Research from CPA Canada finds that a third of Canadian adults can’t predict their incomes month over month, whether it’s the source of the money, the amount they’ll be receiving or both.
According to “The Perils of Living Paycheque to Paycheque: The Relationship Between Income Volatility and Financial Insecurity,” those uncertain income flows “put people at greater risk of financial calamity and make it harder to effectively use common mitigating strategies like budgeting and saving,” CPA Canada says in a release.
While income insecurity has always existed, particularly in agrarian societies, the modern gig economy has led to a resurgence. The study finds that it is more difficult for people with volatile incomes to make ends meet and plan ahead than people with lower but predictable incomes. This held true after controlling for age, gender, household income and education.
CPA Canada’s report recommends that financial institutions and governments consider these connections when developing products and programs.
For instance, banks and other institutions often “strongly encourage” automated savings, bill payments and investment purchases. “For households with predictable income, these behavioural strategies are likely effective,” the report says. “But when income swings from month to month, particularly if income is already very low, then efforts to encourage or even require monthly pre-authorized payments may at least dissuade certain consumers and, at worst, might be actively harmful to a consumer’s interest.”
Instead, the report suggests, institutions could use account data to track a client’s income and spending patterns to develop ways for households to cope with monthly income volatility.
“The sole focus cannot be on overall earnings,” says Francis Fong, chief economist at CPA Canada, in a statement. “We need programs and strategies that either help people achieve a more consistent income flow or better enable them to cope with the problems and uncertainties that are associated with income volatility.”
The report also points out that the timing and variability of government benefits, such as employment insurance and provincial welfare, can create income swings. “Policy-makers should […] pay close attention to how the planned and actual timing of payments can affect household well-being,” says the report.