Most people are not super wealthy, but we all have an idea what it might be like to be a wealthy
person. We watch them on TV, we follow them on Instagram, we read their blogs and autobiographies.
Unfortunately, that awareness of how the other half lives doesn’t happen much in the other
direction. Though many of us have probably described ourselves as “broke” or “poor”
at one point or another, very few have an understanding of what real poverty feels like.
And it’s not just a matter of having less money. Once you get below a certain threshold,
a whole new set of rules apply that actually make day-to-day life more expensive. If you’ve
never struggled with real poverty, you might not be aware of the many hidden costs and
financial traps that conspire to keep poor people poor.
It’s very hard to make your way through modern life without access to basic financial
services like checking accounts, ATMs and personal checks. But the less money you have,
the more these things will cost you. That’s because banks make their profits by accruing
interest on your money. So if your account balance is too low, usually under $1,500,
they won’t consider you a profitable client anymore, and they’ll make you pay for their
basic services in the form of a monthly fee.
And heaven help you if you go below zero--each overdraft incurs a charge of about $35, and
many banks will deliberately reorder your transactions for the day--from biggest to
smallest--to drive you into the red more quickly and rack up as many overdraft fees as possible.
If a bank is willing to extend you credit at all, the terms will be much less favorable
than for someone with a rosier financial history. You’ll pay more money in interest every
month, and any late payments means more penalties and fees.
Even cash can be more expensive if you don’t have much of it. If you withdraw $100 from
an out-of-network ATM, that $3 fee equates to a 3% service charge. But if you can only
afford to take out 20 bucks at a time, you’re essentially paying a 15% charge to access
your own money.
Taken together, this means that a poor person might end up paying hundreds or thousands
of dollars a year for services that wealthier people virtually enjoy for free. It’s no
wonder, then, that a lot of low-income people avoid banks altogether--but even that comes
at a steep price. Cashing a paycheck without a bank account costs money. Buying a money
order to pay your electric bill costs money. And if that bill is due in just a couple days?
Well, you can either get hit with a late fee, or fedex it--an extra expense that someone
with a debit card and an internet connection never has to worry about.
If you think that dealing with credit card debt is bad, thank your lucky stars you’ve
never dealt with a payday or car title lender. These businesses are often the only recourse
for people without credit cards, and their interest rates reach upwards of 800% annually!
Not only does it cost more to borrow and spend money, but what you spend it on is often more
expensive! If you have to feed a family on a tight budget, buying in bulk at a supermarket
is usually the best option--but one not available to many poor people. Even if they had the
cash on hand to buy weeks’ worth of food in one trip, how is someone who depends on
public transportation supposed to get it home? On their lap on the bus?
Big food retailers--ones with enough purchasing power to offer low prices--are notorious for
avoiding poor neighborhoods, and people who live in these so-called “food deserts”
often lack the mobility to cruise around town bargain-hunting. Instead, they’re stuck
with local convenience and corner stores, where prices are much higher. Or they rely
on fast food, which can seem cheap in comparison, but is actually more expensive than cooking
at home, to say nothing of the long-term health risks.
Rent can also be more expensive. Most landlords require a security deposit between $500 and
$1000 to move in--an impossible sum for people barely scraping by. In that case, your only
option (other than homelessness) might be a low-end extended stay motel, which typically
don’t require deposits, but cost way more than an apartment in the long run. And they
often lack amenities like kitchen appliances and laundry that save apartment-dwellers time
and money.
They say “time is money,” and the less money you have, the more time you have to
spend on everyday tasks. Waiting at the bus stop, waiting at the laundromat, waiting at
overcrowded clinics and public offices. This leaves much less free time to take care of
one’s family, pick up extra work, or strategize a way out of poverty.
It gets worse. Inflation, the general increase in prices, tends to hit things like food,
gas, and rent the hardest. The lower your income, the greater percentage of it goes
to those costs, so a poor person will see their year-over-year expenses go up at a higher
rate than a wealthy person.
All these pressures take a toll on one’s psyche that only makes things worse. Imagine
having to constantly make tough decisions about where to spend your last few dollars:
Pay the water bill or buy food for dinner? Put gas in the car or see the doctor? This
relentless burning of mental energy leads to a deterioration in the quality of one’s
judgement--a phenomenon psychologists call “decision fatigue.” It’s why someone
might visit a payday lender when they know it’s a bad idea--they’re so exhausted
that they’ll settle for a quick fix even if it will lead to more problems down the
road.
Closely related to decision fatigue is the “scarcity trap,” which is our tendency
to fixate on the resources that we have the least of, to the point that we lose sight
of the big picture. Running low on diapers, for instance, can create a feeling of panic
that compels a poor mother to buy 6 months worth of Huggies--only to realize afterwards
that she didn’t set aside enough money for rent.
Some might think that poor people just need to work harder and spend smarter. And while
it’s true that improving your financial situation requires these things, it also requires
having at least a little bit of extra cash to move around, and access to decent spending
options.
If you can’t choose where you shop, where you live, or where you bank, you become a
captive customer to predatory businesses. If you don’t have any extra money to save,
invest, or budget, you can’t make a financial plan. And when are you supposed to think about
tomorrow when you’re constantly putting out today’s fires?
Next time you describe yourself as “broke,” remember that having just a little bit of
wiggle-room is infinitely better than none at all. It can make all the difference if
you’re trying to improve your financial situation.
So if you do have that wiggle-room, be thankful and don’t waste it!
And that’s our two cents!
Missing one payment can quickly spiral into a pit of debt.
Has this ever happened to you and were you able to escape it?
Share your story in the comments.