Arguably starting with Mint.com in 2006, regular people, the kind who don’t have the time or desire to log each and every expense into a complex Excel spreadsheet, got a way to see where their money was really going. This was a huge step. Suddenly people could take control, make a choice to change course if they found their spending didn’t reflect what was important to them or if they wanted to save for retirement, a house or a vacation.
But for millions of people these apps had a fatal flaw. Whether the platform ultimately asked you to meticulously categorize each expense or took a calendar based approach, they all started with the same question: How much money do you make each month? According to the Federal Reserve, for 31% of Americans the answer to that question is: I don’t know. Or, it depends. In short, the creators of these tools — typically smart young people, who graduated from top schools – assumed income is constant. It’s not.
“This is a growing trend,” observes Rachel Schneider, senior vice president at the Center for Financial Services Innovation (CFSI) which works with policymakers and product designers to help the financially under-served. “This is the result of an increase in part time labor, the growth in contract labor, the growth in the number of jobs that people have over their lifetime which means any give job is lasting a shorter amount of time so there are moments of not working interspersed with working. This is cyclical. This is the nature of our economy today.”
This can be true for the fast food worker who does not know how many shifts he’ll be able to pick up. It can be the Uber driver whose income depends upon demand. Or it can be the small business owner who pays herself only what’s left. Whatever the reason, from week-to-week, month-to-month and even year-to-year these people often can’t be sure how much money will come into their bank accounts.
Luckily as personal financial management tools mature several upstarts are taking a stab at solving this problem.
The most recent poke comes from Level Money, which last week released an update meant to take some of the mathematical and psychological friction out of managing irregular income. After you create a Level account (or when existing users login for the first time since the update) and link your bank accounts the app still prompts you to mark you recurring sources of income. The first change is that it then allows you to select the frequency of that income: is it yearly income, are you paid every three months, weekly? If your paychecks are choppy you can tell Level to predict your monthly income, which takes into account seasonal variations. Monthly spending suggestions adjust accordingly. You also have an I-don’t-know option, which tells the app to set aside the most recent amount each month.
The core feature of the app remains a page called “Spendable” which tells you how much you have left to spend this day, this week and this month. This looks the same as before the update but the algorithms operating behind the scenes should be able to predict and model for more complex scenarios.
Expecting a tax refund in April? Level can divide that windfall across multiple months so you can resist the urge spend it all at once. Roommate sent you his portion of the rent via Venmo? Level will automatically link the debit card charge with the Venmo credits.
“Level has been designed to help simplify the way we make financial decisions. We want to make it so it is easier to spend smarter and save more,” says Jake Fuentes, a Stanford grad who started Level in 2013 after over drafting his bank account despite a steady income. “That job is difficult even if you have regular, reoccurring expenses that are fairly predictable in nature. Unfortunately that is not real life for a lot of people.”
Fuentes decided to tackle the irregularity issue after hearing from users that app wasn’t meeting all of their needs. Sure, Level was pretty but it wasn’t capturing the peculiarities in their individual financial situations. “Everybody thinks that they are an edge case,” says Fuentes. “That they are unusual. But everybody has got them. Plus the Millennial generation does not follow the same career paths that our parents did. We are Uber drivers. We are Task Rabbits. We change jobs frequently.”
Another potential solution comes from upstart Even, which has not launched publicly yet but is developing tools to help even out cash flow. For $3 a month Even calculates an hourly worker’s average pay, saves money when she makes more than her monthly average and pulls funds from savings when she make less. If she doesn’t have enough saved Even will provide an interest free advance to be paid back the next time her income is high. In a story that appeared in April, New York Timescolumnist Anand Giridharas explained,
Even’s “product” is an app, still in beta testing, that smooths the irregular, up-and-down paychecks of hourly workers into the steady flow of a simulated salary. On good weeks, when users outearn their Even salary, the company banks the surplus into a separate, Even-managed savings account. On bad weeks, when users fall short, they still get their salary, thanks to past surpluses or to interest-free credit from Even. The app won’t do anything for the 25 million Americans who, according to the Federal Deposit Insurance Corporation, have no bank account, nor will it help any of the many Americans who are simply too broke to get by even in the good weeks. Yet the Even founders have become something rare: innovators for the less fortunate in a Bay Area technology scene full of people who variously ignore America’s historic level of inequality, worsen it with their real estate purchases or “leverage” it when they realize that the losers of the new world order they’re building can at least be their Uber drivers, Instacart grocery deliverers and Homejoy toilet scrubbers.”
Recently CFSI partnered with JPMorgan Chase JPM +0.16% to launch the Financial Solutions Lab, the initiative aims to find innovations that can help solve financial problems average Americans are facing. Even was among the nine winning companies announced last week from the lab’s inaugural competition to find the startups solving a specific issue. This year’s problem? Irregular income. Other winners included automated savings tool Digit, reputation based borrowing platform Puddle and bill management app Prism.
“It is actually exactly the kind of problem we are capable of solving today or in the next few years, relative to what we could have come up with 10 or 15 years ago,” says Schneider. “This is probably appropriate. A lot of what we are seeing is the result of technology fueled productivity gains. It is the result of companies being able to time the labor spending more specifically to their labor needs as a result of technology. Now it is time to use that same predictive analytics and data to help employees solve the challenge that creates in their financial lives.”
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