Can Savings Help Overcome Income Instability

This brief explores the role that savings can play in alleviating material hardship for low-income households. We use longitudinal household data from the Survey of Income and Program Participation (SIPP) to examine whether modest liquid assets—sometimes referred to as precautionary or emergency savings, a rainy-day fund, or ready money—can protect against impending hardship for low-income households with nonelderly heads. Such households are at risk of adversity because their monthly incomes are low and highly variable. Compounding this inherent income instability is the likelihood of unanticipated spending needs. The SIPP is well-designed for such research, as low-income households are oversampled and the members of each survey panel are followed for multiple years. Interviews are conducted at four-month intervals (or waves), and monthly household income is measured at each wave. Detailed information on liquid assets and other components of net worth is gathered approximately every year. Measures of economic wellbeing are also collected for each panel, indicating hardships related to health, housing, food, and other basic needs. The analysis here focuses on the following research questions: