Spending Habits Of The Rich - So-Called ‘Richcession’ Fictional?
What could be the spending habits of the rich that they seem to be immune to recessions?
In the midst of global economic crises that shake financial foundations and rattle markets, a curious phenomenon often emerges: the wealthy seem to defy the odds and continue to amass riches.
In short, the rich just keep on getting richer.
While economic downturns and financial turmoil tend to disproportionately affect the masses, the affluent class appears to be either unbothered or unaffected.
Does it have something to do, to a certain degree, to the spending habits of the rich?
COPYRIGHT_WI: Published on https://washingtonindependent.com/spending-habits-of-the-rich/ by Katya Ryder on 2023-08-18T03:05:22.847Z
“Richcession” explained — will it save the economy from a full-blown downturn?
A recession is an economic downturn characterized by a significant decline in economic activity across various sectors of an economy.
It is typically defined as a period of two consecutive quarters (six months) during which the gross domestic product (GDP) experiences negative growth.
GDP, by the way, measures the total value of goods and services produced in a country.
In a recession, there is a reduction in:
- consumer spending (that includes the spending habits of the rich)
- business investment
- overall economic output
Recessions can affect the wealthy in several ways. Still, the specific impact can vary based on individual circumstances and the nature of the recession itself.
Here are some general ways in which recessions might affect the wealthy, particularly the spending habits of the rich:
a. Wealth Erosion
The rich often have substantial investments in:
- financial markets
- real estate
- other assets (e.g., jewelry, luxury cars, yachts)
Recessions can lead to declines in asset values, causing a reduction in their overall net worth.
When the events below happen, they can directly impact the wealth of affluent individuals:
- stock market crashes
- property values declines
- devaluation of other investments
b. Income Reduction
Many wealthy individuals derive a significant portion of their income from:
- business ownership
During recessions, businesses may experience lower profits, leading to reduced dividends and capital gains. This can result in a decrease in their passive income streams.
Such circumstances may impact the spending habits of the rich.
Perhaps they will hit that pause button when it comes to their shopping sprees for jewelry and luxury cars.
c. Business Impact
The rich often own or invest in businesses.
Economic downturns such as recessions can lead to:
- decreased consumer spending
- lower demand for goods and services
- disrupted supply chains
This can result in reduced profits and even business closures, impacting their income and wealth.
d. Financial Stress
While the wealthy have more resources to weather economic challenges, significant market downturns can still cause financial stress.
A reduction in investment value can affect their ability to maintain their desired lifestyle or fund future plans.
e. Portfolio Adjustments
During recessions, the rich might need to adjust their investment portfolios to mitigate losses and adapt to changing market conditions.
To preserve their wealth, this could involve:
- diversifying assets
- reallocating investments
- seeking alternative strategies
f. Charitable Giving
Recessions can lead to a decrease in charitable donations as the wealthy might prioritize conserving their wealth during uncertain times.
Nonprofit organizations that rely on donations may face challenges in funding their activities.
g. Job Losses
While the wealthy are less likely to be directly impacted by job losses, economic downturns can still affect their business ventures and investments.
A recession can potentially lead to layoffs or downsizing within their companies.
h. Opportunity for Investment
Some wealthy individuals might see recessions as opportunities to acquire distressed assets at lower prices.
They can use their financial resources to make strategic investments, taking advantage of market dislocations.
i. Government Policies
To address economic inequalities during a recession, governments may implement policies, such as:
- higher taxes on the wealthy
- increased regulation
These policy changes can directly affect the financial situation of affluent individuals.
j. Psychological Impact
Recessions can create uncertainty and stress for everyone, including the wealthy.
Concerns about financial stability, wealth preservation, and the overall economic environment can impact their mental well-being.
Now that we have defined and gained a clear understanding of what a recession is . . . how about “richcession” (also spelled as “rich-cession”)?
As we have learned earlier, basically, a recession is an economic crisis that affects people in general.
If “richcession” truly lives up to its name, then it might as well affect the spending habits of the rich.
Let’s talk more about it, shall we?
Wealthy wallets to take momentous hit from US recession
Thorsten Drautzburg, an economist and economic adviser in the Federal Reserve Bank of Philadelphia’s Research Department, said in an article republished by the bank that it has always been tough for economists to make recession forecasts.
History can attest to that, as Drautzburg cited what happened during the Great Recession (the U.S. recession, December 2007 to June 2009; global recession, 2019).
Economists predicted a 2.2 percent GDP growth but it turned out otherwise; hence, the Great Recession happened.
Why are we mentioning this?
It’s because, in May 2022, the Associated Press (AP) reported that inflation terribly hit the U.S. Since then, according to Fortune, economists have been mouthing cautionary statements about recessions.
The year 2023 came and it seems a recession is far from taking place given these things happening in the U.S.:
- spending continues among consumers
- the employment rate is stable
- prices of grocery items start to stabilize
- prices of gas went down
The last two, as noted by Forbes, even have strengthened the purchasing power of American consumers.
Nevertheless, some economists have remained persistent with their recession forecast, even introducing the term “rolling recession.”
It means that only certain industries - not all - have been affected by the recession they predicted in 2022. Such industries include the financial sector and the tech industry.
Aside from a “rolling recession,” for these economists, there has also been a “richcession.”
Several of those who got laid off were moneyed, according to Forbes; so, they have the financial means to endure unemployment for a certain period.
Upon encountering the term “richcession,” one may ask: Does it mean the number of rich people - the millionaires and the billionaires of this world - is dwindling?
Nope. On the contrary, the term has something to do with the infamous phrase “the rich getting richer.”
Mark Zandi, the chief economist of Moody’s Analytics, told Business Insider in July 2023:
The rich are a lot richer today than they were pre-pandemic. When people say ‘richcession’ I just don't see it.- Mark M. Zandi
A July 2023 AP report supports Zandi’s claim when it mentioned that contrary to what certain economists have been predicting since 2022, the U.S. economy is “accelerating.”
In addition, wealthy Americans “aren’t exactly suffering” either.
Economic factors, such as recessions or economic booms, can impact spending habits.
The rich appear to be prioritizing enriching experiences (e.g., cultural events; global travel) that align with their interests and values over material possessions.
As Zandi shared with Business Insider, wealthy people would rather purchase a 2,000-dollar concert ticket to see Taylor Swift perform than a Rolex.
According to SmartAsset, a New York-based fintech company, as of 2022, the number of millionaires in the U.S. reached 24.5 million.
Only 21 percent of them inherited the money they have.
The spending habits of the rich can be influenced by a variety of factors. These factors often interplay with one another to shape their consumption patterns and financial decisions.
Economic conditions and the desire for experiences, as discussed earlier influence them.
Here are other probable factors affecting the spending habits of the wealthy:
a. Income and Wealth Level
High-income and wealthy individuals have more disposable income, which allows them to spend more on discretionary items, such as:
- luxury goods
- upscale travel
- high-end services
Their spending habits are often aligned with their financial capacity.
b. Lifestyle and Social Status
The rich often seek to maintain or elevate their social status by displaying their wealth through conspicuous consumption.
This can involve purchasing high-priced items that signify their affluence, which include:
- luxury cars
- designer clothing
- upscale real estate
c. Investments and Financial Goals
The wealthy often have complex investment portfolios and financial goals.
The spending habits of the rich may be influenced by:
- the returns on their investments
- their desire to preserve and grow their wealth over time
d. Peer Influence and Social Circles
Wealthy individuals often socialize with other affluent people.
Peer pressure within these circles can lead to higher spending, as individuals strive to keep up with the spending patterns and lifestyles of their peers.
e. Generational Patterns
Family upbringing and generational wealth can impact the spending habits of the rich.
Two things to consider:
- Those who inherit substantial wealth may continue family traditions of spending.
- Those who earned their wealth might have different perspectives on consumption.
f. Taxation and Financial Strategies
Tax considerations can play a role in spending habits.
Wealthy individuals might strategically allocate resources to minimize tax liabilities, leading to decisions, such as:
- charitable giving
- investing in tax-advantaged accounts
g. Philanthropic Activities
Many wealthy individuals engage in philanthropy and donate to causes they believe in.
This can impact the spending habits of the rich, as a portion of their wealth is directed toward charitable efforts.
h. Market Trends and Consumerism
The rich may be influenced by market trends and consumerism.
Fads and luxury brands can drive spending patterns, as the wealthy seek to align with current fashion and lifestyle trends.
i. Financial Education and Awareness
Those with a high level of financial education and awareness might make more informed spending decisions.
They could prioritize investments, savings, and wise purchases that align with their long-term financial goals.
j. Age and Life Stage
The spending habits of the rich can change over their life stages.
Two possibilities to ponder on:
- Younger wealthy individuals might be more prone to conspicuous consumption.
- The older ones might focus on legacy planning and securing their financial future.
These factors can interact in complex ways, and not all wealthy individuals will exhibit the same spending habits.
Personal values, individual goals, and unique circumstances also play a significant role in shaping how the rich choose to spend their money.
Per SmartAsset, wealthy people typically spend their money on the following:
- alternative investments (e.g., antique pieces; paintings)
- commodities (e.g., gold; livestock; horses for racing)
- hedge fund
- private equity fund
- real estate investments (residential and commercial properties)
- stocks and stock funds (e.g., dividend-paying stocks; index funds)
Yes, they do. Not only that, most of them stick to it.
According to the financial website Ramsey Solutions by American radio personality, author, and podcaster (The Ramsey Show) Dave Ramsey, millionaires make a budget, including grocery lists!
That’s simply because the rich like to plan - particularly on how they spend their money - and they “make solid money goals.”
We can safely say that budget plays an important role in the spending habits of the rich.
Ramsey Solutions also cited the study conducted by personal finance expert Chris Hogan. In his book, Everyday Millionaire (2019), he shared that based on his survey involving millionaires, 93 percent of them would stick to their budget.
In a December 2022 article by Forbes, some of the magazine’s Forbes Councils Member share what they believe are “smart financial habits” of the rich.
Here are five of them:
a. They make short-term and long-term goals.
Nick Chandi, co-founder and CEO of ForwardAI (a fintech in Canada), said that the rich make solid plans with “realistic financial goals.”
b. They keep track of their incomes and expenses.
Chartered Financial Analyst (CFA) Martin Jarzebowski, director at Federated Hermes (an investment banking company in Pennsylvania), said that wealthy people “consistently monitor” where their incomes come from (“how much you earn”) together with their expenses (“how much you burn”).
This might as well reflect the spending habits of the rich.
c. They get the services of financial advisors.
Evan Jehle, COO of FFO (a business management company in New York), said that the rich hold meetings at least once a year with their financial advisors as well as their accountants and other people who help them manage their finances and wealth.
d. They routinely invest.
Jessica Cannella, co-founder and president of Oak Harvest Financial Group (financial planners in Houston), said that the wealthy “consistently invest.”
This one validates the idea about “making their money work for them,” as told by real estate certified public accountant (CPA) Amanda Han, co-founder and director at California-based Keystone CPA, Inc.
e. They take risks but only “educated risks.”
Letitia S. Berbaum, COO of The Zandbergen Group (financial planners in California), said that the rich favor “an informed decision.”
That’s why they consult (as also recommended by Jessica Cannella) financial advisors regarding money matters.
Economic uncertainties influence the spending habits of the rich.
The wealthy may become more conservative in their spending, while strong economic growth might lead to increased spending.
Still, as American novelist F. Scott Fitzgerald (1896-1940) described the rich in his short story The Rich Boy (1926): “They are different from you and me.”
The spending habits of the rich during a recession may still involve thousands or hundreds of thousands of dollars - possibly even more.