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.