Skip to content

How Well Do Americans Balance Income and Spending?


Tuesday, November 6, 2018

American savings
Thinkstock/BrianAJackson

By YiLi Chien, Research Officer and Economist, and Qiuhan Sun, Research Associate

According to the 2016 Survey of Consumer Finances, around 55 percent of American households earned more than they spent, which indicates that they ran an income surplus. Around 30 percent of households broke even, while the rest (about 15 percent) ran an income deficit, where income is less than spending.

Permanent Income Hypothesis

A simple economic theory such as the permanent income hypothesis suggests that some households borrow to improve welfare.

Consider a typical household wage income stream over the course of its life. Its wage income starts relatively low while young, peaks at middle age and drops to zero after retirement. According to the consumption smoothing theory: The consumption smoothing theory suggests that individuals seek to have a stable path of consumption throughout their life.

  • Young households should borrow to support a higher level of consumption.
  • At middle age, they should clear out their debt and save for retirement.
  • In retirement, they should spend down what they have saved.

As a result, it is natural to see that some households, especially young ones, would run an income deficit and borrow. However, this conventional thinking on the borrowing and saving pattern is not consistent with the data.

Household Income Surpluses by Age

We found that the percentage of households running an income surplus or deficit (income larger or less than spending, respectively) was almost constant across age groups. We see from the figure below that the youngest age group (age 20 to 35) had the highest percentage of households that run income surpluses.

income spending by age

In fact, the percentage of households running an income surplus gradually declined with age, while the percentage of households that broke even gradually increased with age. This is the opposite of what we would expect to happen. Obviously, the permanent income hypothesis without any modification (such as a borrowing constraint) does not describe the data well.    

Household Income Surpluses by Income

What, then, explains the pattern of income surplus or deficit observed in the data? Intuitively, low-income households are less likely to save than high-income households. The figure below confirms this intuition.

spending by income

We divided the households by their income quartile and found that the percentage of households running an income surplus increased in step with the level of household income while the percentage of households running income deficits decreased with the level of household income.

Among households in the highest income quartile (annual income greater than $98,000), 74 percent ran an income surplus and only 8 percent ran a deficit. In contrast, only 34 percent of households in the lowest income quartile (income less than $27,000) were able to save.

In short, 55 percent of American households saved, and another 30 percent of households broke even in their income and spending. The remaining 15 percent of households ran an income deficit and had to borrow. We also found that households that did not save were more likely to be low-income households and, hence, could not afford to save.  

Notes and References

1 The consumption smoothing theory suggests that individuals seek to have a stable path of consumption throughout their life.

Additional Resources


Posted In Financial  |  Tagged yili chienqiuhan sunsurvey of consumer financessavingincomespending
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.