The Psychology Of Poverty

By Martha V. Shelton | October 22, 2012 AAA
The Psychology Of Poverty



Americans' spending habits are largely dependent upon several different factors, such as a person's age, level of education, occupation and other demographic characteristics. Not surprisingly, the most important determinant of a person's spending habits is income, as those who earn higher incomes tend to spend their money very differently compared to those who earn lower incomes. Here, we look at how spending habits differ between income groups.

Lower Income Groups
Lower income groups, or those that earn less than the 2011 median household income of $50,054, devote a markedly higher percentage of their income to the basic necessities versus higher income groups. This makes sense, as a household spending a similar dollar amount on food or clothing would see their percentage allocation vary by income level.

The Consumer Expenditure Survey conducted by the Bureau of Labor Statistics offers data that supports this idea. To illustrate this point, we look at annual housing expenditures within the $20,000 to $29,999 income group, which averages around 39% of total annual spending. This compares with 31% for those earning $70,000 per year or more. If one were to dig deeper into the housing expenditures data, one would find a related point: higher income earners - who are more likely to own their own homes - spend a larger percentage of their money on mortgage interest and property taxes versus lower income earners.

A Breakdown of Spending Habits by Selected Income Groups as of 2011

Consumer Expenditure Category $20,000 to $29,999 $50,000 to $69,999 (median household income is $50,054) $70,000 and more
Average annual expenditures $30,398 $50,034 $81,767
Total Food 14.1% 13.1% 12.0%
Food at home 9.2% 8.0% 6.5%
Food away from home (restaurants, etc.) 4.8% 5.1% 5.5%
Alcoholic beverages 0.7% 0.8% 1.0%
Housing 38.6% 33.8% 31.4%
Utilities, fuels and public services 9.8% 8.0% 6.1%
Apparel and services 3.1% 3.5% 3.5%
Transportation 15.3% 18.0% 16.6%
Healthcare 8.7% 7.4% 5.8%
Entertainment 5.4% 5.7% 5.3%
Tobacco products and smoking supplies 1.2% 0.8% 0.4%
Personal insurance and pensions 4.9% 9.7% 14.8%

Source: Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, September, 2012; note percentages will not sum to 100% as there is overlap among several categories.

Lower Income Groups Spend Less
While lower earners spend a larger percentage of their income on basics such as food and housing, they allocate a larger percentage of their income to certain discretionary categories. A notable difference between spending patterns of lower and upper income households is the percentage of income devoted to education expenses. Higher income groups tend to allocate around 2.4% of their annual expenditures towards education, which is noticeably higher than the 1.7% allocated to education by the $20,000 to $29,999 income group.

Tobacco as an Affordable Luxury
Research funded by the New York State Health Department has shown that lower-income groups continue to smoke at rates significantly greater than those of higher income groups. This can be seen in the share of wallet dedicated to tobacco spending, which is 1.2% for the $20,000 to $29,999 income group, but only 0.4% for those earning at least $70,000 per year. Even in states where tobacco products have been heavily taxed, such as New York, where cigarette taxes are as high as $4.35 per pack, low-income households continue to rank tobacco highly when it comes to household spending decisions.

Pensions and Insurance
One of the greatest differences in spending habits between income groups is the difference in percentages of income allocated towards pensions and insurance. This is a bit of an intuitive point, as pensions and insurance do not immediately deliver tangible value to a household, or at least not in the same way that food, tobacco or housing do. A much smaller percentage of lower income households' wallets go towards pension & insurance, only 4.9%, while higher income households shuck 14.8% of their annual spending in this direction.

The Bottom Line
Though there are many factors that influence consumers' spending habits, household income is one of the most influential factors. There are noticeable differences in the ways that lower-income households spend their money versus higher-income households. While lower-income groups spend a larger share of their income on the basics, such as food and housing, they also devote a lower percentage of their wallets towards education, when compared with higher income groups. Expenses such as insurance and pensions, which do not have an immediately visible tangible value, account for a larger share of higher earners' wallets.

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