Tuesday, March 15, 2011

To Stop Being Poor, You Must First Stop Thinking Poor.

Enterprises such as this, thrive in poor neighborhoods.  Rich folks know better than to pay a fee to cash a check, or to take out a "payday loan"  at 30% interest.  That's how they get rich - owning places like this, instead of patronizing them.

There are some folks who say that the "system" is stacked against you - that no matter what you do, you can't get ahead.  You can believe this if you want to.  But in a large part, decisions you do make have a dramatic influence on your life.  And here in America, we are free to make decisions - good decisions, bad decisions, and incredibly, incredibly bad decisions.

And in America, if you make incredibly bad decisions, no one is going to tell you that it wasn't your fault.  Well, some people will try to, to be sure.  But more importantly, no one is going to warn you ahead of time.

Except perhaps, me.  But then again, if you are poor, chances are, you aren't reading this.  And if you did, you'd dismiss what I am saying out of hand.  After all, "everyone" gets payday loans, "everyone" leases new cars, and of course "everyone rents" furniture - it's even the name of the store!

And that is the problem right there.  Not only do people make horribly bad financial decisions, when you point this out to them, they get defensive and actually defend horribly bad ideas like 300% interest rates.  When they finally do go bankrupt, it is never their fault - only the fault of the "fat cat bankers" or the government.

This is, of course, weak thinking at its worst.  But increasingly, our society not only tolerates weak thinking, it rewards it.  Yes, you can get something-for-nothing, and if it all goes horribly wrong, the government will bail you out.

And yes, this is increasingly true for the middle-class as well.  At the height of the housing craziness in Florida, around 2006, I was out to dinner with some Real Estate Agents and Mortgage Brokers, and they all said the same thing - that the current trend was unsustainable, and that the prices were so high, that no one could afford to buy anything without some sort of funny-money loan.  And they all foresaw a time when it would horribly go wrong.

And they agreed, at the time, that "the government will have to bail everyone out, it will be so bad".  That was in 2006.  Two years before it hit.  And this was the general consensus of people "on the ground" - in the business - and at ground-zero of the mortgage meltdown.  And yes, they all continued to sell houses and mortgages until 2008.  What else could they do?  They had to make a living, and telling people not to buy wasn't bringing them home a paycheck so they could make the mortgage payment on their overpriced house.

But for the most part, the middle-class survived the meltdown.  The people who got stung the most were the folks who bought into the something-for-nothing payment-optional toxic ARM - people who never owned a home before and felt they were getting in on a "sure thing" before they could be "priced out of the market."

But I digress....

How can you, as a poor person, better your life and increase your income by 10-20% or more - effectively increasing your disposable income by 50% or more?  Simply by not doing horribly bad financial things.  Here is a short list of financial mistakes that no one should ever make, regardless of income level.

Paying money to cash a check:  If someone writes you a check, deposit it at your bank, and it will be "cashed" for free.  Don't have a bank account?  GET ONE.  Or go to your local credit union.  Alternately, go to the bank that issued the check and ask to cash it.  You will need ID, preferably two forms.  But its FREE and if you are poor, you can't afford to be paying people for money.

Pay Day Loans:  Paying 30% interest so you can have money today, instead of a week from now makes no sense.  Once you sign the papers on the PayDay loan, you will end up bankrupt.  It is like slow-motion suicide.  One payday loan leads to another, until you spend thousands of dollars in interest trying to pay off a $500 loan.  If you are even contemplating a PayDay loan, use this as a wake-up call to reorganize your finances.  If you are "running out of money" before PayDay, chances are, it is because you are spending it on things you don't need.

Paying ATM Fees:  Using a "foreign" ATM and paying $2 to $5 in ATM fees makes no sense whatsoever, even in an "emergency" (most "emergencies" end up being anything but that, and most are just a result of poor planning).  Even if it means walking a few blocks - or driving a few miles - to your own bank, it is worth saving the dollars.

High-Interest Rate Credit Cards:  You can get a credit card today with a rate below 10%.  Paying high rates (and some cards go to well over 50% nowadays) makes no sense at all.  You will end up paying TWICE for each thing you buy.  And chances are, most of the stuff you buy isn't stuff you needed.  Get a debit card instead, or pay cash.  It's a lot cheaper and you'll stay out of credit card debt, which is like a bear trap for the unwary.

Money Orders:  Many poor people end up using money orders, which can cost a dollar or more apiece.  Imagine, if every time you wrote a check, you had to pay a dollar!   You'd get so upset, you'd burn down the bank!  But poor folks think nothing of this.  Most do this because they are afraid of banks, or have been turned away from banks because of staggeringly poor credit.

Rent to Own Furniture:  Paying 2-3 times the value of an object, just so you can have it "today" and pay over time makes no sense at all.  Yes, you need furniture, eventually.  No, you don't have to have it "right away".  I've slept on the floor in a sleeping bag while saving up to buy a bed, and so can you.  Leaning to live without is hard, but it is far more profitable in the long run.

Consumer Financing:  Avoid these places like the plague.  Their interest rates are staggering, and you will squander half your income on interest payments.  What is it you need so desperate in life that you have to pay 15% interest on it?  Answer:  Nothing, if you think about it.  Learn to live with less.

Used Car Dealers:  These places are always in bad neighborhoods and sell questionable used cars for far more than book value, but offer you the "favor" of financing the car for you - "Buy Here, Pay Here", usually by the week.  The car will be dead before you finish making payments on it.

Brand New Cars and Leasing:  It is tempting, after having had a bad experience with a used car dealer to buy a brand-new car "to avoid all those hassles".  But that is akin to saying that you had a bad experience with Crack Cocaine, so you'll try Heroin instead.  A new car is very expensive, particularly if your credit rating is shot.  In terms of cost per mile, it is the most expensive way to travel.  And yet, oddly enough, a lot of brand new cars are sold to very poor individuals, who buy "on time" - or at least try to, before the repo man puts his stinger on the car.

 This is by no means an exhaustive list.  But all these things have one thing in common - they are based on the Culture of Poverty.  The idea that some folks get in their head that they don't "deserve" any better - that regular financial institutions and channels of commerce are not available to them, because they are not "good enough".  So they resort to what are little more than loan sharks (without the broken knee caps) to pay for things that are more wants than needs.

UPDATE May 2014:   I went to use the ATM today.  My bank cancels my PIN number if I don't use the ATM every six months, so I set my calendar to remind me to use the card before the PIN expires.   In the receipt slot was a receipt from the previous user.  They withdrew $40 and paid a $3 fee to do so.   This is typical Poverty-Think on several counts:

1.  Thinking that $3 "isn't a lot of money" so it doesn't matter.

2.  Not planning ahead for finances, thus being forced to use a foreign ATM.

3.  Taking out a measly $40, insuring that tomorrow, they will do the same thing.   $3 is 7.5% of $40 - but it is only 1.5% of $200.

But this is the culture of poverty and poverty-think.   Thinking that paying interest is OK, that paying extra is OK, that small charges like this are "inevitable" and thus squandering away half of your disposable income every year.

Your disposable income represents only about 10% of your overall income.   Cut out little expenses, and you can double your effective disposable income.