The additional cost of poverty...

Factual Questions
41

OK folks sit down, gonna show you some stuff on the expenses of the rich & well the average, money & who has it, & some good sources to go to if you never seem to have enough of it and want to learn to change that.

First off, some information on me. I’ve been bouncing around in the investment and political fields for about 20 years now. I also started and had flame out an internet business, fun, educational but expensive. I’ve been a registered investment rep for all those year, and currently I am a Charter Financial Analyst canidadate (i.e. I’ve been studying for the exams, in fact just took Part I yesterday.) I’m had dealings with all kinds of clients in my job, from immigrant workers, to those with net assets in the 100s of millions. I took a step back in pay to get my foot in the door at a great opportunity and last year, and according to Turbo Tax my Income was a couple % above the national average.

In some examples I will use my brother, after 16 years of college, med school, residency & fellowships, just finished his first year as a doctor (some specialist I can’t spell). You can kinda make a guess at his income.
First off, its not so much the poor or even average spend more on things, the well-to-do actually probably buy more expensive options of many items. Its that the really basics of life take up a greater percentage of their income. The good news is that thanks to big box discounters & warehouse food stores, this disadvantage has been marginally decreased. But as you will see, the wealthy are hit really had in some areas.

But here are some representative samples based on percentage of income that my brother and I spend on basic typical expenses in our household:

 Housing  (annual):  Me (Average) :  18.5%  Bro (Soon to Be Wealthy): 9.1%
 Auto + Auto Ins (monthly)  : Me  : 1.5%   Bro:  1.2%
 Heat & Elec (coldest month) :  Me:   0.40%  Bro: 0.09%
 Est Toilet Paper (bulk: 4 pks per yr per prsn in hh): Me: 0.11%  Bro: 0.020%

Ok, so your day in day out items weigh heavier on my budget than his, but then check out some other items that weigh on him that are a by product of his position & income:

Monthly Student loan payments:  Me: 0.14%    Bro: 0.28%
Life & disability insurance:   Me: 1.62%   Bro: 5.62%
Federal Income Tax Paid (sans SS & Medi):    Me: 7.9%   Bro: 24%

The trick is to indentify your means, and live within them. Actually a little under them. My brother drove a beater car for his first year, and when he did get a new one it was a mid-sized econ box. He’s watched some of his med school classmates just sink them selves in debt with huge homes, fancy sports cars and such without having any idea what their actual means can support.

In the Millionaire Next Door (sorry can’t remember the author but please don’t sue I’m pulling your book) there where two ethinic groups with an inordinate amount of millionaires. Scots, who the author said where excessively thirfty, the Scottish households often living well below what their means could support, thus they had large savings & investments. And Russians, where the author found had a very high rate of individuals who were entreprenuers.

I tried finding the link but last year alone the U.S. add over 400,000 households to the $5 Million Net Worth Club (to 1,400,000 households). Nearly all were entreprenuers. Surprising thing, nearly all those interviewed never set out with the goal of being wealthy, they just had a drive to build a business, or did something they loved to do. The money was just a by-product of their passion.

Back to the toilet paper…

Despite this massive wealth some Americans are creating, it seems more & more many are living not below their means and saving to build wealth. But living above it and falling deeper into debt.

If your in the later group, and don’t see yourself as an entreprenuer, that means to break the cycle you need to think like a Scot. I’m going to recommend a book, and if you can’t check it out of the library it is well worth the $12.00. Its “The Only Investment Guide You’ll Ever Need” by Andrew Tobias. In chapter One he talks about the absolutely mind boggling investment returns you can make by… Buying in Bulk. Here’s a sum up of of his example: Say you every week went through a bottle of wine. You stopped every week plunked down $10 & went home. Then on Jan 1 you go in and they start offering a 12 bottle case for a 10% discount. So you start buying it that way, and you make 10% on your money right. Nope. Watch this. Ok so you go in Jan 1 and instead of plunking down $10 for one bottle, plunk down $108 for the case of 12 on discount. So you’ve spent $10 like always, and invested $98 in the remainder of the case. So you save $1 per bottle for 52 weeks for tying up $98, wow! that’s 53%+ return and tax-free! But wait! OK let’s say its Jan 1, and you’ve got the $10, and will have the $10 every week. But to get the case you have to borrow the money (for math simplicity assume you can borrow at 0%). OK so in case A you go in every week & plunk down the $10. In case B, you plunk down $10 plus you start a line of credit & borrowed $98 and bought the case of 12. Now next week you A goes in plunks down $10 while you B plunks the $10 down to pay off the line of credit and drinks the second bottle from the case. After 12 weeks A goes in plunks down $10. You B goes in to buy a second case for $108, you have your regular $10, so we need to finance again. But wait, so week one you plunk down your $10, and financed $98. Then for 11 weeks plunked your $10 into paying down the line of credit, that’s $110. So you got $12 extra bucks. So you plunk your regular $10, the extra $12 and now only owe $86 on the line of credit. If you keep this up all year, slowly using the savings to pay down what you need to borrow. In the end it works out to an annual saving of 177% tax-free! The trick of course is to have the disipline to keep plunking down the $10 into your savings or paying down your debt.

Think about all the things you use regularly that has a discount in bulk will last. I’m addicted to Diet Pepsi, and my morning habit was running a $1.40 a day. I can get a 6-pack of the same stuff for $3.99 at Wal-Mart ($0.665 per bottle). Holy wow, that’s a 47.5% discount! Imagine my rate of return on that! Admittedly it’s on $3.99 but do that over all your neccassities and your talking serious money.

42

The word was ‘encourage’ not ‘make’. Regardless, the point stands that you don’t need to be a low earner to be poor, there are lots of reasons why people get into debt. You may wish to consider adding ‘need’ and ‘desperation’ to your otherwise rather unsympathetic and one-sided list.

43

A lot of people who are poor have low intelligence. Somebody with an IQ of 80 is going to have a hard time managing a checking account, let alone getting training/education and a semi-skilled job.

For a lot of poor people, telling them to just get an education is like telling a fat person to just eat less. It’s simple in principle, but a lot harder in reality.

44

I live paycheck to paycheck. I occasionally have to pay $35 for an overdraft on my checking account. How often do you think this happens to wealthier people? You’re not going to go overdrawn, in other words, unless your bank account is frequently empty. So I’d wager that 99% of the overdraft fees collected by your average bank come from the people who can least afford them.

45

Cite please.

46

As a wealthier person, I average about once a year.

47

The absence of banks in poor neighborhoods brings another hidden cost: ATM fees. If you need cash, chances are you won’t be able to find an ATM that won’t charge a fee within walking distance of you (important if you don’t have a car).

Limited parking in high-density areas also contributes a cost. I used to live in a low-income apartment complex in northern NJ. There wasn’t enough space for everyone to park in the lot, so most residents with cars had to park on the street, which still only provided a very limited number of spaces. And if you were lucky to find a spot, you had to be conscientious about which days were street-cleaning days, or you’d get a hefty ticky. The police had a field day on street-cleaning days.

Parking was one of the most stressful things residents had to deal with. I was lucky enough to secure one of the parking spots in the lot, but my luck came with a big price. Fifty bucks a month. You had to renew the permit at the beginning of each month, and if you forgot to go down to the booth during the few hours a month it was open (I never worked late on those nights, lemme tell you), you were ass-out. During my five years at this place, I was privy to plenty of fights and arguments involving people complaining about promised openings being denied to them. I saw grown people begging and crying. It was horrible, but the tears were completely understandable. Without a reserved parking spot, you resorted to driving around the block multiple times each night, looking for legal parking that might never materialize. Or you risked getting tickets for parking under no-parking signs.

Another hidden inconvenience that I observed before I had a car was how hard it was to catch a commuter train during rush hour if you lived in a “bad” neighborhood. I used to take Midtown Direct (NJ Transit) in the mornings, leaving from the South Orange station, and it didn’t take long for me to realize how lucky I was compared to the poor saps leaving from East Orange. The train would be so packed with Wall Street types coming out from the suburbs that by the time it made their way to East Orange, there were no more seats for the working stiffs (very few business suits would be among the number…more like fast food uniforms). They’d be lined up on the platform and the train would just zoom on by. The Wall Street types (and me) were lucky because even if we missed a train during rush hour, another train was bound to be at least twenty minutes behind it. But the poor saps living in the inner city, trying to get to Newark, Hoboken, or New York, would probably have to wait much longer–watching train after train pass them by. And if they were lucky enough to have a train stop for them, they’d have to stand the whole way.

That doesn’t translate into a direct cost, but it does increase the likelihood of workplace tardiness and foul moodness, which could cost someone a much needed job.

48

The chart on the second to last page is especially interesting. People in the lowest group for IQ (70-85) had much higher chances than the rest of the population of dropping out of high school; living below the poverty line; being unemployed; or being a chronic welfare recipient.

49

I don’t think it is necessary for anyone to give a cite to the phrase: “A lot of people who are poor have low intelligence.”

A lot of people in all economic groups have low intelligence depending on how you define “a lot”. I personally know an elderly French couple with several hundred million dollars with a 50 year old son with Down syndrome. If they die before he does, he will have a hell of am inheritance although he leads the same lifestyle now.

I don’t think it is unreasonable to think intelligence and economic status are positively correlated although we all know exceptions. However, in any case, if you are very poor and not that bright, things may be a lot harder.

50

Not only that, but poor people are more likely to end up in jobs where being 10 or 15 minutes late will result in disciplinary action.

51

Another reason why it’s harder for a poor person to buy in bulk is that you have to have a private vehicle to lug 24 rolls of toliet paper. If your primary mode of transportation is a bus, you’re limited to what you can carry with two hands or a granny cart.

You may also have limited storage space if you’re poor. At my poorest, I was staying in a 350 sq ft apartment. I had a hard enough trouble storing one roll of TP, let alone 24.

52

Thank you. That is fascinating reading.
I got to meet Sternberg at Yale, so it was interesting to read the section outlining his take on this.

53

But that doesn’t have anything to do with being poor – it has everything to do with knowing how to keep your checkbook balanced. If it’s a conscious decision rather than being bad at math, then it’s a poor decision. Are you (not you-you, the general you) bouncing checks for $10 worth of cigarettes?

How does Check 21 affect check bouncers now? They’re cleared and resubmitted so rapidly, I can’t imagine that writing bad checks is a smart thing to do for whatever reason.

54

I agree. I’m rich and I don’t keep thousands of dollars sitting in my personal checking account in case of an overdraft. Instead, I keep records. Even then, I screw up once in a while and bounce a check. My records have gotten a lot better now that I use a computer and pay bills on the internet.

55

Back when I was living check-to-check (it’s amazing how much having a family forces you to change that - yet I’m making the same money and living close to the same lifestyle) I switched jobs. My first week with the new job I was out of town the whole week and when I got back my mailbox was absolutely STUFFED with overdraft notices.

Why? Because my old boss had “accidentally”, or so he phrased it when I told him I was on my way to his office to get my money one way or the other, put a stop payment on my final paycheck.

Strangely enough, most of the creditors in that situation were very understanding about my story and let their returned check fees slide.

Fucker.

-Joe

56

I really have nothing to add, just an anecdote.

Years ago, I worked with a guy who wasn’t exactly broke but he was constanly on the edge. He was a high school drop out I might add.

He and I would go to lunch all the time and when it was my turn to drive he would always take note that my gas gauge was almost always full. He would say something about how I must be ‘rich’ in order to spend so much on gas and that I must do a lot of driving. He on the other hand would spend 2 dollars here and 2 dollars there every couple days keeping his fuel gauge constantly between empty and 1/4.

I explained to him that just because I fill the tank on a single stop doesn’t mean I spend more or even drive more. I added that by going to the gas station every couple of days he was actualy the one who drove and spent more. He just shook his head, told me was stupid and insisted he was the one living the right way.

57

Nobody has mentioned health insurance yet. Poor people are less likely to have health insurance, or if they do have it, they’ll have poor coverage.

Example:

My best friend had a roomate. Roomate couldn’t afford health insurance. She got an infection from an ear piercing, but didn’t got to the doctor because she couldn’t afford it. The infection got really bad, she developed a fever and HAD to go to the ER. She was left with a hefty medical bill, and an ear permanently scarred by the infection. Not long after she recovered, she dislocated her knee. Still didn’t have insurance. This was three years ago and collections agencies have still gone after her. Her credit is also wrecked, making things like financing a new vehicle or even getting a cell phone extremely difficult.

Even myself, I pay $118 a month, and what is covered I have to pay a 40% deductible. That feels like quite a lot of money down the drain- even if it does come in useful, I’m still stuck with the 40%, which in most cases I’m probably not in a position to afford. An ambulance ride is about $1,000 bucks, which would be $400 out of my pocket- depending on the situation I’d almost rather have a roomate drive me to the hospital for free :rolleyes:

58

I’ve thought of that, or heard it mentioned before. But - how well do you think that would go over - “I’m broke, my ass in the wind - and now I gotta go to a mandatory class.”

No, the time for “mandatory counseling” would be prior to the extension of credit or a family approaching the poverty line. I agree in principle though, that people are often woefully uninformed about money and credit.

I certainly was no exception, very quickly burning through what little savings I had accumulated, racked up some nice credit card debt, bought a car, borrowed lots of money for college, etc. It was extremely difficult to bring this under control but it was worth it. I learned that compound interest works both ways - simple, but still.

What I discovered, and is not advertised so well, is that a good credit rating is one of the keys, if not the key, to a successful life in the US. Just a few dings on the ole credit rating - and the price of everything just went up - cars, consumer credit, mortgages, everything. And I mean everything, and for a long time. And, it may mean not getting that job one just applied for.

On the other hand, paying off debts down to reasonable levels, maintaining a rock steady payment history, saving even just a little at the bank, word gets around and other doors will open up. Money rates are much more competitive. The additional thing to remember that isn’t often mentioned about the poor - they aren’t just getting ripped off on what they buy - the money spent must also be measured agains the “lost opportunity costs” i.e. money going to service interest payments would have gained at minimum the prevailing interest rates, or even greater returns invested in stocks or mutual funds.

59

i don’t want to be rude and i could not be more sympathetyic to your plight and i agree the person who suggested bettering yourself so you would be worth more than $10/hr is an insensitive idiot, but if you are working 40 hours a week for more than $10/hr and only getting $14,000 there is a serious problem somewhere. Eleven bucks an hour would work out to $22,000. There is no way you are paying $8,000 in taxes.

60

Additionally, with regard to the community college fees, California even today has one of the best resident fee situations in the country. Residents of other states are not so lucky. Twenty years ago the fee structure was even more favorable before California went proposition crazy and caused almost everything to become underfunded. I hope the author of that comment, who remarkably was able to pull himself up by his own bootstraps, bears that fee structure in mind when it comes time to vote on tax issues in his state.

Additionally, additionally it is really heart rending to hear the animus directed at poor people in this country on a daily basis, to some extent on this thread also. Noone is poor by choice although many are indeed poor because they have made a conscious decision that the effort and expense and risk it takes to increase their likelihood of getting out of poverty is not worth it. But let’s just for a second assume that every poor person does make this effort and more remarkably actually betters himself intellectually and in preparedness for the marketplace. How many new jobs will be created for these future success stories? True some will become entrepreneurs and better themselves and others, but the vast majority will remain at the bottom of the ladder until a slot opens up above them, just as they do now. To eliminate poverty requires the efforts of the government and the people, not just the people who are poor. It would be nice if everyone would recognize that while their individual success may be the result of hard work, it is also the result of the fact that they have great parents, a good solid education, good health, good genes, probably good looks and a heck of a lot of good luck and good people who helped them. Not everyone is in the same boat though we all should be.