Understanding financial volatility

Our entire financial system is built around the idea of regularity. Monthly regular incomes are expected to pay regular monthly bills and fund regular deductions. The assumption of a steady earning rhythm forms the basis of regular monthly assessments and monthly views of affordability. But for millions of low and moderate income households, irregular pay is the norm. And that number is growing.

The challenges for those facing this new normal are acute, and don’t just emerge on a monthly basis. Volatility takes many shapes and there are many drivers of variable pay, but overall we estimate that income volatility impacts more than 25 million people on low and moderate incomes in the UK. According to research from the Resolution Foundation, four out of five low income earners in the UK have volatile pay, and so do two thirds of those on more moderate incomes. People’s experiences of volatility are a result of a wide range of circumstances, and reflect work and life contexts that can be found in all parts of the economy. These range from zero-hours contracts and self employment to weekly pay, variable pay rates at different times, changing shift patterns, as well as multiple jobs, job changes, time out of work and the interaction of earnings and benefits.

So while variable and unpredictable pay is incredibly common, the financial products, services and policies that are part of our daily lives, will often assume that people have a regular, salaried income. Engaging with a system that fundamentally misunderstands their circumstances is a source of many of the challenges people face. A clear understanding of volatility is therefore crucial. For those on low incomes, it makes the already challenging task of making ends meet even more fraught and burdensome. And for those on moderate incomes, volatility introduces an instability and insecurity that is deceptively difficult to earn your way out of.

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Real Accounts Impact Briefs

Real Accounts in the news

Listen to our Head of Research, Sope Otulana, on Radio 4’s Today Programme, where she speaks about the impact of income volatility on low and middle income households.

Our research

Research objectives

This research aims to answer the following questions:

What kinds of income volatility do low to moderate income (LMI) households experience from pay-period to pay-period?
What kinds of expense volatility do LMI households experience from pay-period to pay-period?
What financial strategies do households use to manage this volatility, for example saving, formal or informal borrowing, or reducing consumption?
What products or services might be most useful to these households in supporting them to manage this volatility and maintain or build financial resilience and wellbeing over time?
How might policy interventions in areas such as pensions, savings and insurance be best aligned with the lived experience of financial volatility in LMI households?

Research methodology

This project used a mixed-method ethnographic and quantitative primary research approach modelled on other financial diaries work, such as the US Financial Diaries, Living on Little, Portfolios of the Poor, Canada Financial Diaries, the FinWell London diaries and Glasgow Diaries.

Financial diaries work allows the tracking of income and expenditure over time – capturing the day-to-day and week-by-week ups and downs and financial strategies that are missed by annual survey data.

The research followed the financial lives of 51 low to moderate income (LMI) UK households in depth for 3-10 months*.

Households were assigned a named lead researcher, who conducted in-depth interviews with financial decision-makers in the household on a monthly basis, exploring their experience of money-management, income and expense volatility, access to financial products and services and the implications of these for their overall financial wellbeing and ability to save for both the short- and long-term.

In addition, participants were asked to sign up to a financial data collection platform and to link their financial products to that platform, including banking, saving, borrowing, and investment products. The platform captured data on their income and outgoings to enable quantitative analysis of trends in the financial experience of the households, both at an individual level, across sub-groups of the sample with shared characteristics and at the total sample level. This data collection was supplemented with manual data entry to log any transactions not captured automatically, for example cash and in-kind transactions.

*51 households for 3-10 months (33 for 9-10 months, 11 for 6 months, 7 for 3-4. months)

About the programme

A long-term study of UK households’ financial lives

In spring 2023, Nest Insight, the Centre for Personal Financial Wellbeing at Aston University, and the Yunus Centre for Social Business and Health at Glasgow Caledonian University launched the Real Accounts project. Believed to be the first study of its kind in the UK, this new research programme builds an in-depth understanding of the lived experience of financial uncertainty among low to moderate income (LMI) households across the country.

In contrast with the snap-shot data achieved by annual surveys, this long-term study provides a fully joined-up view of household finances, capturing the day-to-day, week-to-week ups and downs, and working with households to understand the situations they face and the strategies they use to manage their money. The project used a research data collection app, custom designed by Moneyhub, to capture real-time income and expenditure transaction data over 3-10 months for a sample of 51 LMI households, combined with monthly qualitative interviewing. We are in the process of publishing the findings widely and freely to help inform policy and market innovation and debate.

This project was supported by the Aviva Foundation, as part of its focus on helping people and communities feel in control and positive about their financial futures, and by Fair4All Finance, serving their mission to transform the system so that everyone has access to the right products and services, whenever they need them.

If you’d like to find out more about how your organisation can get involved, please contact Sope Otulana, Head of Research: sope.otulana@nestcorporation.org.uk

About our programme partners

The Aviva Foundation aims to help people and communities feel in control and positive about their financial futures. Millions in the UK are struggling and worried about money. The cost-of-living crisis has only added to the stress for those already living on an economic knife-edge. The Foundation funds organisations working on new ways to help people prevent and prepare for financial challenges, or deal with and recover from financial setbacks. Its ambition is to tackle difficult problems in new ways. The Foundation gives organisations the support and stability they need so they can use their expertise to innovate and transform the lives of those who need it the most. For more information, visit: aviva.com/sustainability/aviva-foundation/

Fair4All Finance is a non-profit working to make the financial services system fairer for everyone. They exist to transform the system so that everyone has access to the right products and services, whenever they need them. Their funding comes from the Dormant Assets Scheme which makes it possible for money from forgotten bank accounts to be used to help good causes. For more information, visit: fair4allfinance.org.uk/about-us/

About our research and delivery partners

The Centre for Personal Financial Wellbeing at Aston University is an interdisciplinary, academic, research centre that seeks to get to the heart of the causes and consequences of personal and household financial insecurity. It focuses on providing accessible and timely insights to support a wide range of leaders and decision makers including those in the financial service industry, third sector organisations, academics as well as the general public. For more information, visit: aston.ac.uk/cpfw

Glasgow Caledonian University (GCU) is working, through research and education, on shaping society, influencing governments and transforming people’s lives around the world. GCU is delivering world-leading research with outstanding impact, as evidenced by the results from the latest UK Research Excellence Framework in which 91% of their health research was formally classified as world-leading or internationally excellent, and more than 80% as outstanding for its impact, a result surpassed by only one other university in the UK. The Yunus Centre for Social Business and Health, where the GCU members of the Real Accounts research team are based, conducts world-leading research to conceptualise and evidence ways that lives of individuals and communities can be improved through a better understanding of various community-based and health-focused initiatives. Since 2014, the Centre conducts financial diaries research in the UK through their FinWell programme of work supported by prestigious funders (Chief Scientist Office, Economic and Social Research Council, and Guy’s and Saint Thomas’ Charity), experienced collaborators and extended policy networks. The research team now also includes GCU’s WiSE Centre for Economic Justice, experienced on gendered intrahousehold financial management. For more information, visit: gcu.ac.uk

Moneyhub works with clients to improve the financial wellness of people. Hundreds of companies use its award winning Open Banking and Open Finance technology to understand their customers better through data. With Moneyhub, businesses can deliver more suitable products,comply with Consumer Duty, and automate money management or payments to increase consumers’ capacity to spend, save or invest more. To give the gift of financial wellness, and reap the rewards, visit www.moneyhub.com.