Why Financial Slack Is a Key Indicator of Financial Health
“Financial slack” means a household’s income is higher than its expenses. Having financial slack leaves unused money at the end of the month that can go to savings, investing, and reducing debt.
Households do not have slack when household income from wages, public benefits, and other sources is not enough to cover basic needs. Each month, necessary expenses are higher than the available money to pay those bills. Those basic costs include housing, food, utilities, healthcare, childcare, transportation, and debt payments on car loans, student loans, other loans or credit cards.
Increases in prices for basic needs are making it hard for SaverLife members to find financial slack. One reason for rising prices is high inflation that came out of the COVID-19 pandemic. But an even bigger challenge is long-term increases in prices for housing, healthcare, childcare, and higher education.
What Can Financial Slack Do for SaverLife Members?
From talking to our 670,000 members across the nation, we know that having slack means SaverLife members can set aside money in short-term savings. That saved money can help in future months, when expenses might exceed income. Members then have a safety cushion to protect against things like a drop in income or an expensive car repair. In time, financial slack also lets members build savings for retirement, home buying, or other long-term goals. Savings are key to pay bills on time and manage debt, which in turn boosts credit scores. In other words, financial slack is the secret ingredient for financial health.
Financial slack is the focus of one of eight questions we ask our members about their financial health, as we explained previously in the Financial Health Dashboard. Our survey question about financial slack explores how members’ total spending compares to their total income over the last 12 months. Only 26% of members said they had slack – that their income was greater than their expenses – compared to 43% of all U.S. households. Half of members spend more than their income, which makes it hard to save and increases the chances of falling into debt. The rest of the members report that they break even.
When we compare our members who have financial slack with those who do not, a clear pattern emerges, as shown in the chart above.
For all of these financial health indicators, having slack means better financial health. On average, SaverLife members with slack are 77% more likely to be financially healthy than members without slack. These findings make sense from a practical view: it is hard to save, pay bills on time, and manage debt when income does not exceed expenses.
How a Lack of Financial Slack Can Harm Financial Decisions
Lacking financial slack can also produce a negative mental effect. A key study titled “Poverty Impedes Cognitive Function” (published in the journal Science in 2013) found that having too little money makes it hard to make good financial decisions due to the mental and emotional strain of trying to prioritize spending. When people have financial slack, making financial decisions is easier.
We see this pattern among our members. As shown above, half of SaverLife members who have financial slack say they plan ahead financially, compared to just 27% of members without slack. Too often, people may think that difficulty in making good financial decisions springs from a lack of financial knowledge, but the evidence shows that a lack of slack may be the more common reason.
Does Slack Increase When Income Increases?
Yes, slack increases with higher income. Only 26% of members with income under $25,000/year have slack, but 50% of members with income of $100,000 or more have slack. The connection between financial slack and income is reflected in this chart (pictured right).
There are three important things to note about this chart:
Having higher income is not a guarantee of having slack. In fact, for 31% of members in the highest income group, monthly expenses are actually more than income.
Members in the three bottom income ranges are nearly identical. It’s not until income reaches the $75,000 to $100,000 range that we see a positive change in slack.
Not until the $100,000+ income group do we see equal numbers of members with and without slack.
The Solution: Public Policies That Increase Income AND Decrease Expenses
Public policies that increase SaverLife members’ incomes may be necessary, but on their own, they are insufficient remedies to improve financial health.
Policymakers can and should increase:
the national minimum wage,
refundable tax credits like the Child Tax Credit and the Earned Income Tax Credit
amounts that people receive in important safety net benefits like Social Security retirement and disability payments
But even these income increases may be eroded by housing, healthcare, childcare, and education costs that continue to climb, making it hard for people to experience financial slack. Therefore, policymakers should increase spending on direct subsidies such as financial assistance for rent and childcare while also considering supply-side strategies like universal childcare and increasing the supply of affordable housing units.
To help SaverLife members and millions of others like them, policymakers should focus on both sides of the ledger: income AND expenses. This will require a shift in mindset toward policymaking focused on household balance sheets instead of solely on macroeconomic indicators like Gross Domestic Product growth, the stock market, and the unemployment rate.
Stay Connected to SaverLife Research and Advocacy
SaverLife members take action to improve their financial health, but structural economic factors beyond their control also powerfully affect their individual financial journeys.That is why SaverLife pursues research and advocacy to change public policy for the benefit of our members and other low-to-middle-income households.We support policy that creates opportunities for our members to achieve their financial health goals and plan for their futures.
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