In Hard Times, People Who Grew Up Poor Spend More, Cut Less

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PHILADELPHIA, PA - MAY 31: at Weso Mini Market, a Philadelphia corner store that stocks fresh fruits and vegetables as part of government program aimed at providing nutritional foods in some of the city's lowest income neighborhoods, on May 31, 2012, in Philadelphia, PA. Since 2009, Philadelphia has secured millions of dollars in federal funds to combat a surging obesity rate, now hovering around 66 percent for adults. Many dollars have gone towards bringing nutritious, affordable foods to neighborhoods that have traditionally gone without. (Photo by Jahi Chikwendiu/The Washington Post)
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What would your response be to the following questions?
  • Would you prefer to have $20 tomorrow or $30 a month from now?
  • Would you prefer a certainty of receiving $20 or a 60% chance of getting $50?
  • Would you rather have $40 today or $50 next week?
  • Would you rather be certain of receiving $30 or have a 40% chance of getting $45?
Now, consider how your answers would be different if you grew up in a wealthy family or if you came from a poor one.

Recently, a team of researchers from MIT Sloan School of Management posed these questions to subjects in a series of experiments to confirm the impact of "life-history theory," which says that your early life environment creates a pattern of behavior and responses that emerge even more strongly in adults during stressful times.

What they found was that the economic environment in which you are raised influences how you handle financial problems as an adult. No surprise there. What's eye-opening about their findings is how people from different walks of life act during times of economic crisis.

In a nutshell: Poor people spend more than rich people during difficult economic times.

Stress Response: Save or Spend?

You'd think that when times are tough, everyone's natural instinct would be to pull back on their spending and switch to save mode. It also seems logical to expect that those who grew up in families that struggled financially would be more cautious about money when faced with a weak economy.
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But when measuring the survey responses, Prof. Joshua Ackerman and his fellow researchers found that people who grew up in rich households were more risk-averse and reacted to an economic crisis by slowing their spending. Meanwhile, people who grew up poor were more impulsive and took more risks than those from wealthy backgrounds.

A supplementary experiment testing how recession cues affect decisions to save rather than to spend money from a paycheck gave the researchers similar results: Individuals from wealthier backgrounds chose to save for the future, while those from low-income childhoods opted to spend money to improve their current quality of life.

Why Do People Who Grew Up Poor Spend More?

On the surface, spending more when times are tough may just seem foolish, but Ackerman says that people who come from a poor background are behaving rationally according to their psychological instincts.

Ackerman explains it this way: If you grew up poor, your life history may lead you to think your chances of surviving a recession and coming out ahead are very low. Your expectation that your lifespan may be shorter -- again, based on your life history -- means that instead of taking measured steps to preserve the little money you have, you're more likely to take risks and spend money on things like jewelry or cars in order to show off and attract others to "promote reproductive success."

What Was Your Recession Reaction? Not everyone responds in the same way to stress, whether financial or otherwise. What has been your response to the tough economy? How do you think it was influenced by your upbringing?

How A Family Of Four Manages To Live Well On Just $14,000 Per Year
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In Hard Times, People Who Grew Up Poor Spend More, Cut Less

"My husband told me he'd heard about this book, ["America's Cheapest Family Gets You Right on the Money]," she said. "We talked about it over the phone and I read it and thought how it could apply to us."

The couple had a single savings goal in mind –– scraping together $30,000 for a downpayment on their home in their native Henderson, Nevada.

The mindless spending was out, and Wagasky came up with a budget she could make work.
"I changed the way I was grocery shopping and started working my way up, " she said.

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Wagasky barely knew her way around a kitchen when she started her money makeover.

Now she's an avid cookbook collector (she checks them out from libraries or asks for them as gifts to save), and it's one of the simplest ways she's managed to cutback on spending.

With a $7 bread-maker she scored at a local thrift shop, she never spends on store bought slices. She's not shy about professing her love for wholesale stores like Costco, which is her go-to source for baking ingredients.

Above Wagasky's twist on homemade Sloppy Joe's.

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"Everything must be budgeted," Wagasky wrote in a June entry on her blog. "From family outings, to toiletries to clothes purchases. It must be budgeted."

And she takes Do-It-Yourself to the extreme. Everything from laundry soap and clothing to the kitchen her husband installed in their new home was either crafted by hand or thrifted.
She swears by this home-made laundry detergent recipe. (pictured above)

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When it come to cutting costs, cable was as easy luxury to part ways with.

With two children aged 6 and 8 to entertain, Wagasky invests $14.99 in a Netflix plan and recently added Hulu to the mix.

The family also uses a simple antennae to pick up basic cable channels.

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With a single source of fixed income, there's no room for impulse purchases in the Wagasky household.

They budget $400 for groceries each month and that's it.

"Once that $400 is gone, it is gone," she writes. "There are no extra shopping trips made because there is no more money."

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Wagasky said they have no credit debt, but they do charge emergency expenses on plastic when absolutely necessary.

"We recently had some medical bills we had to pay, and we were able to take our savings and pay those down as fast as we could," she said.

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With gas prices creeping higher each all the time, the Wagaskys watch their mileage like hawks.

That means combining errands together and doing all they can to make one take of gas last a month.

"We know we don't get to drive and visit family often, so when we do we cherish it," she wrote in a blog entry.

"We don't go just for an hour, we stay and visit and even run errands that may be close to where we have family. We try to remember that when the gas is is gone."

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After Wagasky's husband left active duty and started school, the couple knew they would only have $14,000 per year to live on.

So they paid off the $8,000 he owed on his truck while he was earning more and they could afford the expense.

They also bought a van, which they saved $10,000 for initially and were able to pay the remaining $12,000 owed within a year.

Having zero car payments is a nice relief.

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Like anyone with simple math skills, Wagasky was quick to realize how much cash she was wasting on prepackaged snacks for her children.

She cut them out completely and whips up homemade granola bars and trail mix instead.

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If you're on a tight food budget, your freezer will become your best friend.

Wagasky chops vegetables and fruits and freezes them for a month. She actually does the same for dairy products like cheese, butter and yogurt.

"I am able to freeze about 8 gallons of milk each month," she writes. "They sit at the bottom of my freezer and we thaw them out when we need them." Baked goods get the same chilly treatment.

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Wagasky was dubious about joining a food co-op, but after three months, she realized she would never beat the savings or quality she found.

Food co-ops pool membership fees together in order to fund a monthly harvest that's distributed at designated pick-up points.

A couple of times per month, Wagasky gets a basketful of in-season produce for $15 –– way better bargain than she'd ever find in stores.

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By the time Wagasky's husband came home from Iraq, they had managed to scrape together the $30,000 they needed for a downpayment on a home.

"But we decided the best option would be not to have a mortgage payment at all," she said. "We found a fixer-upper that didn't have a kitchen ... and we paid cash."

Price tag: $28,000. With the leftover cash, they were able to finish the kitchen and install wood flooring throughout the house.

By Business Insider


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