Balancing Points: the financial system needs to adapt to the flexibility needed by the millions of people on volatile incomes

Read Impact brief 2: Balancing Points – the struggle for stability (PDF)

The latest set of findings emerging from our Real Accounts research have revealed a rich and startling picture of how people on volatile incomes are managing their finances. 

Many people in the UK – we estimate more than 25 million – live on incomes which vary from week to week or month to month. This volatility compounds the challenges of having a low or moderate income: it’s a hidden vulnerability which is too often under-recognised.  The challenges of a volatile income affect financial wellbeing and prevent people from putting aside savings, both for emergencies in the present and a pension in later life. It’s also, as we’ve been hearing in our investigations, something which creates a time-consuming mental load and requires ingenuity to manage – largely because it isn’t understood in enough depth by those designing financial products and policies. 

This is an issue which hasn’t had enough attention until now, and we want to change that.  Real Accounts is a long-term study with households around the UK, gathering first-hand stories and real-time digital transaction data to build an in-depth, in-the-moment understanding of the strategies and behaviours that households are deploying to manage money. 

Along with our research partners from Glasgow Caledonian University and Aston University, and with a digital research tool powered by MoneyHub, we’re hearing startling accounts of stress, constant proactivity and sheer ingenuity from people simply managing their money day-to-day. The households we’ve been speaking to are constantly juggling: for example, moving money between accounts in ad hoc pots, prioritising bills and borrowing informally from friends and relatives to cover gaps, avoiding direct debits and manually paying every bill, or choosing a lower income in exchange for less income volatility. 

Take Becky, one of the people participating in the research. Despite being a rigorous planner and manager, she experienced several financial shocks over a six-month period. Her child started at a new school and needed new uniform. She was offered a bigger flat, but had to move within five days – triggering extra unexpected expenses. This need to move quickly affected the savings she’d been trying to put away for rent. The move also created uncertainty about her rent and how much Universal Credit would contribute. By the time the rent and Universal Credit issue was resolved, Becky had fallen £800 into arrears, forcing her to sacrifice council tax and hope her local authority would spread the payments.   

To manage this volatility, Becky had already asked for her Universal Credit to be paid twice rather than once a month. And we saw her making dozens of small transfers between different savings accounts to ‘hold it’ and ‘not easily spend it’ – but this created a huge burden of attention and mental load, without resulting in her building up a savings pot that could help her deal with emergencies. Her story demonstrates the negative impact when people have to constantly make decisions and do mental accounting, without being able to make progress or move beyond pinch points. 

Ahmed, another of our research subjects, is a further example of someone seeking stability in spite of the system, caught in a constant balancing act. In his mid-20s, he is the designated money manager in an inter-generational household with several sources of variable pay. His relatives transfer money to him to ‘look after’, then ask him to withdraw it when needed – he’s like the family bank. Ahmed told us how he’s developed a strict routine for himself, never leaving more than £60 in his current account. When he goes over that amount, he transfers money into a separate savings account, and then back when needed. This requires constant vigilance, and makes it impossible for him to accumulate longer term savings. Over six months, he transferred more than £20,000 into his savings account, but wasn’t able to keep it there due to the small emergencies and unexpected expenses that are a part of his household’s everyday life. 

The people participating in our study don’t lack ingenuity, financial literacy or the habit of saving. But the financial products available to them aren’t giving them the right mix of flexibility, accessibility and ‘locking away’ savings that they need. An opt-out approach to savings via payroll by employers, which our trials have shown to significantly boost the number of people building up savings, could also be part of the answer. 

The millions of households on volatile incomes need support in the form of trustworthy and flexible solutions that are useable and relevant for them, and which enable them to build long- and short-term savings without a constant mental load. Volatility creates a mentally exhausting focus on today – and makes planning for tomorrow even more difficult. As our research continues, we hope we’ll gain an understanding that will help our financial system better fit all of our varied and volatile lives. 

Sope Otulana, Head of Research at Nest Insight