Poverty is cyclical. If your earnings fall below a certain level, the cost of living can make rising to stable financial footing next to impossible. To break this cycle there needs to be intervention or systems change, and that starts with gaining empathy and understanding into why and how it is expensive to be poor.
When you break down the average American’s monthly expenditure, most of it goes towards housing, transportation, healthcare, childcare, and basic goods such as food and clothing. When we examine the structures in place around financing these needs, it becomes apparent that in most cases, the more money you have, the less expensive it is to afford them.
Access to a line of credit can be a financially beneficial thing, but the system benefits individuals more the bigger their bank account is. Let’s start with the concept of an overdraft fee. While many banks offer overdraft protection and market it as as a service, it can result in the accumulation of fines that make it more difficult to maintain a bank account. If you have insufficient funds in a linked savings account to cover the overdraft, this “service” can cause more harm than good. Overdrafting by $5 results in a $35 overdraft fee. While you gain the $5 good or service you intended on purchasing, you’re paying 8x the price. Had you known you were in danger of overdrafting, you may have opted out of the purchase altogether.
The system benefits individuals more the bigger their bank account is.
Not only can a $35 fee be difficult to bear for someone struggling to meet their basic needs, these seemingly small fees add up to a staggering total; Americans paid $15 billion in overdraft fees in 2016. That number is particularly disheartening when you consider the fact that the majority of the profit made by the banks through these fees come from accounts that belong to the poorest of the banked population in the United States. To avoid an overdraft fee, one may elect to pay with a money order, which costs roughly $7 at the bank and only $1.25 at the post office. Unfortunately, bank and post office hours often coincide with work schedules, making acquiring a money order difficult logistically. While a $7 fee is far cheaper than what some banks charge in overdraft fees, if you’re able to maintain a high enough account balance you avoid fees like this altogether.
When the pressure is on for essential needs, many of the financially vulnerable will make use of payday lenders. A payday loan is an incredibly high interest loan that allows people who are living paycheck-to-paycheck to have the funds to make ends meet until they get to their next payday. What happens when you have little to no savings and your car, your means of transportation to a job, breaks down? Maybe it’s the middle of winter and not paying a $400 utility will result in services being turned off. The Economist reports that the average interest rate on a payday loan in 2013 was 322%, compared to the average credit card interest rate of 15%. The exorbitant costs of financial tools geared towards people struggling to remain financially stable is evidence of a broken system.
Many of these more expensive housing options are less desirable and in worse condition than the cheaper options.
Housing also proves to be very expensive for the poor. There are a number of poor individuals who are living in temporary residential arrangements, such as motels or month-to-month apartments which charge a higher monthly payment but require no initial move-in fee or deposit. Because many poor Americans are unable to pay a first month’s rent plus deposit, they are stuck making higher monthly payments. Adding insult to injury, many of these more expensive housing options are less desirable and in worse condition than the cheaper options requiring an up-front payment. In many cases, the landlords in these less desirable properties are exploitative. They have little to no incentive to improve the properties because of the shortage in affordable housing. Therefore, tenants often pay 2-3x on utility costs because of poor home quality.
Say you are having to live in a motel, or you have a home and are unable to pay this month’s electric bill; you either don’t have a refrigerator or, it’s not working for the time being. Consequently, when buying something as simple as milk for your family, you are forced to buy the 16oz bottle–instead of a one gallon jug because it will spoil if left out–and spend 8 times the amount per gallon on the purchase. Milk is just one example, there are countless other instances for which being able to buy more of something allows you to pay less in total for that good. The sum of all of these small costs associated with the need to have sufficient capital up-front to save money in the long term is yet another attributing factor to the cyclic nature of poverty that is difficult to break.
The same principle holds true for insurance. Paying a monthly insurance bill is something many impoverished individuals and families are unable to do as they need every dollar from their salary to meet more basic needs. If they face an accident or are slammed with any type of emergency services bill which they need to pay out of pocket, it could take years (or may not ever be possible) for them to find financial stability in their lives. Additionally, because areas with more poverty often times have higher crime rates, they require residents to pay a higher premium.
It is a tragic irony that the ability to hold a minimum balance in a bank account, or make monthly payments on such basic requirements as housing, transportation, and utilities, makes it cheaper for the wealthy to participate in the world around them than for those who are counting each dollar to make ends needs. What can we do to even this out?
Learn more about our approach on our initiatives page.