Tuesday, October 04, 2005

Being Poor All The Way To The Bank

In a recent speach about the response to the Katrina disaster, John Edwards, among else, said this:
Second, folks need a chance to save for the future. The CCC sent money home to families. FEMA actually had a good idea with these debit cards. But now they're doing direct deposits in bank accounts. The problem is, many people displaced by the storm lived in neighborhoods without banks.

A worker making $12,000 a year could spend $500 just cashing checks and buying money orders to pay the bills. David Shipler begins his book about poverty by saying "it's expensive to be poor," and he's right. So as we offer relief, we should help people open bank accounts so they can escape the check-cashers and save. So they can get ahead - not just get by.
Some conservative commentators have commented on this, displaying their out-of-touchness (I will not say ignorance and arrogance) by voicing surprise that people do not have bank accounts. I will now briefly explain why not having a bank account is a rational choice if you are poor.

If you are not poor, your bank balance looks somewhat like this (X-axis is time, Y-axis is amount of money in the account):
Once a month (or so) your paycheck gets deposited in the bank. Over the period of a month, you gradually spend most, but not all of the money. Something remains in the bank account. That difference between income and spending accumulates over time and gathers interest. It is obviusly a good idea to keep that money in the bank, or to move it to a different account (e.g., savings, retirement) or invest in the stock market.

Let's, for the argument's sake, assume that you do not start off as poor, but as middle class. You have a bank account and the balance looks like the one above. But, as economy is slouching, your expenses start matching your income. Gas prices go up. You salary does not. You incur additional expenses, e.g, you have a baby, or your car is getting older and needs frequent repairs, or your health insurance premiums go up, or the taxes on your house double. As a result, you spend all of your pay-check every month - nothing remains.

Your balance approaches zero at the end of each month. Then a disaster strikes: you have a huge medical bill to pay, or the car repairs cost you several hundred bucks, or someone dies and you have to pay for the funeral, or you loose your job and it takes you a couple of weeks to find a new one that does not pay as much as the old one. Your balance will start looking like this (the arrow showing the time of the disastrous event):

Every month you are faced with a choice, really a false choice: do you worry about your credit rating, or do you pay your bills and feed your kids. To hell with the credit standing - your primary duty is to survive, keep the roof over your head and feed your kids. Every month, you get into the minus. Month after month you dip deeper and deeper into the red.

What happens then? The interest rate is pretty small. At the end of the year you may accrue a dozen bucks total. On the other hand, every time you write a check that puts you into the minus, your bank automatically charges you a dozen bucks. You get smart: pay all the little bills first and leave the biggest bill (e.g. rent) for the end, getting into the minus only once a month, thus avoiding paying multiple penalties.

Let's look at this from a different angle. Whenever your balance is positive you accrue interest. The bank holds your money and pays you for that privilege. In a sense, the interest rate is the penalty the bank pays you for owing you money. But when the situation is reversed and you owe the bank money, you do not pay exactly the same penalty rate. Instead, you pay exorbitant amounts of money that put you even deeper in debt.

All the money that a bank has belongs to someone else. The bank invests that money and uses it for a lot of good and important stuff (on top of paying their employees, building and equipping new branches, and advertising). Without the banking industry, the economy would not be able to operate very smoothly.

Yet, the banking system is not designed to be fair, nor is it good for poor people. When you open an account you are asked to sign on the dotted line - you have no say in the crafting of the contract. It's YOUR MONEY, after all, that the bank will be using, so it is YOU who should have a bigger say in how the contract is worded and how penalty rates are calculated when one party owes the other.

So, what do you do if you get into the situation depicted in the second figure above (or if you are poor to begin with)? Get out of the bank! Close the account before the bank closes it for you. Or keep the account but do NOT deposit your money in it. Keep the cash. Spread it along the month as wisely as you can. Pay everything with cash. If you cannot (and I am assuming it is illegal to refuse cash - the legal tender in the US - though many organizations do), exchange the cash for a money order. Quit using checks. Keep only one small credit card - completely empty - for emergences. Not just that you have a better control of your finances and a better feel, day-by-day, about your financial state, but you also avoid paying penalties for going in the red.

All of this I am telling you from personal experience. The picture number Two is how our bank account looked for quite a while. We keep a checking account in one bank, but do not use checks - debit card only. I check the balance almost every day. We also have a savings account. Whenever some money comes in I put a piece of it in the savings account. By the end of the month, there is usually sufficient money there to pay the rent, which I do using a money order.

We have one credit card which is tiny - only $400 credit limit. We use it occasionally and try to clean it up every month because this improves our credit rating. For 14 years we had two cars - needed for two people, two jobs, two kids to take to two schools. Now we have one car and on some days have logistical nightmares with driving schedules. Sooner or later we will have to get a new car, but I will not be able to afford to buy a car that I can afford to drive with current gas prices (hmmm, first Priuses are 5 years old now - perhaps they are getting within reach).

My mother sends some money all the way from Yugoslavia sometimes when I am in a financial crunch. My mother-in-law sometimes pays some of our bills, or buys us a lot of groceries, or buys kids' clothes. We are poor, but we manage every month to survive somehow, using magic for most part. One of the key aspects of it is to have as little to do with banks as possible. Bank will come and get you and bleed you to death if you do not know what you are doing. It is a rational economic choice for a poor person not to have a bank account at all.

I owe my school almost $800 dollars in tuition for the last year. I was planning to pay it once my defense date is set. However, a couple of days ago, I lost my school e-mail account (which only means I'll loose departmental information - no big deal), but more importantly I lost online access to the library, something I need for my Dissertation writing. I need to download papers. I have no idea how to find such an enormous amount of money. I guess I can negotiate a payment plan, but even that would be a couple of hundred per month that I do not know where it will come from.

While writing my thesis takes time and energy, and teaching does not really take much time (and does not pay much, either), I would not mind an additional flex-time job. Anyone in Chapel Hill/Carrboro/Pittsboro/Raleigh area has a job I could do? Waiting tables? Let me know. I would also appreciate a hit on the PayPal button every now and then. Or should I install an Amazon button instead, for those who do not like to use PayPal? Let me know in the comments.

posted by Bora Zivkovic @ 10:12 AM | permalink | (7 comments) | Post a Comment | permalink