Low Income Families Spend 40% of Income on Luxury Items

Kamchowder's picture
Rank: Gorilla | 625

Just read this article about spending habits of Americans.

People who make the most money spend the biggest chunk of their incomes on luxury goods, but even the poorest households spend a significant amount on luxuries, according to an analysis released recently by Deutsche Bank Research.

To sum it up, Americans spend a lot on luxury items.

The wealthiest families (the top fifth of earners) spend around 65% of their incomes on luxury goods and 35% on necessities, according to the study, which looked at spending habits between 1984 and 2014. Middle-income households weren't far behind: They spend 50% on luxuries and 50% on necessities.

Unsurprisingly, people with disposable incomes tend to be able to afford luxury goods.

Now for the interesting fact, a significant portion of the income that low income people get is spent on luxury items.

Even the lowest-income families (the bottom fifth of earners) spend 40% on luxuries and 60% on necessities, according to the study's author, Torsten Slok, chief international economist for Deutsche Bank Securities.

Below are some figures for household incomes in America.

The bottom two fifths of earners made $47,300 or less in 2014, according the Tax Policy Center. The middle two fifths made between $47,300 and $134,300, and the top fifth made more than $134,300.

Now to define what luxury is.

It's worth noting that by the specialized nomenclature of the dismal science, even eating at McDonald's is a luxury -- that is, we do it more as our incomes rise -- while smoking and lottery-ticket buying are categorized as necessities. For its part, the Deutsche Bank report explicitly defined luxuries as goods or services consumed in greater proportions as a person's income increases and necessities as those goods or services that make up a smaller proportion of spending as a person's income increases.

Below are more interesting facts stated in the article.

While we tend to think of spending on luxuries as an indulgence driven by emotions, recent research suggests consumers' feelings play a key role in spending on necessities as well. "Consumers who experience a loss of control are more likely to buy products that are more functional in nature, such as screwdrivers and dish detergent, because these are typically associated with problem solving, which may enhance people's sense of control," the authors of an April 2017 study in the Journal of Consumer Research wrote.
Still, the richer you are, the more likely you are to overspend on unnecessary purchases with your credit card, a January 2017 NerdWallet survey found. Nearly half of Americans (49%) say their emotions have caused them to spend more than they can afford, it concluded.
Most Americans (86%) say it's OK to go into credit-card debt to pay for necessities such as emergency purchases, medical expenses and expenses related to unemployment. But about even more people (87%) said they would be embarrassed to go into debt to pay for unnecessary purchases they can't afford, nonemergency travel expenses or cash advances, NerdWallet found.
Women are more likely than men to overspend because of stress (35% vs. 24%), while men say excitement leads them to spend too much, the NerdWallet survey found.
Households at the bottom of the income ladder (less than $50,0000) are more likely to overspend because of stress than households making $100,000 or more (34% vs. 24%).

I think that it is not surprising that low income households spend a significant portion of their incomes on luxury goods, but I didn't know that it was nearly 40% of their income. In addition, considering the "fight for 15," I don't think that minimum wage earners will spend their money wisely. Instead, low income earners will spend a lot of their money on luxury goods and blame their lack of wealth on Wall Street.

What are your thoughts on the spending habits of low income people? What do you think happened to personal responsibility? Any facts that surprised you? Do you spend a lot on luxury goods?

Comments (56)

Jul 7, 2017

I dont want to sound rude but are you preparing for a interview you keep on analyzing so many articles?

...

    • 2
    • 1
Jul 7, 2017

No worries, you are not sounding rude. I try to analyze current or interesting articles that are relevant to the WSO community. When I analyze these articles, in turn, allows me to have something to talk about on a deeper level when I network.

    • 2
Jul 8, 2017

Please, if you have an inkling of care for your career and future job prospects, do not bring how irresponsible the poor are in allocating their income during any sort of interview or networking event.

    • 2
Jul 7, 2017

majority of poor people have bad habits and spend money rather than invest it.

Jul 7, 2017

Poverty is, to a large degree, a mindset. I grew up poor, worked my way through school, and now am some kind of middle class. But no matter what I say or do, my childhood friends who didn't "make it" won't do the simple things required to escape poverty. College? "Waste of time and money, I won't get a job from that." Instead they chase easy outs. "But I can make 90k if I drive the bus 80 hours per week if I can cover everyone who doesn't show up and if the union lets me and if there's enough in the city budget for it. Why would I go to school?"

    • 4
    • 4
Jul 7, 2017

Same background I come from. Started reading a lot of books when I was younger.

    • 1
Jul 7, 2017

From your experience, has growing up poor been a driving force to be successful?

    • 2
Jul 7, 2017

College is a waste of time and money if you don't major in finance or STEM or go to less than a middle-tier state school.

    • 1
    • 2
Jul 7, 2017

Do you believe that spending money is a way for poor people to mentally escape their current situation?

    • 1
Jul 7, 2017

Yes, but that's true for everyone. As Americans, we're programmed to want to spend money. Advertising, marketing, and "give me your money in exchange for x" is everywhere we go. There is a whole lot of truth behind "pay to play", too much in a sense.

Everything we do is a form of programming: spend money on a fitness hobby you afford while working an office job and you're now a yuppie and targeted by Apple, Adidas, and a select bunch of other advertisers who probably have you further into their grip than you realize. As a low-income individual, you might be in the grip of Nike, the used BMW market, Walmart, Costco, and the chicken spot (god damn do I like those hoodburgers). We're sold a vision of ourselves in America; "who we want to be" is, in society's eyes, reflected in what we buy.

    • 2
    • 1
Best Response
Jul 7, 2017

Before everyone here starts jerking each other off about how awful poor people are, let's address some things.

First of all, this - "It's worth noting that by the specialized nomenclature of the dismal science, even eating at McDonald's is a luxury -- that is, we do it more as our incomes rise -- while smoking and lottery-ticket buying are categorized as necessities." - is stupid. Having to feed your kid a garbage $1.29 cheeseburger because you can pick it up fast as you're driving your broken down car between your day job and your evening job is not a luxury, and I can't think of many things more wasteful than cigarettes and lottery tickets. The flaws in any definition of luxury, since it is entirely relative, let alone this definition, make this entire exercise nonsense.

Second, this is also basic math. If low income families buy their kid a computer for college, or an iPhone for Christmas, that $1000 computer or $500 phone is obviously a higher percentage of someone who makes $40k a year's income vs. someone that makes $400k's.

    • 15
Jul 7, 2017

I agree with you. The definition of luxury and necessity here are poorly defined. Like who the fuck considers cigarettes and lottery tickets a necessity...you can't live off of cigarettes and lottery tickets. The economist defining this stuff is an idiot.

Jul 7, 2017

You'd be surprised at how right those definitions are in an econometric sense. Do you "need" cigarettes? No, but try telling that to the people who purchase them religiously. We don't "need" computers or smartphones either, but would you go through your college career without one despite having the money to afford it? Your definitions of these terms are exactly what make you (I'm assuming) a more affluent individual. You know what it takes to succeed, and that makes you successful. If you're really an IB analyst, you have to understand that the vast majority of Americans don't know 80% of the shit you do.

    • 3
Jul 7, 2017

Good analysis. I agree with you that the definition of luxury is not clear (from this economist), but I think that, as a broad generality, if an item is a normal good than it can be more luxurious.

For the economist's claims about cigarettes being a necessity, I agree with you that it is bs. Same goes for the burger (if it is cheaper to buy rather than to make a meal).

Jul 7, 2017
Kamchowder:

. Same goes for the burger (if it is cheaper to buy rather than to make a meal).

It's not always a matter of price for the poor, but a matter of time. My example of someone who has to feed their kid while driving them to daycare after picking them up from school because they have to work two jobs to pay rent isn't an invented situation. Tons of Americans deal with that shit.

    • 1
Jul 7, 2017

Read the book "Poor Economics" Abhijit Banerjee and Esther Duflo (real names)

In one chapter they do a study where they give extra money to dirt poor people in third world countries.

These people were able to afford food and all "necessities" needed. With the extra income they just bought high qualify food (fish) instead of saving.

    • 2
Jul 7, 2017

Thanks for the suggestion. I'll be sure to pick up a copy.

Jul 9, 2017

Sounds like an interesting read! I'll put it on the list, thanks :) (not that I have time to read, but it is always good to try lol).

Jul 7, 2017

Seems like a tautology to say that higher income people consume more luxury goods when you define luxury goods as those goods more frequently consumed by higher income people.

Better methodology of defining luxury vs necessity would be nice. I believe they are confusing definitions for "normal" and "inferior", with luxury and necessity. IIRC luxury vs necessity has to do with elasticity of price to demand not income to demand but it's been a few years since I studied this material.

    • 2
Jul 7, 2017

I had to research tautology, but I get what you mean. I have to agree with you that luxury differs based on the person and at this point it is just a game of semantics. If the researchers used a term that has a specific definition like "normal" and "inferior" goods, this study would be less controversial, but as you said it would not be completely accurate. Although I would have to say that luxury and normal goods are related.

Jul 9, 2017

To the people talking about minimum wage in this thread, I think $15 only makes sense in the most expensive urban areas like NYC, SF, LA, etc and is stupid in rural Mississippi or Appalachia Kentucky.

But there a decent point for raising wages slightly to $10 (minimum wage last risen would be around $10 if adjusting for inflation) and tying it to inflation so we don't have the same argument every other year.

    • 1
Jul 9, 2017

Would tying the minimum wage to inflation also mean that minimum wage will decrease when deflation occurs?

Jul 9, 2017
jackdonaghy26:

To the people talking about minimum wage in this thread, I think $15 only makes sense in the most expensive urban areas like NYC, SF, LA, etc and is stupid in rural Mississippi or Appalachia Kentucky.

But there a decent point for raising wages slightly to $10 (minimum wage last risen would be around $10 if adjusting for inflation) and tying it to inflation so we don't have the same argument every other year.

We had wages tied to inflation until the 70s in Italy. It creates the cycle wages rise->demand rises->prices rises->wages rise and so on. Then inflation was at 18% and we had to abolish it. Nobody is ever going to try it again.
If you want minimum wages to rise, you have to look elsewhere rather than forcing regulations. Either decrease the labour supply or prevent jobs been offshored or replaced by machinery.

Jul 9, 2017

You make a really good point, and I definitely didn't think of that. But I would still support a small increase in the minimum wage to ~$10.

Jul 9, 2017

It doesn't surprise me at all. When you see people on facebook ''omg I just cashed in my social security check, gonna give food stamps to my kids and then Imma buy an Iphone for myself'' then it's a sign that personal finance is dead in the US.

    • 1
Jul 9, 2017

Hate to be that guy - given how they define luxuries ("the Deutsche Bank report explicitly defined luxuries as goods or services consumed in greater proportions as a person's income increases and necessities as those goods or services that make up a smaller proportion of spending as a person's income increases"), how is it possible to conclude "poor people spend their money foolishly"? I mean, that definition would necessitate that the rich 'waste' a larger % of their income on these items than the poor do?

    • 1
Jul 9, 2017
Comment
Jul 9, 2017
Comment

"If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus, and you must not stay there, you must go beyond them." - Bruce Lee