The Secret To Building Wealth Could Simply Be Having Rich Friends, According To This Fascinating Study
The secret to building long-term wealth could simply be having wealthier friends. According to a fascinating study, your social circle can boost your own financial status in a phenomenon called “the rich friends effect.”
The power of connections will significantly increase your likelihood of investing in the stock market and maintaining savings accounts, effectively shaping your financial future.
The study was conducted in March 2024 by the National Bureau of Economic Research. It looked into the IRS tax return data and social networks of more than 27 million Facebook users to better understand how friendships influence financial behavior.
The researchers found that people with friends who earned higher incomes were a lot more likely to invest in stocks and maintain savings accounts, even after taking factors like income, education, and financial literacy into consideration.
“Given that the total return to the U.S. stock market from 1980 through September 2024 has been over 12,000%—for example, $1,000 invested in the S&P 500 in 1980 would be worth $121,350 today—this creates a disparity in wealth for those who participate relative to those who do not,” said Brad Cannon, a co-author of the study.
“Understanding why some people invest and others don’t is important for addressing social concerns such as rising inequality.”
Apparently, having 10 percent more high-income friends in your network is linked to a 2.9 percent higher likelihood of investing in the stock market and a five percent greater chance of having a savings account. This amounts to an 18 percent increase in stock market participation compared to the average person.
The most important social factor in predicting financial behavior is “economic connectedness,” a term that refers to the proportion of high-income people in someone’s social circle.
It explained over 56 percent of the variation across counties when it came to participation in the stock market.
rh2010 – stock.adobe.com – illustrative purposes only, not the actual people – pictured above are a group of elegantly dressed people in a luxury banquet hall
“We found that in counties where friendships with prosperous individuals are more common, investment and savings tend to be higher,” Cannon stated.
“Moreover, we found that having these friendships with wealthy individuals plays a more important role in shaping financial behaviors than two other aspects of social capital we looked at in our study: having a tight group of friends and living in a community with strong civic engagement.”
The rich friends effect is driven mainly by being in an environment where you regularly interact with wealthy people, whether it’s at school, work, or recreational activities.
The finding has the potential to address wealth inequality. If lower-income people have wealthier friends, it could lead to better financial outcomes for them because the friendship influences whether they start saving and investing at all.
On the other hand, being friends with lower-income individuals affects how much higher-income people save and invest. The effects suggest a mutually beneficial relationship, demonstrating that social connections help people reach financial goals.
Needless to say, just making wealthy friends will not automatically guarantee someone will save or invest more. But knowing people who invest can make it seem less daunting.
You can view the study, which was published by the National Bureau Of Economic Research, here.
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