Hand-to-Mouth households: Who are they and why?

Studying how households make consumption and saving decisions is crucial for analyzing the impacts of macroeconomic policies—such as monetary and fiscal policies—as well as their implications for aggregate welfare. Traditional consumption theory states that households adjust their expenditures in direct relation to disposable income: they increase consumption when facing unexpected income changes, in proportions defined by the marginal propensity to consume (MPC). For example, if disposable income rises by 1,000 and the MPC is 0.7, then consumption increases by 700, while the remaining 300 is allocated to saving. However, advances in macroeconomic research show that consumption decisions are more complex than this simple framework suggests.

Do all households save part of their disposable income? And do all households have full access to credit markets to smooth consumption without difficulties? The literature defines Hand-to-Mouth (HtM) individuals as those who allocate their current income entirely to consumption, meaning they neither save nor borrow. From another perspective, these households are also commonly known as rule-of-thumb consumers, who may set aside only a small, fixed proportion of their income for saving. In practice, their marginal propensity to consume (MPC) is equal to, or very close to, one. One of the main causes of HtM behavior is liquidity constraints: these households face limitations in accessing financial markets for borrowing. Moreover, they encounter high transaction costs in asset markets—not only monetary costs, but also costs in terms of financial knowledge and literacy.

An important factor influencing the proportion of households classified as Hand-to-Mouth (HtM) is financial inclusion. Evidence shows that individuals living in countries with high levels of financial access are less likely to be HtM. In contrast, higher unemployment rates and a larger informal sector are positively associated with HtM behavior. Moreover, a greater share of HtM households is typically found in economies with lower Human Development Index scores (Tran, 2025).

From a comparative perspective, the share of HtM households also varies across developed countries. Kaplan et al. (2014) report about 30% in the United States, 20% in Australia and Spain, and more than 30% in the United Kingdom and Germany. In South Korea, the figure is around 35% (Park, 2017), whereas in Japan it is only 13% (Hara et al., 2016). Similarly low proportions, close to 10%, are observed in Malta, Austria, and the Netherlands (Arroyo and Tisnés, 2024).

One might assume that only low-income households fall into the category of Hand-to-Mouth (HtM), since they lack the saving capacity to prioritize basic consumption. However, wealthy households can also belong to this category. Kaplan et al. (2014) report that more than two-thirds of American households classified as HtM are not technically poor. For instance, this may be the case for consumers who own a physical asset, such as a house, but face high financial leverage due to a mortgage. Such indebtedness limits their credit access and saving opportunities, thereby constraining their ability to smooth consumption over time.

The presence of Hand-to-Mouth (HtM) households is highly relevant because of its implications for fiscal and monetary policy. Cloyne et al. (2020) use housing tenure as a proxy for balance-sheet positions, identifying systematic patterns of consumption and saving behavior. Mortgagors, who are wealthy in the sense that they own physical assets, typically face liquidity constraints due to mortgage payments. By contrast, outright homeowners not only hold substantial physical assets but also significant financial assets. These households are able to smooth consumption over time, and empirical evidence shows no significant effects of monetary policy on their spending. Mortgagors, however, experience large increases in consumption following monetary easing. A third group, renters, generally lack both physical and financial assets. They are also affected by monetary policy, but to a lesser extent than mortgagors. This evidence aligns with the findings of Heterogeneous Agent New Keynesian (HANK) models, which emphasize that the main transmission mechanism of monetary policy operates through indirect effects—such as liquidity constraints—rather than the direct channel of intertemporal substitution (Kaplan et al., 2018).

Similar patterns emerge in the case of fiscal policy. Cloyne and Surico (2017), using UK data, show that only mortgagors significantly adjust their consumption following unexpected tax changes, while outright homeowners exhibit no response. This again underscores the central role of liquidity constraints.

Another important question that emerges is: once a household is Hand-to-Mouth (HtM), is it always HtM? Recent literature suggests that the nature of income changes plays a crucial role. Baugh et al. (2021) find that households facing liquidity constraints increase consumption when they receive expected tax refunds. However, the same individuals, in other periods, prefer to deposit these funds into liquid accounts to smooth consumption. Similarly, individuals with high liquidity levels tend to spend out of refunds, while others with high credit card debt use them to smooth repayment obligations.

These patterns cannot be fully explained by HtM behavior. Instead, they are consistent with mental accounting behavior: households categorize and treat money differently depending on its source and intended use, even though money is fungible (Thaler, 1985), (1999).

Without a doubt, the study of HtM households and their macroeconomic implications remains a growing field. At the same time, advances in sophisticated methods—such as HANK models, which capture the dispersion in household behavior—have contributed to answering many of these questions.

References