Americans have good instincts about what to do with sudden cash windfalls
What would you do if you unexpectedly received $500? How about if you suddenly lost $500? Researchers have found that consumers respond very differently to those two questions.
Just 19% of people said that they would increase their spending if they had an unexpected gain of $500, according to a study distributed by the National Bureau of Economic. Comparatively, 75% of people said they would not adjust their spending in response to such a windfall. In other words, they wouldn’t rush out and spend it on something totally frivolous. Following a $2,000 gain, 27% said they would spend more money and 39% said the same about a $5,000 windfall.
However, those who said they would increase their spending if they received a $500 windfall said most of that extra spending would go toward “non-durables” such as vacations, eating out and charitable donations. Not so smart from a financial perspective, perhaps. But something interesting happened when people were told they’d receive large amounts of money: Those who get a bigger windfall were more likely to put it aside for “durables” such as home renovations or college tuition.
The study was performed by researchers from the Federal Reserve Bank of New York, University of Chicago and Arizona State University and distributed by the National Bureau of Economic Research. The study’s findings were based on responses from more than 2,500 people to questions asked as part of the Survey of Consumer Expectations (SCE), a monthly survey fielded by the Federal Reserve Bank of New York.
Consumers are more likely to respond to a loss
Losses proved to be more persuasive than windfalls when it came to adjusting consumers’ spending habits. Nearly half of respondents said they would reduce how much money they spent following an unexpected, immediate $500 loss. And half of those who said they wouldn’t spend more following a $500 windfall did say they would spend less after a $500 loss. So they remained financially responsible.
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However, 39% of respondents who said they would spend more following a $500 windfall said that they wouldn’t cut their spending following a $500 loss. “Since many of the households who react to the $500 gain do indeed have liquid wealth, it might not be surprising that they are able to smooth out the effect of the $500 loss,” the researchers wrote. In other words, $500 isn’t a big deal to these people because they likely have more cash on hand, so they’re more comfortable spending it.
People’s instincts fall in line with financial advisers’ recommendations
Americans aren’t well equipped when it comes to savings — nearly half of U.S. households didn’t have enough cash saved up to cover a $400 emergency, according to data from the Federal Reserve. And nearly 1 in 5 Americans claim to have no money set aside in an emergency fund whatsoever.
Indeed, when it comes to bonuses most personal finance experts suggest putting at least some chunk of it into a rainy day fund. This new study’s findings, therefore, suggest that consumers may instinctually err toward putting their bonuses into savings rather than spending them away.
But not adjusting spending at all in the wake of an unexpected windfall isn’t necessarily foolproof. Some financial advisers recommend that bonuses should be used to pay down debt. Another option is to spend it smartly — using it for home renovations or to pay for extra training could easily translate into a high home value or a promotion at work with a large paycheck attached.
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