If you want to increase your wealth, try making some rich friends. And if you want Do rich friends… maybe go to Applebee’s?
A working paper released this week by the National Bureau of Economic Research, or NBER, finds that when people from low-income backgrounds compare themselves to their high-income counterparts, they are more likely to invest in the stock market and save their money.
“Friendships across socioeconomic classes could improve lifetime wealth accumulation and help break cycles of poverty for individuals with low socioeconomic status,” the researchers wrote.
To determine the significance of cross-class relationships on wealth, the researchers analyzed Facebook information and combined it with IRS financial data. What their study found is that when communities have a higher level of “economic connectedness” – meaning that low-income people often interact with high-income people – the result is that low-income people have much more likely to invest and save, even when controlling for factors such as race, financial literacy, and education.
The only problem? There are not always good meeting points where the two groups can cross paths organically.
In the United States, income and wealth inequality is a particularly potent problem. The richest 10 percent of families own three-quarters of the nation’s wealth, while the poorest half of all Americans own just 2 percent of that wealth. Internationally, the United States lags far behind its peers in income inequality.
Oddly enough, fast-casual restaurant chains like Applebee’s, Chili’s, and Olive Garden could play a role in closing this wealth gap.
Rich friends, rich benefits
When class groups are isolated, their members tend to mirror the financial habits of those around them. For people who are already wealthy, this means they continue to invest and accumulate wealth. But for less wealthy people, who are less likely to save and invest, their financial habits are perpetuated. The cycle of poverty continues.
As NBER researchers point out, there are fixed costs associated with prudent money management. Some are psychological, some monetary, and pose major barriers for low-income people to overcome to start saving and investing more regularly.
For example, if everyone in your friend group believes that depositing your money in the bank is a bad idea, you will probably believe the same thing. This is an example of a psychological barrier (and a major reason why 6 million US households are unbanked). On the other hand, many low-income people don’t have the time or money to learn how to use certain financial resources and tools to build their wealth. These are monetary barriers.
By establishing relationships across classes, however, researchers say these fixed costs can be reduced, allowing more low-income people to organically learn how to save and invest, which can also help alleviate any worries they may have .
Applebee’s: The key to reducing wealth inequality?
On a larger scale, the NBER paper highlights that greater opportunities for people from different economic classes to interact with each other can reduce wealth inequality. (Tailored policies or laws could help desegregate those populations, too.)
As it stands, forming these relationships between classes is not always easy. Our daily lives are often invisibly dictated by social class, and organic opportunities to meet people from different income groups tend to be limited.
Take, for example, separate research from the Massachusetts Institute of Technology. It turns out that some publicly funded spaces like libraries and parks may foster some class interactions, but they’re actually not the best places to meet someone from the other side of the income gap. If economic diversity is what you’re after, a stop at Olive Garden or Applebee’s might be what you need.
“Indeed,” the MIT researchers wrote, “the most socioeconomically diverse places in America are not public institutions, such as schools and parks, but affordable restaurant chains.”
So, during your next round of Dollaritas, try striking up a conversation with a stranger. Who knows? You might make a new friend and improve your finances in the process.
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