Analysis

Typical Family Income Improved in 2016—but Financial Stability Remained Elusive

New research suggests that other balance sheet factors continue to dampen economic security

The Census Bureau released the latest edition of its annual report “Income and Poverty in the United States” on Sept. 12, and the findings indicate economic improvements for the typical American family in 2016. According to the study, median real household income reached $59,039, up 3.2 percent from 2015, the second consecutive annual increase. Also for the second year in a row, the poverty rate decreased—from 13.5 percent in 2015 to 12.7 percent in 2016. But despite these encouraging signs, research from The Pew Charitable Trusts suggests that other variables, particularly income volatility and financial shocks such as unexpected expenses, mean income gains may not be enough to alleviate financial instability in many households.

First, a closer look at the census report shows that most of the improvement was confined to a relatively few locations. Gains were concentrated primarily among households in metropolitan areas with no statistically significant changes for families in other places. Moreover, those living outside of metro areas had the lowest median income in 2016. Further, Pew’s recently published infographic “Does Place Matter for Family Financial Security?” shows that in 2014, household income varied across the urban-rural continuum—from big cities to small, rural areas— and that, compared with other types of communities, metro areas had higher median incomes and greater concentrations of families with annual incomes over $85,000.

Despite these differences, the Pew study found that people across the urban-rural continuum share pessimism about economic opportunity, indicating that having higher income may not be sufficient to make people optimistic about their economic circumstances. No matter where they lived and how high their income:

  • Less than a quarter of respondents to Pew’s 2014 Survey of American Family Finances said it is common to begin poor, work hard, and become wealthy.
  • More than 90 percent of survey participants said financial stability is more important to them than upward mobility.

Additional Pew research highlights other factors that affect Americans’ balance sheets and sense of financial security. For many households, income is not predictable from one year to the next. From 2014 to 2015, more than a third (34 percent) of U.S. households experienced fluctuations of annual income of 25 percent or more. Such swings may make it challenging to plan and budget, and may have a profound effect on families’ sense of financial well-being. And this volatility, and the financial vulnerability it can create, were not confined to households at any single rung of the income ladder or education level or in a specific racial or ethnic group.

In addition to income volatility, financial shocks, such as an illness or emergency car or house repair, also play a large role in many families’ balance sheets. In 2015, about 60 percent of households had sufficient liquid savings to cover an unexpected $2,000 expense—the cost of the typical household’s most expensive shock. Not surprisingly, families with higher levels of savings in 2014 were more resilient—able to withstand an unexpected financial obstacle—than other households to financial shocks a year later. Notably, households that had income below $25,000 but at least $2,000 in liquid assets in 2014 were as financially resilient as those with middle income that had less than $2,000 in liquid savings. What is surprising, however, is that, regardless of income, about half of families with at least $2,000 in liquid savings in 2014 still struggled to make ends meet after their most expensive 2015 shocks. Specifically, the most expensive shock was destabilizing—that is, it reduced financial well-being— for 76 percent of low-income households, 60 percent of middle-income families, and 23 percent of high-income ones. Further, more than 2 in 5 households experienced financial insecurity after their most expensive shock even if they had a savings cushion.

Taking a holistic view of family balance sheets by also considering income volatility, financial shocks, and income by location makes clear that families continue to walk a financial tightrope, even as income moderately improves.

Sarah Sattelmeyer is an associate manager, Sheida Elmi is a senior associate, and Joanna Biernacka-Lievestro is a senior research associate with The Pew Charitable Trusts’ financial security and mobility project.

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