It’s Expensive To Be Poor

Being poor is expensive. Not only do you have less money to get by with but everything also costs more. The secret to getting rich is in economies of scale and bulk buying, something the poor simply can’t afford. As they’re stuck trying to make ends meet day-to-day, they can’t invest in the future and so are stuck with false economies that cost them more in the long run. This is the source of the counter-intuitive saying that “You have to be rich to be poor.”

The poor pay more for groceries and food. This is because the poor are concentrated in urban areas where rent is higher so businesses have to charge more. The cheapest grocery stores are the ones who can use economies of scale and market power to push down prices (think of Wal-Mart). These are located in the suburbs where there is the most space and cheapest land. However if you are too poor to afford a car or it is too far to get public transport, then you are stuck with the expensive city shops. These shops are too small to buy in bulk, but instead have to buy from wholesalers and middle men, which pushes prices up.

This leads to additional problems like poor health. The cheapest food is usually the worst quality, while the healthy organic food is usually the most expensive. The poor are forced to buy the cheapest food that costs them in the long run through poor health. They solve a short-term problem by creating a long-term one. The poor also drink and smoke more, though if I had to deal with the stresses of poverty, I’d need a smoke too. The pub is often the only social area and source of entertainment in working class communities. The poor are the main purchasers of lottery tickets, for them it is the only way they can escape poverty.

There are numerous examples of false economies that capture the poor. A cheap pair of shoes may only last 6 months, whereas some twice the price may last 2 years. (Terry Pratchet explained this well) The poor simply don’t have the money to invest in quality goods and are instead trapped in poverty, paying more and getting less. There are significant discounts in buying fuel in bulk or during the summer and saving it for winter. However the poor lack such storage and can only buyer smaller (and dearer quantities).

The poor suffer from their exclusion from banks. Their lack of savings and poorer credit history means they have to pay higher interest and often are forced to resort to loan sharks. Instead of buying something outright they instead have to use hire purchase. It was reported that a $200 rent-to-own TV in Wisconsin costs $700 when interest is charged. They can be charged exorbitant rates and end up paying the loan several times over. Without a bank account they cannot cash paychecks but instead have to use shops who charge a 10% commission. These charges are known as a “Ghetto Tax” and if they were removed it would put an additional $6.5 billion dollars into the hands of the poorest Americans.

Poor people pay more in crime and security. It is the poor who live in the neighbourhoods with the highest crime and it is they who are robbed the most. Local businesses have to put in extra security measures and increase prices to pay for these. Crime forces people to focus on the short-term only and discourages long-term investment. After all, what’s the point in investing if it is only going to get stolen?

They suffer from poorer housing. As they cannot buy they have to rent, even for decades. The poor may have paid for a house several times over and still not own it. Poorer housing has poor insulation leading to more spending on heating. If you lack the money to pay a washing machine, you have to go to a Laundromat, and pay much more over the long run. Buying a cheap car costs you more in repairs. The poor lack the power of the internet to shop around and find cheaper alternatives. They are stuck with what they’ve got.

If the poor are late for a payment, they get hit with large fines and hidden charges. This severely damages their credit ratings and can cause them to lose the product, meaning prior payments are wasted money. Banks and insurance companies make huge amounts of money off hidden charges or and high interest rates are charged on overdrafts. When you are stuck trying to make ends meet on a day-to-day basis it is impossible not to miss a payment and suffer a fine. Not having a credit card is the same as having a bad credit history. You are stuck with the high interest loans and fees which eat your money.

The poor suffer from a lack of confidence and information. If you have low levels of education and lack of access to media, you cannot find out what the best deals are. The poor suffer from a lack of good networks and connections who can point them to the best deals. If everyone you know lives in the ghetto, then you’re stuck in the ghetto. Poor people are often exploited with hidden costs and charges, like they were by “predatory lenders” before the financial crash. They lack the information and education to be aware of all the details of a contract and as a result they are often tricked and conned.

They also lack confidence. Poor people often feel inferior around middle or upper class people. They are (deliberatively or accidentally) made to feel stupid and undeserving. Psychologists have noted the extreme levels of stress that working class people feel simply being in a bank. They feel they don’t belong, that people like them shouldn’t be here. Their self-esteem is crushed, even without anything being said. In the end they will accept whatever they are given and ask no questions.

Being poor crushes your soul. Many of the poor know that they are being overcharged and are getting a raw deal. But what can they do? They feel excluded and alienated from the rest of society. They feel cut off and that there is nothing they can do. So they give up. What’s the point in trying if you’re not going to win? So they buy from their local shop knowing its cheaper elsewhere. They accept what they have because they have no choice.

26 thoughts on “It’s Expensive To Be Poor”

  1. The secret to getting rich, apart from earning a lot, is to spend less than you earn and to save and invest your surplus wisely.

    Doing that requires a low rate of time preference, which most people don’t have – and the rewards for which are diminished by the State through its taxation, welfare and inflationary policies.

    One major interest of mine is consumer credit. The proliferation of credit cards is fascinating. I personally have never had a credit card or indeed borrowed any money from anyone (except for one instance when I temporarily lost access to my bank account).

    If people were willing to save up one or two months of their salary and to keep it always there as a reserve, it seems to me that the vast majority of them would not need to use a credit card (outside of emergencies, which are rare for people who don’t take risks). But many people are not able to delay consumption; they aren’t able to deprive themselves of things in the short-term or reduce their standard of living to an appropriate level. It is common for them to spend whatever money they have access to and then rely on credit to stay afloat.

    Because I always leave some money in reserve, I never pay any overdraft fees, credit card interest, bank charges etc. I don’t use up my mental energy worrying about cash flow because I know that I have a reserve so that there is not going to be any issue. I was recently awarded a generous pre-approved overdraft facility by my bank and I might use it a little bit to accelerate my personal investing activities, but the fees will be minimal and the amounts borrowed insignificant in comparison to my status.

    Sure, I could spend much more money on my accomodation, on my car, on clothes, entertainment and holidays, but I prefer to keep my spending at a level which I know is comfortably beneath the amount that I earn. That’s a sensible way of living your life, no matter how much you earn, even if it means that your standard of living is a little lower than you would like it to be. At least you don’t need to worry about interest or missing payments and you can gradually save.

    I’m quite pleased by the consumer credit drought which is starting to take hold in the UK. Ordinary people are increasingly turning to payday loan companies for their spending because they are no longer getting what they need from the high street banks. The APR on these loans is often around 1200%. It can’t be long before more people start to realise that they would be far better off in the long-run if they made a priority to reduce their consumption first of all, before seeking credit. If they do that not only will they personally benefit but they will help society by allowing more capital to be directed towards productive activities. Of course, this transition to a stable consumer balance sheet is another positive phenomenon which is under attack by the Bank of England.

    1. Its funny I’m currently reading a book about the behavioural economics of credit cards and borrowing. It is certainly a problem and one that played a role in our recent crash. Saving is always a great principle but sometimes events get in the way and we have to borrow. For poor people like I mentioned above, they have so little money that they cannot afford to save much.

    2. The problem with your, “the poor should save” theory is that it’s not possible to do so without the savings being taken, services being lost, or arrest taking place.

      If a poor person has too much money on hand in cash and law enforcement finds it, a drug trafficking conviction is almost guaranteed even if they’ve never touched a drug in their life. The prosecution will threaten them with ridiculous sentences and then offer something comparatively light in exchange for a plea. Their state-provided “defense” counsel almost without exception and always without regard to the details of the case advice that they take the deal.

      The poor can not keep the money in a savings account. Done prior to learning, the money ends up in a bank that slowly drains it away with fees, even if they have to “accidentally” lose deposits to do so. It has happened to me and everybody I know. Done with more knowledge, a more ethical bank with higher yield can be found. By the time they’ve learned how to manage their money, they’re in debt and their assets will be seized.

      The poor can not keep money in a checking account. The pennies saved to put back add up to enough that would cause them to lose access to services needed to survive. If a poor person receiving food assistance has money in the bank, then the government cuts off their assistance until the money is gone. There is no grace period, no chance to get ahead, and no opportunity to do anything about it.

      The system is engineered to guarantee that what you describe can’t happen. The worst part about that is this is hidden from those in the middle class. The upper class knows; they get rich this way. The poor know, but lack the linguistic skills to communicate it to people who during the process cause them to feel inferior (even if unintentionally). As such, the middle class has a perpetual perspective that the poor choose to live in poverty.

      It’s strange how nobody ever stops to think about how ridiculous that conclusion is. Nobody chooses poverty any more than they would choose slavery because there is very little difference. Read the descriptions of what it is like to be a slave, as written by Frederick Douglas. The only difference today is that the slave quarters are bigger, and we can change masters if we’re willing to suffer for it.

      Notice the transition from “they” to “we”. Many potential readers here would not have made it this far had I begun with “we”.

      1. Wow dude. Just wow. Where do you come up with this stuff? I mean, its VERY obvious you’ve been really well off your whole life so I cant expect you to write about poverty TOO accuratly, but you really played up alot of that shit. Specifically the drug trafficking and the foodstamps getting cut off for having a bank account. Ive been homeless since I was 16, (26 now)have had unexplainedbank accounts, foodstamps several times, Iin several states and no ones ever questioned It. Addmittedly, Im better at poverty than most Iin my situation, but the fact of the matter Is, yes, alot of these people are fucking stupid. Im surrounded by it constantly, but I can deal with It, I can kinda relate, but whats more annoying is gated community liberal college student yuppie fucks like you and everyone else on this site talking out of your ass on some feel good “Its not your fault your a loser, its the mans” just shut up, you have no idea what your talking about

    3. Saving up one or two months worth of salary is harder to do the less you earn, to give an example with numbers.

      Guy A earns 1200€ from a part time job.
      Guy B have a high skill job and work overtime in addition, he earns 4000€.

      Guy A have a 500€ apartment, buy food for 100€ a month, and spend another 200€ additionally on assorted bills, commuting costs, and year-averaged consumer electronics. He is left with 400€ a month surplus, and to save up that buffert of 2400€ takes him 6 months, his buffert is also small and can evaporate rather quickly.

      Guy B have a 900€ apartment, buy food for 200€ and spend 500€ a month on bills, fuel and other similar costs, he also puts 500€ a month into financial investments, leaving him with 1900€ surplus. It takes him only 4 months to fill his emergency account, despite having a significantly more expensive lifestyle, and that value at 8000€ is a bit above 3 times as much as Guy A. And if SHTF he can also tap into his financial investments that are piling up, but if he don’t need to tap into them they’ll eventually skew the situation even more in his favour as capital gains build up.

      Guy A could of course save more than 400€ a month by adopting an ascetic lifestyle with no tv, computer or internet, have a 250€ minimal apartment and eating rice and vegetables for every day to reach 50€ in food.

      But that’s a huge sacrifice of comfort and limitation of lifestyle, whereas Guy B would only gain a moderate increase in comfort if he doubled his living costs.

      To summarize: basic living costs scale unfavourably at the poor end of the spectrum.

  2. You should look into cognitive load theory and the related debate about how constant worry (about money) diminishes the amount of cognitive bandwidth available for making the kind of “good choices” that seem so easy and straightforward when you are well off. It’s not only that good food costs more money, but that it requires more thought (fewer preservatives and less processing means that you have to know how to prepare it and how long it will keep) as well as more mental energy to find places to get it (here in so many cities in the States, the grocery stores and supermarkets are in the relatively affluent suburbs, while the cities and the lower income areas have convenience stores and fast food restaurants).
    It’s an important issue and one I am always happy to see people looking into…

    1. I actually did read an article on that a week or two before writing this one. I considered including it in this post, but I felt I would be making it too long and diluting the message. Psychology and the working of our brains deserve a post in themselves.

  3. “The cheapest food is usually the worst quality, while the healthy organic food is usually the most expensive. ”

    Organic food has never been proven to be any more healthy than food produced using any other method.

      1. This is not strictly true, I can go to a market (I’m lucky to have one) and buy the veges the supermarkets did not want (bent leeks, malformed broccoli) much cheaper. It did mean I needed money on that day, and the ability to store those veges, and a means to cook them. I could not walk the streets with a 10Kg bag of potatoes. The base ingredients are cheaper, the ability to process them in a usable form is not.

  4. First time I have commented on a blog, I think.

    As someone who through some bad luck and bad decisions, and some things business wise not working out, going from the waterfront apartment to homeless and living in hostels on borrowed money, This resonates with me. I’m also going to say that this would have resonated with me before as I was actually aware what those in lesser positions that me encountered.

    As things were heading downhill I moved into cheaper unfurnished accommodation, I had a good lifestyle but not one where I was overcommited. The first thing, I could not afford to furnish the place, not even on cheap second hand stuff, I ended up renting furniture including a bed, and a washing machine. The cost of doing so was high depending in the item, the bed was about one year of payments as the cost of the bed, the washing machine was similar. I did not rent a TV, that was about 20 weeks of payments. I will add the rental company were in no way sharks and provided a professional and valuable service. When I could not pay they waived the non payment charges (the contract explicitly stated), without my even asking. I ended up renting for only two or three months, and they happily came round and picked the stuff up – end of contract. However, the reason they picked it up was I could no longer afford rent. However…people are renting TVs for years, when they could have one in twenty weeks of payments.

    Next thing utilities, there was a 15% prompt payment discount, if paid within 10 days, which means a 15% penalty for not having cashflow.

    Food – I cook well, I cook well because I was lucky enough to have been taught to cook well by my mother. But the ability to get to a place I could buy cheap basics was not there, I did make a point of getting to a cheap suburban supermarket when I got some money and spent a fortune on supplies. I was fortunate that occasionally a big bucket of money came through. That fortune, saved me so much though. Others do not have that luxury of a bucket hitting them in a single hit and are still buying smaller portions at a higher unit cost.

    Luckily my bank had stopped charging dishonour fees, the concept of charging you for not having money to make an automatic payment was not welcomed in the country I live in, and its been discontinued by all banks.

    Cigarettes, an absolute escape and a treat, and of course you smoke when you are poor. It’s a lovely thing to do, and look forward to, you are not looking forward to the next opera or Pearl Jam concert. So i understand why money is spent on them, and also cheap alcohol.

    Then – access to money. There is no way a bank will extend you money when you have no money coming in, and this is absolutely fair on their behalf, they are not being jerks.

    Then you hit the hostels, you can’t stock up to save money, you are eating at Burger King because calories wise, its great value (I walked past Burger King today while looking for lunch and was disgusted). You can’t buy the ingredients for one, in a form you can carry around in one bag, and cook, to make something the equivalent of $3 burger that satiates you. You are also in a shared kitchen, and people steal your food if you have anything of use. So you are on ramen or fast food.

    I was having to make choices between food, or a bed for a night. The bed always won, so got kinda hungry, I did carry in my bag some basics, onions, rice, some stock, eggs, and veges I could get for cheap, so if I had a stove, I could cook.

    I have turned things around, and I am lucky to have the smarts, education and a professional and social network to allow me to do so. I started on a contract at a place, where I was getting up in the morning and putting on a suit, in a hostel and returning their very night, I then was asked to interview for a job and got it. My first pay, I bought a new suit and stayed on in the hostel. If they knew where I was, and what was happening to me I shudder to think what would have happened.

    I had to borrow money to get through it, the crazy thing in hindsight I was borrowing money from the CEO of a pretty reasonable software company, he is one of the few people who knows and still respects me highly. By borrowing money, I am talking $100.

  5. “the poor are concentrated in urban areas where rent is higher”

    Why would that be the case? Why would the poor live in high rent areas?

    1. Well that’s where jobs traditionally were and there are costs to moving home. People also have social and cultural ties in the inner city. they also may lack information about where the cheapest place to live. There is also inertia.

  6. This article is skipping over several important factors. The first being most of the wealthy did not get rich, they were born wealthy. Secondly, not all poor people have poor spending habits (yes some do), but they are poor because of lower pay for necessary jobs; the poor mostly live on minimum wage or in that area of pay. This article is based in the idea the poor are poor because they don’t know how to use money, well that is a fallacy in itself, if you don’t have money what can you spend it on. You can’t afford to by the healthy food because you won’t have enough food, fair enough. But if you don’t make enough money to move to an area with better job, get a better education, or pay for less; then it isn’t just how you live your life. The jobs themselves are the issue for the poor. We could outright create millions of jobs for our country if we did the necessary things for our country; invest in a green infrastructure would be millions of well paying jobs, rebuild our government so its not fool of useless millionaires who are destroying our country so they can have more money. Don’t treat the poor like they are stupid, they work hard, my friends and I are poor; we have all had two or three jobs at some point. We are simply not paid for what we work, when compared to what is paid to people who let there companies lose billions of dollars and then get 10 billion in bonuses.

    1. Actually you missed the point of this post. I was not trying to explain poverty or why people are poor. Rather I was showing that if you fall into a poverty trap it is very difficult to get out. My very aim was to show that simply being frugal and saving is not enough, nor is stupidity the reason. My point is that regardless of intelligence, the poor are forced to pay more simply for being poor.

      1. Agree the poor pay for everything 3 times over but you could say someone who takes a mortgage pays for their home twice over in interest rates and a rich man can buy a house outright, ok I’ve never been rich but I never been in debt I know others who earn 3 times my earnings but struggle to make ends meet. You have to live below your means if your poor the trouble with a lot of poor they see what the rich have and will get in debt just to have it and then their is the poor who trying to get rich from gambling and then turn to drink or drugs when they lose their is 100s of reasons why the poor stay poor and poverty is passed down from one generation to the next. You have to sacrifice if you want to have even the smallest amount of savings but most are not willing to make sacrifices..

    2. Then I do apologize I missed the point of your article. And that might be due to my bias, I am far to use to seeing in papers, news media, and everywhere on the internet how easy it is for people to not be poor if they don’t do a, b, or c. I watched a video on The Daily Show earlier today, were a woman was talking about how 250,000 dollars isn’t rich. I legitimately could not even begin to imagine what I would spend that kind of money on. And I say after a reread with my bias taken out your article has some fine points. I have two friends and their child who were living with me for the past two months, he found a job that could potentially make over 10,000 a week selling life insurance to union members. So they got their own place, moved out, then they send him to a place where the steel union hasn’t worked in 15 years, but they are required to remain in the union. I am lucky in that I have a stable job, that gives me regular overtime due to a trained position. But, its terrible watching my friends and family unable to find a job that doesn’t pay 8 dollars an hours. The system needs rebuilt, not just how much people make, but what we actually pay for necessities. Let the cell phones be 10,000 for all I care, but milk needs to go back down to 99 cents a gallon.

  7. I’ve never been rich but I never been in debt I know others who earn 3 times my earnings but struggle to make ends meet. You have to live below your means if your poor the trouble with a lot of poor they see what the rich have and will get in debt just to have it and then their is the poor who trying to get rich from gambling and then turn to drink or drugs when they lose their is 100s of reasons why the poor stay poor and poverty is passed down from one generation to the next. You have to sacrifice if you want to have even the smallest amount of savings but most are not willing to make sacrifices..

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