The Liquid Hand-to-Mouth: Evidence from Personal Finance Management Software

Abstract

We use a very accurate panel of all individual spending, income, balances, and credit limits from a financial aggregation app, and we document significant spending responses to the arrival of both regular and irregular income. These payday responses are clean, robust, and homogeneous for all income and spending categories throughout the income distribution. Spending responses to income are typically explained by households' capital structures. Households that hold little or no liquid wealth have to consume hand-to-mouth. However, we find that few individuals hold little or no liquidity, and we report that liquidity holdings are much larger than predicted by state-of-the-art models that explain spending responses with liquidity constraints due to illiquid savings. Given that present liquidity constraints do not bind, we analyze whether individuals hold liquidity cushions to cope with future liquidity constraints. To that end, we analyze cash-holding responses to income payments inspired by the corporate finance literature. However, we find that individuals' cash responses are consistent with standard models without illiquid savings, and neither present nor future liquidity constraints being frequently binding. Because these models are inconsistent with payday responses, we feel that the evidence therefore suggest the existence of "liquid hand-to-mouth" households that spend heuristically.

Perceived Precautionary Savings Motives: Evidence from FinTech

“…If the users who react the most to overdraft activation were present-biased, they would have consumed out of their higher deposits even before activating the overdraft facility, which is not true in the data. Our results are closer to Olafsson and Pagel (2018), who document that users of a FinTech app that hold wealth in deposit accounts and use overdraft facilities at the same time increase consumption spending on paydays. In our setting, we show that individuals with the highest ratio of deposits to income react the most in terms of spending once they activate the overdraft facility, whereas in Olafsson and Pagel (2018) individuals with lower amounts of deposits spend more in response to income payments.…”

How Do Individuals Repay Their Debt? The Balance-Matching Heuristic

“…In contrast, in online experiments, Taubinsky and Rees-Jones (2018) find sharp evidence that attention to taxes is increasing in tax rates, supporting 9 The one exception is the 1 / N heuristic, which captures some behavior exactly, and has a comparable goodness-of-fit with the root mean square error metric. 10 Our paper is more broadly related to a literature that examines how credit card utilization responds to changes in contract terms and shocks to income (e.g., Gross and Souleles 2002, Agarwal et al 2018, Olafsson and Pagel 2018. these models.…”

Coming in at a Trickle: The Optimal Frequency of Public Benefit Payments

“…We found that expenditures increase by roughly 10% for all goods or all raw foods expenditures upon payment receipt. In the payday liquidity model, this corresponds to a value of x = 0.1, which is one-third the estimate of x = 0.3 obtained by Olafsson & Pagel (2019) in their study of total expenditures on consumption and non-consumption goods. The estimates are consistent to the extent that grocery store items are less likely than other non-grocery categories of expenditures to be classified by consumers as splurge goods.…”

“…We adopt the following modified version of the regression used in Olafsson & Pagel (2019) to estimate the effects of pension receipt on expenditures:…”