People who believe that individuals who spend a lot of money are wealthy, spend more of their own income, save less and are, on average, more financially vulnerable, says new research from the London School of Economics and Political Science (LSE).
For the paper, published in the Journal of Consumer Research, researchers looked at over two million transaction records from the bank accounts of over 2,000 users of a money management app. They measured users' beliefs about spending and paired those responses with their account data.
They found that respondents who strongly believed that big spenders were wealthy spent nearly 13 per cent more on lavish items, such as jewellery and flights, than those who did not believe that high spenders are necessarily wealthy. This equated to spending £296 more on lavish goods and services each year.
People who had stronger beliefs that the wealthy spend a lot, also had on average £1500 less in savings.
About a third of respondents, who were in the US and UK, agreed that those who spent more were likely to be wealthy, while two-thirds were inclined to disagree.
Dr Heather Kappes, Assistant Professor of Marketing at LSE and co-author of the paper, said: "While these may not seem like large amounts of money, for some people spending in this way contributes to them being financially vulnerable when emergency expenses crop up. This can be stressful and negatively impact mental health.”
The paper also details how the researchers were able to influence people’s beliefs about spending and wealth by showing participants one of two persuasive newspaper articles. One was headlined, “Big spenders often less wealthy” and the other “Big spenders often more wealthy”.
Participants then completed a task, which involved dividing an unexpected $20,000 windfall between seven categories. These were: buy things I want or need; give to charity or church organisations; give or lend to friends or relatives; travel; pay off debts; invest or put in savings; other.
The researchers found that participants who had read the article which said that spending doesn’t necessarily imply wealth intended to spend 6.5 per cent more of their windfall on of paying off debt, saving, and investing than those who had read the opposite.
The size of the effect of reading the article was such that roughly 18 people would need to be given such an intervention in order to help move one person – who had enough income to permit saving – out of financial vulnerability.
Dr Kappes said: “It goes without saying, that many people who are facing financial difficulty have an income problem, not a spending problem. But before the COVID crisis, half or more of households were unable to fund emergency expenses without seeking high-cost credit, and this included a lot of households with high incomes. So given the magnitude of the financial challenges facing the US, UK and similar countries, even small improvements in our understanding of how we might help some people who spend beyond their means are important.”
The research also found that people who believe that ‘spending implies wealth’ focus on the ability to spend while people who do not believe spending implies wealth focus on the effects of spending.
Dr Kappes said: “We haven’t tested this idea yet, but the results with adults suggest that to help our children have a healthier relationship with money, it may be better for them to hear messages such as ‘if we buy those sweets we won’t have money left for the toy you wanted’ rather than ‘we can’t afford that, we’re not rich.
“It’s likely that our decisions about consumption as adults have been affected by hearing these kind of things, as well as through observing our family and community’s spending habits.”
The researchers also note that: “Given that status hierarchies are one of the most universal constants across cultures, changing ideas about how the wealthy act may be a more fruitful intervention than trying directly to decrease the desire for public status symbols.”
They point to both to Japan, where the wealthy do not spend lavishly, and the ‘Financial Independence, Retire Early’ (FIRE) movement. The paper explains that, “Adherents to [the FIRE] community use frugality and extreme savings to retire decades earlier than the norm. In doing so, these individuals interpret low spending as building wealth, with wealth representing freedom in how to spend time, rather than the accumulation of possessions or experiences. This interpretation allows for minimizing spending to be a status symbol in this group.”