Home Finance Behavioral Finance The Price of Poverty
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A broken piggy bank reveals many I.O.U. notes, a visual analogy for disappointment, poor budgeting, poor financial planning, indebtedness, poverty and loss.

The Price of Poverty

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There is a high price to pay for living the life of those who don’t have any resources to pay it.

Most people can imagine that being poor isn’t ideal. But what a lot of people don’t realise is that their idea of poverty might be wrong. There is poverty in the Western world. Poverty does, in fact, happen in the richest countries too. Sometimes, it is just difficult to imagine what that looks like if it isn’t happening in a Unicef commercial.

Moreover, poverty often perpetuates itself. There is an actual concept called the “poverty trap.” This is a cycle of people making choices that sustain their financial state. I want to dive into some of these today, as they show that poverty is very much a product of market failure.

What do the poor buy? Well, I’ll give you a hint: not as much as those who aren’t in poverty (surprise). One of the biggest issues with a constant restraint on money is that you cannot benefit from bulk buying.

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If you’ve ever been in a supermarket you know that the price per unit decreases as you can buy more of it. You are effectively being rewarded for taking stock from the supermarket. This works outside of the context of a supermarket as well. There are many bulk deals out there. The issue with a bulk deal is: although the per-unit price is cheaper, the total price of all that you’re buying is often not (otherwise who is in charge of pricing?!). If you can only afford to buy 2 kilos of something, there’s no point in buying 4 kilos, because the per-unit price is now 30% cheaper. If you don’t have the money to buy the 4 kilos, you’re going to have to stick with the 2 kilos. And often, for those in poverty, they can’t wait an additional while to save up to be able to buy 4 kilos. If we’re talking food, you need to eat!

Now there is some irony in my previous statement as well: those in poverty might actually buy certain things more frequently than those who do not have such constraints? Why? Because they cannot invest in more expensive and often higher quality things. And cheaper things of lesser quality tend to break down more often.

I think there’s a lot of examples here: cheaper clothes have thinner fabric which rips more easily or just loses colour or fit after a few washes. Technology breaks down quicker or slows down quicker. Cars are the same. Especially when things get bought second hand (nothing wrong with that!) there is the risk that it has already lived a lifetime, and is more likely to break down or run out, before the next owner has had enough use out of it.

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What is the number one way to make your money grow? Compound interest. I believe in passive income (saving, but preferably investing). But you know what you need to have to obtain this type of income? Money. Isn’t that just ironic?

Let’s be real here, this option of growing your income is not an option to anyone in poverty. But other options don’t tend to be available either… It is a great indication of market failure and its anti-social nature that those who need access to credit the most, are the least likely to get it.

Now, I personally don’t think loaning money to invest is a good idea (I’m very risk-averse, it’s not for me). But there are plenty who have done this successfully (and plenty who failed), but to someone with a terrible credit score (or no score at all), this will never even be an option. The fact that you know poverty will exclude you from a large part of the financial market.

As such, where can you turn? Now here is where things get so much worse: not only does the “formal” market refuse you, the “informal” market is more than happy to have you. When I say informal, I mean loan sharks and other creatures that should just stay in the murky waters and never surface…

I have written about how payday loans work and why they are terrible debt to have (it just grows), but if it’s a temporary relief from a certain (financial) death and no one else will lend you the money, what are you going to do?

If you don’t believe me that there are people like this out there, who actively prey on those in precarious financial situations, please watch these two videos by John Oliver, on Auto Lending and general Predatory Lending. And then try telling me the market isn’t rigged.

I think it’s time we stop blaming people for being poor, them having made “the wrong decisions” and perpetuating their own poverty. It is a disgusting stigma and belief that is grounded in little to no reality and is often believed by those who do in fact have access to the formal market, and who might ask for a second mortgage or a nicely secured loan, because that might lead to some type of a tax advantage for them in the longer run. Because they have the money to prove upfront they are in fact “good with money.”

Those who live in poverty have much more to suffer than what is outlined above. I have written articles about the relationship between mental health and money, and on how longer term stress (which poverty most definitely causes) can lead to both mental and physical illnesses. Part of this is caused by the stress of trying to make it from week to week, but a lot of it can also be contributed to stigma.

As I mentioned when starting this article, the white majority in the Western world has a very clear idea of what poverty is: it’s non-white, non-Western and not in our own backyards. But as societies are struggling with integration (we are just not handling it right), political corruption, misogny and covert sexism and racism turning overt, we have become increasingly divided and poverty is occuring right beneath our noses, and the idea that we have of poverty is just outdated (and racist). But is the idea that “nothing like that could happen to a good white Westerner” which is toxic throughout. Because it indicates, in its fundamentally racist groundings, that to be poor is to be lesser than.

As such, I think it is important to address what makes someone poor, and how it effects their decision making: In my next article, we will dive deeper into the Psychology of Poverty.

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Merle van den Akker
Merle van den Akker is a PhD student in Behavioural Science, at the Warwick Business School. She studies the effect different payment methods, especially contactless and mobile methods, have on how e manage our personal finances. In her "free" time she writes articles on personal finance, behavioural science, behavioural finance and life as a PhD student, these are all published on Money on the Mind. With DDI, she writes on personal and behavioural finance, to ensure that knowledge from academia trickles into the mainsteam, and can help as many people as possible!

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