I read an interesting article recently. The headline grabbed my attention. It’s Expensive to Be Poor. It points out things that people don’t know, even the poor people, and it points to a some policy initiatives.
It is easy to assign blame for poverty to bad management, drug or alcohol abuse or gambling. Those are different problems. The point is clear. Poor people have expenses that must be covered, just like everyone else and for poor people the cost to do so may be much higher. The hydro bill is due. The children need new shoes. The refrigerator is empty. Bus fare to get to work. Someone is sick and needs some medicine. A tooth aches. Where do you get the money?
Everyone knows about the expenses, but they miss the idea that how you pay changes the cost.
The problem for poor people is there is little or no reserve money. That means when you need something, you buy it at whatever price is offered. People with reserves buy things they will need when they are on sale. People with reserves tend to buy in bulk. Lower per unit cost.
There is an interesting measure to assess the well-being of the economy. It is the ratio of the number gas sales that are “Fill” to total gas sales. When times are tough the ratio falls. People buy less because that is all the money they can afford. Multiple trips to the gas station are somewhat more expensive.
Little reserve introduces financing methods that wealthier people never use. Payday loans or in store financing are well beyond expensive. If you need food on Wednesday and have no money, a payday loan is the solution. The need is in the present, the cost is in the future. Easy choice. The fact that it reduces the ability to meet the future and its needs is overlooked. Similarly, in store financing for a new television or furniture. You can find the value of that if you go to a furniture store selling things with the first payment far in the future.
The deal looks roughly like this. The floor price for a couch and two chairs is $2,000. The deal is no payments for 12 months and 5 years of payments after that at $65 per month. If you need new furniture right now, how good is that?
As it turns out not very good. Interest on this type of loan is typically about 2.5% per month, so that means that cash price of the suite should be around $1,500 and the other $500 is the interest until the start date of payments. $65 per month for 60 months is $3,900. The person who can only afford this deal ends up paying $3,900 for a $1,500 item. It easy to stay poor under those conditions.
Same deal, or worse, with televisions and other electronics. $12 per week for 3 years will buy a $1,000 laptop. Interest rate roughly 59% annually. Curiously just under the 60% usury law limit.
Bounce a check, $50. Over limit on credit card $30.
Payments are death financially unless they are optional. A no interest car loan is okay if you could pay cash but decide to invest the money elsewhere.
Poverty requires doing what you can, not necessarily what is best.
It is harder to get ahead when you are poor. Even a little ahead pays huge benefits. If people know the costs, they can avoid some of them and gradually build a better future. Maybe a community financial education organization with a little money to help deal with some of the reserve issues would be useful.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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