Households in the U.S. regularly experience unexpected negative income or expense shocks, and low- and moderate-income households experience these shocks at disproportionately high rates. Relatively little is known about the impact these shocks have on households’ subjective sense of financial well-being, and how access to different types of liquidity (e.g., liquid assets, credit cards, social resources, and income flows) can mitigate the impact of these shocks on subjective financial well-being. To address these gaps in the literature, this paper uses data from a two-wave survey administered to 3,911 low- and moderate-income tax filers in 2018. Applying a difference-in-difference analysis, we find that the experience of an income shock between survey waves was associated with a large decline in subjective financial well-being, while the experience of an expense shock was associated with a more modest decline. Relatively liquidity-constrained households tended to be more negatively impacted by shocks than their counterparts, though not all sources of liquidity were equally as effective in buffering households against shocks. The findings of this paper point to the need for policymakers and program administrators to develop tools that can facilitate access to different types of liquidity to offset different financial risks for households.
Bufe, Sam; Roll, Stephen; Skees, Stephanie; and Michal Grinstein-Weiss, “Financial Shocks and Financial Well-Being: What Builds Resiliency in Lower-Income Households?,” (October 21, 2021). Social Indicators Research.