The Wealth Effect: When Rising Markets Change How We Spend

When your investments rise and your home value jumps, it can feel like the world is opening up. But that “I’m doing better” feeling can nudge spending in ways that don’t match your real cash flow, and that’s where the wealth effect gets interesting. Jeff Bingham unpacks why people often spend more when they feel richer, even if their paycheck, debt load, and monthly bills stay the same.

We talk through where the wealth effect actually shows up across different households. Stock market gains don’t land evenly because stock ownership is concentrated, so many families experience the biggest boost through home equity instead. That leads to a bigger question about housing affordability: if younger adults struggle to buy homes, where does their sense of financial momentum come from? We also explore how these pressures can feed larger economic debates and why you’re hearing more people consider alternative systems when they feel locked out of asset growth.

Then we bring it back to practical financial planning and behavioral finance. Paper wealth isn’t the same as liquidity, and rising net worth can become a trap if it triggers lifestyle creep funded by credit. We share a simple way to think about “future you” versus “present you,” plus the internal pressures that can quietly sabotage a solid plan, from marketing to comparison spending. Subscribe, share this with a friend, and leave a review so more people can build real confidence with their money.

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Securities and advisory services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak and B&H Wealth Strategies are not affiliated. http://www.finra.org/ http://www.sipc.org/

Transcript

Welcome And The Big Question

SPEAKER_00 0:03

Welcome to the Four Seasons Podcast, brought to you by BH Wealth Strategies, serving Northeast Tennessee and Southwest Virginia since 1966. Here, we guide you through the ever-changing seasons of your financial journey, offering insights to help you grow, protect, and enjoy your wealth. Ready to turn your financial dreams into reality? Dare to dream. And now, here's your host, President of BH Wealth Strategies, Jeff Bingham.

What The Wealth Effect Really Means

SPEAKER_02 0:44

When markets rise, people feel richer. But what happens when competing economic theories collide with real-world behavior? Today we're unpacking how the wealth effect shapes decisions, confidence, and long-term financial planning. Welcome back everyone. Skip Monty, co-host slash producer, back in the studio with president of BH Wealth Strategies, Jeff Bingham. Jeff, how's it going?

SPEAKER_01 1:06

It's going great. Skip, how are you doing on this? As we're at least recording, this is the uh the day before the 4th of July in uh America celebrating its 250th birthday.

SPEAKER_02 1:18

So uh I'm doing doing great and excited to be celebrating the 250th. Unbelievably, unbelievably excited. So, Jeff, um, great to be here on July 3rd and uh recording with you. So let's let's dive right in. So, today's question is the wealth effect part two. We've actually covered this a little uh uh in our last recording. Is this really a battle of economic ideas? Won't you walk us through that and what that means?

SPEAKER_01 1:47

Yeah, I mean to kind of go through and think about, you know, how does it how does it work? What what does it really mean? And we like I said we touched on this in a in another episode. So uh hopefully folks that'll watch this will try to tie these two together. But let's I'll walk back through what it is. The wealth effect is that when when people feel wealthier, they tend to be happier. That seems to be obvious, right? But they also uh you know tend to be more comfortable in increasing maybe their lifestyle and their purchases, your purchases and and and probably gifting and all of those kind of things that they do. So we don't just leave it as a consumerism, but citizens, if you will, feel better. And the wealth effect, you know, it's something that's been around for uh gosh, for for more than 100 years, the concept as it was kind of built and out of uh and brought more into the modern consciousness uh under Ronald Reagan. It was the assistant treasury secretary, and the name will elude me at this moment, but under uh Donald Regan was the was the uh was Reagan's uh chief economic advisor at the time. So anyway, it was a deputy of his. And so um, but what it means is is that you know, the the the better you feel about your net worth, you watch your 401k plans, your your investments go up, and your homes go up in value. Uh, and that's a a key element to this that we'll touch on through it, is that you tend to be, you know, uh the economy works better, people are spending more money. You know, we're a certainly a consumer-driven economy. It's 70% of GDP or something like that. So you can see the the importance of that in driving the American economic engine, you know, comes from the individuals. And so the better off you feel, you know, the better you feel about your net worth, the more you're gonna spend. The the numbers are about three or four cents for every dollar of increase in net worth, of you know, of the wealth effect, if you will, net worth that goes up. You spend about three or four cents for every dollar that that you'll see your portfolio, your home value, your net worth go up. And that's that's across all fronts, but it's a really skewed valuation when you look at that, because it on the middle uh to working class families, it's really closer to 10 or 11 cents on the dollar. And again, as we talked about this, and this is kind of how we built this, was out of the Trump accounts and and investments in the stock market. Well, the market and the ownership of wealth, you know, in stock market assets, let's say, is so skewed to the upper, to the upper income class. I mean, it's it's you know, it's um like 10% own the top 10% own over 50% uh of all the wealth that's in the U.S. stock market. The bottom 50% own less than 10% of it, so or may or almost none of it. So you can see how skewed those numbers are. So the wealth effect uh it comes in the in the middle to to working class families more from home valuations. Uh so that's a really critical element

Home Values, Affordability, And Ideology

SPEAKER_01 4:55

in it. So if you think about it, in many ways, there's your there's your economic, there's your clashes, right? There's where your clash takes place. That's where we kind of start talking about the ideas and the question that you had. Uh, and it leads also to the things, think about where the wealth effect is, those that don't own the markets, think about what we've talked about as far as the lack, the affordability crisis, right? The the Gen Z and the millennials that we that we've touched on in the last episode as well, they you know, homeownership is very difficult now. They don't own homes. They're fine, you know, where do they find the free dollars with the the expense of things that are out there to invest in the stock market? So where does the wealth effect come from in that cohort uh of you know of our nation? Like that those agents, that cohort that's right there. Um, because if it comes from mostly from home appreciation, you don't own a home, how do you feel better about it? And again, that's where I'll tell you, and I think the clash begins to happen as we're talking about the the economic clash. That's where we see when people are in the situation that and I think it's true, but I also think we also in a in a great degree and necessarily we can argue back on this, that people are uh it's also thrown in our face all the time that there's there there's an affordability price, so we talk about it all the time. I'm not saying that we necessarily manifest and it's not true, but we talk about it all the time, and so we see these problems and we think we're and if you pursue it and you think about the numbers that are just gay, well, this is capitalism's fault, right? This is the current system's fault that we're like is and so there that if if capitalism is at fault, then socialism, socialist ideas, right? At least some variation of that becomes an alternative to look at. And if this one ain't working, and I'm told that it isn't working all the time, I'm gonna look at an alternate solution. I think that's a bit of what we see in the world today, but there is uh a rise of the idea of socialism again. Um certainly across the country, uh in within you know different states and different cities, and certainly New York is the place where we would shine the brightest light on that. Uh, with you know, Mangabe winning uh becoming the mayor there, and then the the uh the election that just in the primaries that just hit the place up there in the democratic primaries that were won by democratic socialists protests. You know, I mean they're not like we're not, you know, it's not the public saying they're that, they're saying that's who they are. And they won those elections. And that's in the again, the irony of that is that it's in the you know, it's in the heart of the economic engine, right? It is the financial capital of the world, you know, is New York City. Uh, you know, that's where Wall Street is. And so now you've got these really are seeing the true clash of that. So long-winded answer, and I said we were gonna have more discussion. So let me back off and let you kind of interject and what your thoughts are as you look at it from maybe a different perspective than I do.

SPEAKER_02 8:13

You know,

Perceived Wealth Versus Real Liquidity

SPEAKER_02 8:14

for for for a lot of cohorts, actually, not just the younger generation, um, are there risks when people rely too heavily on perceived wealth instead of actual liquidity?

SPEAKER_01 8:28

Oh, I don't think, yeah. I mean, I as my dad would always say without question, I mean, um, you know, if you're what we just said right there, with the wealth effect is there, that perceived wealth. And it it's not that it's it is real, but it's on paper, right? You know, especially if it's a if it's home valuation, right? When your home value goes up in value, and all of a sudden, you know, your your home was valued at, you know, I don't know, pick a number, at $250,000. And then over the last, you know, several years, it's gone, you know, it's valued now at $400, uh, you feel wealthier. You've got more equity that's in your house. I mean, if you still have a mortgage on it, I mean if you own free and clear, then it's obvious, but also your equity rises up. You may or may not be tapping into that. So your job situation and your economic, you know, what you're bringing in an income may or may not have changed at all or changed very little relative to that ratio of change from a $250,000 house to a $400,000 house, a $250,000, you know, $401k plan rising to $400,000, you know, again, kind of using that same scenario. Well, I feel better about myself. Look at how much, look at my net worth. But I'm still making the same amount of money. I still owe the same amount of debt. So I have the same mortgage payment, but yeah, now I'm going to go out and spend more money. And perhaps I do that with the cash flow that I have, or perhaps I do that with credit or with debt, right? Acquiring more debt to do that because I can increase my lifestyle because my net worth has gone up and therefore I should spend more money. That's a risk, right? That's not liquidity. You're not using your liquidity, which is either cash on hand, money in the bank, or income that exceeds your lot, you know, your basic living expenses, right? And that's, you know, so that, you know, that can be a, you know, that's the that'll be the the other side of the coin a bit, right? Of the wealth effect. You know, do you actually do some damage to the future you by looking at as I have risen in my net worth, right? My assets have gone up, yet my income is the same, and maybe I've taken on more debt, you know, to do that, to, to live, you know, more uh more abundantly, I guess, you know, in a material sense of abundance. You know, I bought a bigger car, I bought new furniture for the, you know, whatever it is, right? These more big ticket items, if you will.

SPEAKER_02 10:54

You know, to a certain extent that could could cause a false sense of financial security, and I guess. And if so, what do investors need to keep in mind when that's created?

The Internal Battle Behind Spending

SPEAKER_01 11:08

Yeah, I mean, that's a I mean, the the things that we're talking about here are fairly, you know, are are complex and complicated to a degree. Um, because again, it's you know, just the sense of having you know more wealth. And that's a good thing. I mean, I'm not where I'm talking about this, I'm not trying to say this is a bad thing. I mean it is a very good thing, right? And we want, that's the that's what we all want to do. I mean, I'm in the you know, in the business of of growing people's assets and making them, making them, you know, not only preserving their wealth, but also increasing their wealth as they're going up the on the accumulation side of the uh of the of the journey, right, if you will. And so we want to do that, but that's where you're when you're accumulating that money there in that sense, in that phase of it, you're really doing that for the future you, right? You're doing that for the future you, not necessarily for the present you. And so there's the there's the you know, so we always talk about all of the things uh that are out there, you know, with taxes and geopolitical and inflation and all these things that are the external forces that are that are going to try to interfere with your on your financial journey that are going to try to rob you of of that of that success, that successful destination that you're trying to get to, let's say. But there's also the internal, there's the internal things, the internal dragons, if you will, that are there, always trying to rob you of where you're trying to go, right? And that's I need more stuff, the news, you know, marketing and ad campaigns and and now the algorithms, man, they're always coming at you, right? Pulling and encouraging you to buy the latest and greatest. You know, you need a new iPhone, you need, you know, not to pick on Apple by instruments, you know, but I need new shiny objects to do that. And so, and that wealth effect can help bolster that algorithm, if you will, that advertising that's coming at you until you need these things, right? And that the the voices in your head, the desire to, well, my neighbor, you know, again, keeping up with the Joneses. I mean, you can, I mean, there's all kinds of cliches and adages that that we can use in this, but it's just true. I mean, we have inside of us, we have the, we have the thing, we know the right thing to do, but we also know that the easy thing to do and the what we want to do in the present, right? What we the discipline to do the right thing versus I want to do this, right? To to really take care of the the current the current you, your family, you know, your kids, uh, all those kind of things. I mean, that's that's really honestly and skip, that's where more of the battle takes place, uh more so uh than it is from all the economic factors that we were talking about in a moment that we typically talk about on here. That battle comes from within each individual. As since the beginning of time.

SPEAKER_02 14:16

Amen, brother. Well, Jeff, fantastic breakdown of the wealth effect. Thank you for that, especially for us commoners like myself. Uh, appreciate the breakdown, and we will talk again in the next episode.

Closing And Free Consultation

SPEAKER_00 14:34

Thanks for tuning in to the Four Seasons Podcast, brought to you by BH Wealth Strategies, where your financial success is our priority. Schedule your free 20-minute consultation today by calling 423-247-1152 or by visiting bhretire.com. Take the first step toward making your financial dreams come true. Until next time, remember every season is the right season to plan for your future. Securities and Registered Investment Advisory Services offered through Silver Oak Securities Inc. member FINRA SIPC, BH1th Strategies and Silver Oak Securities Inc. are not affiliated.