By Andrew Keshner
Friendships can influence our financial well-being for the better, new research finds
A wide range of friends can enrich a person’s life – and a new study suggests that can quite literally be the case.
When people have more rich friends, there’s a greater likelihood they are saving money and investing in the stock market themselves, according to the study, distributed Monday by the National Bureau of Economic Research.
But the researchers weren’t looking at country-club buddies profiting from trading stock tips. They were examining a potential path to narrowing the gap between the haves and have-nots: In fact, people from lower-income households save and invest more once they have friends with more money, their findings suggest.
“Our results suggest that encouraging friendships across socioeconomic classes could improve lifetime wealth accumulation and help break cycles of poverty for individuals with low socioeconomic status,” wrote the authors, who were affiliated with Baylor University’s Hankamer School of Business, Binghamton University’s School of Management and the University of Southern California’s Marshall School of Business.
Every 10% increase in friends of a high socioeconomic status was associated with a nearly 3% greater chance of stock-market participation for a person and a 5% increase in the chance they saved money, the researchers said.
What’s important now is exploring how to promote “cross-class” friendships and interactions in everyday life and business, the authors added.
The study, titled “Friends with Benefits: Social Capital and Household Financial Behavior,” comes at a time when the S&P 500 SPX has broken records throughout the year despite a lower-than-average personal-saving rate and a persistent wealth gap: The bottom half of U.S. households by wealth holds less than 3% of total household wealth, while the top 10% holds 66%.
Meanwhile, leaps for the stock market and housing market in recent years have only concentrated wealth. White families have been reaping the sharpest gains in net worth, Federal Reserve Bank of New York researchers said last month.
Six in 10 Americans are directly or indirectly invested in the market, according to Gallup polling from last year. While 67% of white respondents said they had exposure, 49% of people of color said the same, pollsters said.
The new research on how friends influence financial well-being drew from a trove of Facebook (META) data that was the core of a 2022 study on the long-term financial power of personal connections.
For someone who grew up poor, having friends across class lines was a strong predictor of upward income mobility, according to that study, which was co-authored by researchers from Harvard University, Stanford University and New York University.
The latest study used the Facebook connections to examine two specific financial behaviors: saving money and investing it.
To find these behaviors, researchers looked at Internal Revenue Service tax data by county – specifically, the interest income and dividend income people reported on their income-tax returns. Researchers regarded the interest income as a sign that the person had a bank savings account. The dividend income was a stand-in signaling that the person owned stocks.
The study authors also looked at counties where people had plenty of connections with friends of higher and lower socioeconomic statuses, and counties where there were fewer such connections. The tax reporting for savings accounts and stock-market exposure was more common in counties where people had deeper connections with friends of varying socioeconomic levels.
That trend held for the households at the higher and lower ends of the income ladder, explained paper co-author Joshua Thornton, a Baylor University finance professor.
‘We are not claiming that once you invest, having wealthy friends makes you pick better stocks’
So what’s the connection between friendships and financial well-being?
“One of the puzzles within finance is why not everyone is invested in the stock market,” Thornton said.
There are financial fixed costs, like fees and trading costs, that can throw up barriers, he said. But there’s also “the mental fixed cost: [that] you don’t know what to invest in.”
That’s where people get a little help from their friends, who can serve as credible messengers on money moves. “It’s easier to digest information when you get it from your friends,” he said.
Thornton sees it personally when friends try to quiz him on financial topics, simply because he’s a finance professor whom they happen to know. “They want someone they know they can trust to explain these things in plain English,” he said.
The researchers used Facebook connections as a proxy for the relationships people already have in their lives. In other words, researchers weren’t looking at the money decisions people made after exposure to a social-media “finfluencer.” There’s a whole set of risks involved in taking financial cues from online personalities.
Of course, there’s also the risk of going too far in following a friend’s advice on stock tips or the next lucrative money move, Thornton acknowledges. “We are not claiming that once you invest, having wealthy friends makes you pick better stocks.”
Still, it’s beneficial overall for more people to gain stock-market exposure, he said. “The assumption is that participation, in most cases, is better than not.”
And it’s even better when a well-off friend can spread their wealth of experience. When it comes to a person’s financial security, “it’s not just having a tight-knit friend group, and not just volunteering and civic engagement,” Thornton said. “Much more important to economic well-being is connection with wealthy individuals.”
See also: Yes, money can buy happiness – especially if you think you’re making more than other people
How have your friends influenced your financial well-being? We want to hear from readers. If you’d like to share your experience, write to [email protected]. Please include your name and the best way to reach you. A reporter may be in touch.
-Andrew Keshner
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