Things That Cost More When You’re Poor
Spend less than you earn, save money and – phew! – Your financial problems are solved. If only it were that easy. Being broke sucks in and of itself, and there are obstacles that make it very difficult for poor people to make their way to financial security. For example, here are some expenses that actually cost the poor more.
Toilet paper and other paper clips
Even if you’ve never heard the phrase “toilet paper effect,” you are no doubt familiar with how it works.
The University of Michigan study tracked toilet paper purchases by more than 100,000 American families over seven years. The researchers found that 39% of high-income households bought toilet paper on sale, compared with 28% for low-income households. They also bought on average more buns compared to low-income families. Overall, the study found that low-income households pay about 6% more per sheet, and this is what the researchers concluded:
The inability to buy in bulk hampers the ability to schedule shopping times to take advantage of the sale, and the inability to speed up the shopping time for a sale hinders the ability to buy in bulk. We found that the financial loss that low-income households suffer from underutilizing these strategies can be as much as half of the savings they get from buying cheaper brands.
In other words, as the title of the study suggests , frugality is hard to afford . We also discussed this phenomenon in detail . It’s not just toilet paper. When you’re poor, it’s not easy to buy things in bulk or buy quality items that will last you long. There are many hidden, systematic ways that poor people pay more for things, and there are some costs that are not so subtle.
Car insurance
Auto insurance premiums are tricky, and there are several unexpected reasons why you might pay more for auto insurance – like renting a house or not going to college.
A recent study (PDF) by the Consumer Federation of America (CFA) found that low-income people pay more for their insurance, and that’s not because poor people are bad drivers. Specifically, the study found that good drivers pay an average of $ 681 more per year “because of personality traits associated with lower economic status.”
CFA searched for quotes from the five largest US insurance companies. They compared the rules for two hypothetical men and two women who had the same car model, address, and driving data. They only changed socio-economic characteristics and found that insurers charge 40 to 90 percent more:
Sure, you might argue that auto insurance premiums are more expensive for some reason, but the fact remains that they tend to be higher for low-income people, even if those people are good drivers.
Higher education
These costs can come as a surprise. The general assumption is that the poorer you are, the more grants and scholarships you are applying for.
This may be true, but many colleges, especially private ones, use a method called the “gap” to squeeze more money out of poorer students or discourage them from attending altogether. Basically, these colleges offer prospective low-income students tuition packages that don’t really meet their financial needs. They are underfunding these students and putting off helping wealthier students who can afford to pay the full tuition fees. A recent report from the New American Foundation states :
… colleges are increasingly using their own Institutional Aid Dollars as a “recruiting tool” rather than as a means of meeting a student’s financial needs … In practice, this means that the most successful students, who often come from wealthy families receive the most generous financial aid packages from their schools.
Simply put, this practice makes it more expensive for the poor to attend college. They will get help, but this is not enough. In the meantime, wealthier students get more help than they really need. Of course, poorer students then take on even larger loans to make up the difference and then graduate with a higher debt burden.
Banking and other financial services
Bank fees are expensive just by keeping your money in an account, which is ridiculous. However, they are easy enough to get around – if you have the money.
For example, a regular checking account with Bank of America is charged a monthly service fee of $ 14 . Dismiss it if you have a minimum daily balance of $ 1,500 or more, which is not easy if you are poor. You can also work around this, if you sign up for their credit card and get the right to a certain level. This can be a decent option if you have solid credit. Some banks allow you to get around this if you have a direct deposit of a certain amount. This is a decent option if you have a job that provides enough income and also allows you to sign up for a direct deposit.
The point is, there are solutions, but in practice they do not work when you are completely poor. Research shows that fewer financial service options exist for low-income people, so they rely on costly alternatives: payday loans and other debt traps .
For example, a study by the National Poverty Center found that 17% of nonbanked individuals said that their application to open a bank account was rejected. Many others find their existing bank accounts closed due to too low minimum balances. Whatever the reason, the lack of access to these accounts makes conservation, financial security work, or the creation of a bird’s egg even more difficult. The reasonable basic services available to most of us are simply not as affordable for low-income families, which means they pay a lot more for alternatives.
It’s easy to judge other people’s choices and simplify their decisions – just don’t fall into the debt trap, right? It would be foolish to take a payday loan. The problem is that many people have limited alternatives. If you are experiencing financial difficulties, this does not mean that you cannot do anything about your situation, but it does require overcoming some additional obstacles that most people do not notice. When you know what those obstacles are in the first place, you are at least in a better position to find solutions .