The High Cost of Poverty

It’s wonderful to reach a point where you can stop working and let your money take over. And if you manage to spend less than what your money brings in, your nest egg continues to grow, adding even more money to work for you.

Unfortunately, for people living in poverty, the converse is true. Life costs more when you don't have money.

Banks and credit unions offer their good customers free checking, interest on deposits, and affordable loans. If you fall on hard times or don't manage your account well, you're hit with overdraft fees, low balance fees, late payment fees, higher interest rates on borrowed funds—extra expenses that eat up the spending power of your money.

People who don't qualify for bank accounts have to pay check-cashing services to access their money. And if they can't stretch their funds to cover their expenses until the next paycheck, they may be forced to pawn possessions or take out a payday loan at a usurious interest rate. More drain on spending power.

Those who try to avoid banking fees by keeping all their money in cash risk having it lost or stolen. And it's difficult to operate on the cash system only. No direct deposit, no compound interest. And try to travel or shop online without a credit card.

Workers who live paycheck to paycheck struggle to save anything for a down payment on a house, a new car, or higher education for their children. All of their money goes to support day-to-day existence rather than building a better life.

I always assumed prices should be lower in stores located in low-income neighborhoods. Just the opposite! Plagued with higher crime and more inventory erosion, merchants charge more for goods and services because they require more security to stay in business.

In poor communities, less is invested in schools and other infrastructure. Shopping in the better neighborhoods is often not an option because public transportation doesn't always go there.

So how do we break the cycle of poverty?

It’s a complicated issue, and I wish I had the answer. But the first step is to reverse the cash flow. Reach the point where more comes in than goes out. And those living in extreme poverty may need help to right the ship.

One program I’ve read about is microloans. These are tiny, short-term, low-interest loans made by individuals or organizations to provide start-up funds to an entrepreneur who may not qualify for a traditional bank or small-business loan. They’re used primarily in developing countries but have caught on in the United States as well. A small investment to steer the cash flow in the right direction. For example, lend a seamstress $500 to buy some fabric, which she uses to make clothes to sell at a flea market. With her profits, she buys more fabric, which supplies her with even more inventory that will generate additional profit. Eventually, she’s able to pay off her microloan, hire someone to help her, and someday afford to move into her own shop.

Habitat for Humanity is a nonprofit organization with a mission I support. Providing “a hand up, not a handout,” the charity helps make home ownership more affordable by giving low- or no-interest loans to build or rebuild houses with volunteer labor and donated materials. The recipient of the home has to pitch in on the project, as well as commit to helping on future builds, giving back to others. I’ve watched the joy cover a new homeowner’s face when we handed her the keys to her finished home—a priceless experience to share.

In my twenties, I was a caseworker for the Texas welfare department. I found it depressing to observe the cycle of poverty in matriarchal households, where fourteen-year-old girls aspired to get pregnant so “I can get my own grant.” I watched a few young women break out and start minimum-wage jobs, but in less than a year, they were back on the welfare rolls, because they couldn’t afford to lose their Medicaid, and childcare expenses ate up their pay checks. What was I doing? I felt like an enabler.

One evening at a party, I met a woman who was dating a friend of mine. When I told her what I did for a living, she exclaimed, “Welfare saved my life!” She told me the story about how she got pregnant as a teen and dropped out of high school. Her parents kicked her out of the house, and the baby’s father was not in the picture. At the welfare office, she made friends with another young woman in a similar situation. They moved in together and enrolled in computer school, attending during opposite hours so they could share childcare duties.

They scrimped and worked hard, but after two years, they’d both finished school and landed good-paying jobs. They weaned themselves off welfare and never went back. “But if it hadn’t been for welfare, I don’t know what I would have done,” she said. Her success story made me feel a lot better about what I did for a living.

The problem of poverty is not simple and might never be solved. And not everyone is motivated enough to take advantage of a hand up and do the hard work necessary to crawl out. But with compassion and judicious investment, we can make a dent.

What are your thoughts about reducing poverty? I’d love to hear your comments.

Sharon Marchisello is the author of Live Well, Grow Wealth.