The Cost of Being Poor

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‘You’ve got to have money to make money’. We’ve all heard the phrase, we know what the phrase means and we certainly don’t have to look too hard to see plenty of examples of how that’s true. People with assets and disposable income are much better placed to take advantage of the opportunities and possibilities that life offers. People with assets and disposable income are much better placed to put themselves in positions where opportunities arise. Those without assets and disposable income however don’t just miss out on those opportunities, they are also very susceptible to getting caught in a downward debt spiral that is increasingly difficult to escape from. When you have no money, everything costs more – either in time or money – and when everything costs more, it’s very difficult to get ahead.

Consider, for example, someone who cannot afford a car or whose car is in need of repair but there’s no money to fix it. As a result of no ready transport they’re more likely forced to shop locally and therefore pay ‘convenience’ prices – often much higher than the out-of-town discount stores. If they take public transport, there’s a cost in both money and time.

Similarly for those who have cars. Those who can afford a brand new car will have a manufacturer’s warranty to cover them for mechanical breakdowns for the first few years. Their fuel consumption (and other running costs) will be much lower thanks to a newer, more efficient engine. In many cases, taxes will be lower. The reliability of the vehicle means there’s little to no chance of missing work due to mechanical breakdown. But, if all you can afford is a beat-up old jalopy then your day-to-day running costs are going to be significantly higher and the cost of mechanical failures have the potential to be crippling in both time and money.

For people with little-to-no disposable monthly income it only takes something like Christmas or a birthday to force them to ‘rob Peter to pay Paul’. This often results in a bill going unpaid for an extra week or two until more funds come in and this can have a negative impact on their credit score. When a bill is paid late it incurs a penalty fee, which further exacerbates the stretched finances for the following month. Such people are also more likely to use overdraft or credit cards to carry them over. This in turn leads to extra charges and fees, thus compounding the problem. They’re also less likely to visit a doctor or a dentist (because of the cost aspect) and, as we know, health problems don’t tend to fix themselves. What might have been a slightly expensive dentist bill will, the longer it’s neglected, snowball into a very expensive dentist bill at some point in the future.

When money is tight there might not be a computer or smartphone in the house. This might mean not being able to pay bills on time over the Internet, which means a physical trip to where ever the bill can be paid. Again, this is a cost in both travel and time.

People with little to no disposable income at the ready are unable to take advantage of special offers such as buying in bulk or even business opportunities that may come along - which comes back to the old saying ‘you have to have money to make money’.

When people with less-than-optimal credit scores, or those on a low income or with few assets to their name, try to take out a loan they are often categorized as ‘high-risk’. For lenders this is known as sub-prime lending and sub-prime loans carry a much higher rate of interest. People opting for sub-prime loans are often desperate to get a loan in the first place and will often agree to charges and fees that, under normal circumstances, would be considered outrageous. For those worse off financially the cost of borrowing money is much more expensive than for those with wealth. Those who really need the money end up paying more.

Those with little-to-no disposable income are normally just one breakdown away from a financially crippling ‘financial-death spiral’. For example, if a major appliance breaks down, say a washing machine, folks with no ready access to funds will most likely need to use a Laundromat to tide them over. This is both a drain on time and money. If their car breaks down they might be forced to use public transport for a while until they can afford to get the car fixed. In both scenarios, the cost of the extra services (the Laundromat and public transport) is added to the cost of fixing the initial breakdown problem.

People with little in the way of savings often pay for larger items on credit or lay-by, attracting interest or administration payments on top of the product price. To make matters worse there is often a setting up fee involved or an early repayment fee. With cash in hand there’s always the chance of negotiating a deal for a lower price. With no cash in hand there’s only the option of credit, fees and interest payments. Thus the cost of that fine new T.V. can be significantly lower for someone with cash versus someone who pays for the product over installments.

People with money can opt to move location if they want or need to. People without means cannot do so and are often forced to live in low-income or high-density areas. This can lead to extra costs such as rent bonds, home security, increased insurance costs on the home and car, increased rent or mortgage costs.

When funds are tight people often opt for a cheaper version of a product – such as shoes, tools and other similar items. But, as another old saying goes, ‘you get what you pay for’. Buying a cheaper version of a product is often a false economy. The quality and life-span of the product is often inferior so when the cheaper product invariably breaks after a short period of time it will have to be replaced – costing more time and money in the long run.

For people on a lower wage or with little in the way of savings the phrase ‘time is money’ holds particular meaning. When a fridge or car breaks down and there is no cash in the bank to pay for it, extra hours will need to be worked to make up the shortfall. These are hours that can’t be spent doing something more productive like studying, upskilling or applying for better jobs.

The financial cost of being poor is undeniable and people struggling financially don’t need to be told how much more expensive things are when money is tight – they already know. But knowing and understanding are two different things. Understanding the reasons why it’s more costly being poor might help you, if you’re in such a position, to avoid some of the pitfalls that trap people into an ever-increasing downward debt-spiral.