Income Volatility and Emergency Savings Among Financially Vulnerable Entrepreneurs in the United States

Background and Objective: The COVID-19 pandemic presents an immense crisis for low-income entrepreneurs and small businesses owned by African Americans, Latino Americans, and Asian Americans. During the initial months of the pandemic, nearly 75% of businesses reported a decrease in sales or revenues due to the lockdown (Bloom et al., 2021; Fairlie, 2020). The pandemic has left many small businesses financially fragile, with three quarters of business owners having only enough cash to cover two months of operation (Bartik, Bertrand, et al., 2020). Assistance has been provided at various levels to help mitigate the impact of the pandemic (e.g., the Paycheck Protection Program and the Economic injury Disaster Loan program; Casselman, 2020; Wilson et al., 2020). A lesson learned is that it is important to support entrepreneurs, especially those who are financially vulnerable, to prepare proactively for potential economic downturns. This study aims to examine income volatility and emergency savings among financially vulnerable entrepreneurs, and explores the potential social work practice strategy for this purpose.

Methods: We use data from the 2018 National Financial Capability Study (NFCS, 2018) to describe the income volatility and emergency savings of financially vulnerable entrepreneurs. The 2018 NFCS collected household financial information from a nationally representative sample (N = 27,091) to assess American households’ financial capability. The survey includes nearly 2,980 households with entrepreneurs (identified by positive responses on the self-employment status). We focus on entrepreneurs’ experiences of income volatility (whether having a large income drop in the last 12 months) and emergency funds (whether setting aside funds to cover life expenses for 3 months and whether being able to come up with $2,000 for an unexpected need in the next month) by income, race, and education.

Results: Compared with non-entrepreneurs, entrepreneurs are about 10 percentage points more likely to report a large income drop in the previous 12 months (p<.05), 6 percentage points more likely to report having set aside emergency funds (p<.05), and 7 percentage points more likely to report being able to come up a $2,000 for an unexpected need (p<.05). However, the risk of income volatility is much higher among entrepreneurs with lower household income (<$35,000; 41%) and lower education (high school and below; 34%), as well as among those who identified themselves as non-White (36%). Entrepreneurs in those groups are also less likely to report having set aside emergency funds to cover unexpected needs, and to come up with $2,000 for unexpected needs. For financially vulnerable entrepreneurs, there are statistically negative associations between income volatility and emergency fund preparation in multivariate analyses addressing household demographic characteristics.

Conclusion and Implications: The results suggest that entrepreneurs with disadvantaged socioeconomic status are less financially prepared for the economy uncertainty but have greater risk of income volatility. Emergency funds of entrepreneurs must cover both family consumption needs and business operations. Temporary economic supports for small businesses during the COVID19-pandemic should be transformed into long-term policy mechanisms and financial guidance services for preparing entrepreneurs (especially disadvantaged ones) to build financial capability and emergency assets.