Avoiding the Poverty Tax
There's a lot of money in poverty. Not for the poor folks, of course. (See also: Too Broke to be Frugal)
The money in poverty is for the rich folks who sell things to the poor. You'd think that that there'd be more money in selling to the wealthy, but the wealthy tend to be difficult customers. The poor, on the other hand, are sharply constrained in ways that make them a very profitable market segment.
Rich folks — even middle-class folks — get a whole bunch of stuff for free, starting with free checking. They also get stuff cheap — in particular, they get low rates when they borrow. Most important, they can take advantage of deals that are unavailable to poor folks. (For example, they can get huge tax-free investment returns by stocking up and they can afford to drop collision coverage on their car insurance.)
Poor folks end up dealing with check-cashing stores, payday lenders, rent-to-own stores, pawn shops, and all the other businesses that cater to poor customers — and end up paying a lot more.
You'd think that the shops that cater to rich folks would charge more, but that's often not true. The stores that charge the most are the small shops in poor neighborhoods with a captive market of people whose work schedules and transportation options make it impossible for them to shop elsewhere.
Gary Rivlin, in a new book on the topic called Broke, USA, suggests that poverty ends up adding something like 10% to the cost of living for a poor person — it's like an extra 10% tax just for being poor.
But (and this is the whole reason it's worth writing a post about) it's only like a tax. It's more accurate to analyze it as a fee — a fee charged, not on poverty itself, but on people who lack a set of skills related to running their household economy.
Most of us here at Wise Bread have these skills. We learned them from our parents, from our parents' friends, from our peers, from books, from websites like Wise Bread, and maybe even in school. We know how to balance a check register, which means we don't pay overdraft fees and we don't end up bouncing so many checks that banks won't take our business. We know how to create a budget, so deciding to go into debt is a decision, rather than something that just happens while you're not looking. We know how to read the literature the bank sends with the rules for the various kinds of accounts.
The fundamental skill for avoiding the poverty tax is the ability to calculate the all-in cost of a particular set of choices.
For example, we can take the bank's list of account types and figure out which kind of account will give us the services we need for the lowest cost.
Avoiding the poverty tax is simply a matter of applying that skill to the larger questions of your household economy.
When your grocery budget is tiny, it's tough to stock up on stuff that's on sale — but it's not impossible. Start with one can of tomato paste on sale. The following week you can use that one, freeing up enough cash to buy two of something else that's on sale.
Long before your emergency fund grows to the recommended six months' spending, it's large enough to save you a fortune in late fees and finance charges. (And once it's a little bigger than that, it can provide the security you need to save even more money with higher insurance deductibles.)
The trade-offs involved in deciding to buy a car are hugely complex — balancing all the costs (financing, registration, insurance, maintenance, fuel, parking) against the savings and income made possible by the increased mobility. But identifying the key variables and their approximate magnitudes is enough to make useful comparisons. You can, for example, figure out that you come out ahead by living within walking distance of work, even if your rent is much higher.
Of course, just having the skill is not enough. You also have to use those insights to guide your actions. This is also made tougher by poverty. If your finances are already in desperate straits, it's easy to imagine that any particular error or indulgence won't make any difference.
That's just another example of how the poverty tax ends up hitting poor folks while the wealthy don't even notice. But really, avoiding the poverty tax isn't a matter of wealth. It's a matter of skill.
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