an open Chase credit card during that period. From there, the bank drew a random sample of 100,000 people whose finances they analyzed.

 The bank acknowledges in the report that its population is "somewhat more affluent than the general population" for a few reasons. It doesn't capture the unbanked -- which make up roughly 8 percent of Americans and tend to be both lower-income and non-Asian minorities, the bank said. The $500 minimum-deposit rule also bars the poorest households. Chase credit card holders also have credit scores "above a certain threshold" because the bank doesn't operate in the subprime market.

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