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Study reveals how America’s wealthiest — and poorest — spend their money

Microsoft co-founder Bill Gates, who certainly falls into the top 20% has spoken out about income inequality.
Microsoft co-founder Bill Gates, who certainly falls into the top 20% has spoken out about income inequality.

The notion of growing income inequality in the US has dominated the Democratic primary, and a new study provides insight into spending patterns of Americans who fall into the extreme ends of the wealth spectrum.

That study from the JPMorgan Chase & Co. Institute found the bottom 20% of America’s earners end up allocating a bigger portion of their spending on one key necessity: fuel.

While the top 20% of earners had total expenditures of just 3.5% on fuel, the poorest fifth of Americans end up spending 7.2% on fuel. That difference likely stems from the fact that everyone who drives “must use a fixed quantity of gas to travel to work,” as the JPMorgan study noted. In other words, poor people can’t easily cut back on gasoline.

As you can see from this chart, though, the wealthy spend a bigger share of their total outlay on so-called durable goods — such as cars and appliances. That’s because they have more discretionary income remaining after covering necessary expenses such as gas and food, which allows them to spend more on their wants, such as buying luxury cars instead of a Ford.  

To draw these conclusions about how the wealthy spend their money, JPMorgan analyzed 15 billion different anonymized credit/debit card transactions performed by 50 million different people. Then, JPMorgan’s researchers mapped each transaction to the appropriate income quintile and spending category. 

As you can see from the image below, on an absolute basis, America’s wealthiest 20% spend roughly 28% more on durable goods than the bottom quintile. But the consumption gap narrows in other categories, including nondurable goods. Those goods largely consist of basic necessities, like groceries and clothing, that the poor can’t simply forgo.

The rich do buy more expensive groceries — shopping at places like Whole Foods instead of Walmart — but there’s a limit to how much more expensive these necessities can get.  Interestingly, the amount the top and bottom quintiles spend on fuel is nearly identical, which harkens back to the idea that everyone driving has to buy a fixed quantity of gas to commute, rich or poor.

This study suggests that it could be important to track so-called spending inequality along with income inequality. If the bottom 20% starts to earn more money, that could mean little to them if prices of things like groceries and gasoline spike, as the proportion of spending on necessities, such as fuel and nondurable goods may remain the same, or increase. As the study noted, “Inequality is most concerning when it limits the consumption of basic needs.”

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