Why The Poor Stay Poor

This is not an easy article for me to write.  I now see this as an important counter to the other extreme I covered – life of a 1%er.  It brings back unpleasant memories from my time in Asia, during my corporate stint there.  Don’t get me wrong, we had a great time but the unpleasantness was for a different reason.  Asia is home to over 70% of the world’s poor people.   As is common practice there among all middle and upper middle class working households, the TFR household hired a part-time maid during our stay there. It was initially awkward to have a stranger spend couple of hours each day doing our chores but we slowly got used to it.

Poverty is bad, but it can inspire a child to get out of it.

Poverty sucks, but it can inspire a child to grow out of it if he stays in school.

We ensured we paid market wage, turned out we paid even higher as we later learned from our neighbors.  Our maid came from a typical low income family with a husband and two daughters.  As is customary in her community, just like her, both her daughters were married off young (18-20) and they have children of their own. She first became a grandmother at 43 and now has 3 grandchildren.  Her husband works as a casual construction laborer, so it’s either feast or famine in their household – mostly, famine as he hasn’t been able to find steady work since he suffered a fall at a rickety construction site and fractured his leg (no insurance settlements, the small time contractors in Asia don’t provide any).

Terms of Endearment

We paid our maid $100 a month for the following terms of work, which continually became sweeter for her as she gained our trust:

  • Two hours work per day – doing the dishes and cleaning the floor (of 3 bedroom home).  Some days she would come late by which time we would’ve done part of the chores anyway.
  • 1-2 days off every week as per her choice (as long as she informs us a day in advance)
  • 15 annual holidays
  • Unlimited sick days off for her or family (which she ended up using generously)
  • Annual gifts of clothes and shoes for her and family
  • One month wage as ‘annual bonus’ just for working the full year. Also, we never cut her wages for doing partial work or during many days off for ‘personal’ work.
  • Free tuition for her grandchildren whenever she wants (which the TFR household anyway offers where ever we live)
  • Coverage of medical expenses for any hospitalization (as needed, but within reasonable limits)

Note that she was working only part-time with us, and she worked in three houses doing similar jobs.  All told, she was making $300 or so a month, which along her husband’s $200-250 wages occasionally (he used to earn more before his fracture), put their family in lower middle class income bracket (they were not paying taxes to my knowledge as they were all paid in cash).  

In case you are wondering if they are ‘poor’, they are not, as per world poverty statistics.  Nearly a billion people live on less than $2 a day (most in Asia) so, her family income averaging at $12-15/day puts them solidly in lower middle class (7 times World Bank-defined poverty threshold of $1.90/day).  Also, note that income stretches a lot in Asia due to lower cost of living due to PPP (purchasing power parity) so you must not apply North American or Western European minimum wages here.  

But they are poor for a different reason…because of the lifestyle they chose.

Poverty doesn't always correlate to Frugality.

Poverty doesn’t always correlate to Frugality.

Our maid has the habit of spending a lot on her daughters and showering gifts on grandchildren.   She would also use her time off to visit them frequently.   That was fine with us, but the problem was, she would come late to work on many days and would inevitably run out of money by the middle of the month.  We put up with her because we found her otherwise honest and did good work (when she showed up).

My wife and I tried to explain to her the importance of an emergency fund.  After analyzing her monthly expenses, I showed her she can easily save 20% of their monthly income.   She was staying in a low cost shared rent arrangement and also, was getting other government welfare benefits. You may think this 20% saving amounts to a piddly $100, but keep in mind that if she did it just for one year, their family would save $1200, covering at least 3 months of living expenses for them. Relatively speaking (in PPP terms), they would’ve been better off than many Americans living paycheck-to-paycheck.

No Immunity From Lifestyle & Emergencies

She didn’t bother about emergency fund.  She preferred being the doting mother and grandmother rather than save for emergency or her own old age.

How long will you have the physical strength to work as a maid, I asked her one day.  As long as God wills me to, came the answer.  What if you faced a medical or other emergency needing lot of money quickly, I asked?  Pat came the retort, wouldn’t you take care of me at that time?  Between all 3 households, she continued confidently, she believed she can get a sizable loan (interest-free, of course) to cover the emergency.   She said she can work that off over a year.   That’s when I realized, she did have an emergency fund – me!

As her bad luck would have it, her sister was diagnosed with cancer, and since her sister’s meager insurance couldn’t fund all the treatment costs, the burden fell on her.  So, she came to us with her story, and out of compassion, we gave her $500 to be paid back when she could.  Despite the treatment and care, her sister unfortunately passed away.  Over the following year, she continually came up with one excuse or another to stop us from even partially recovering this interest-free loan from her monthly wages (she objected to recovering even $25 a month and wanted us to defer it to next year).

Then, one day, we informed her of our international relocation.  She said she will absolutely repay us and even asked for our forwarding address to send us $500!  With nearly rolling eyes, I told her not to worry saying I will call her later to provide this information.  In our subsequent calls to see how she and her family were doing, she never once brought up this pending loan.  To this day, she has not paid us back.  

During our last phone call to check in on her, she even asked for another $300 loan, while the last one remains due! I am not angry at all about this, rather I felt sorry for her due to the vicious cycle she has fallen into without realizing its long-term impact on her and her family.  This story has parallels to an American household earning $3,000 a month but burning through it by middle of the month, and turning to friends and payday lenders to bridge the shortfall.  

During the course of this experience, I found out that she had taken similar loans from other homes as well where she worked (some asked her to sign a note, but we never did).  She hadn’t paid them back either.  I also found out that she continued with her habit of blowing all her earnings by the middle of the month and somehow scrounging by on loans till the next month’s income came through.  This story may have an Asian context but is no different from similar folks in America dependent on vicious payday loans as J. Money points out.  They get deep in debt with no end in sight.  

Drowning in a Whirlpool of Debt
poor-indian-1417068_960_720

Behind every wrinkle is a sad story.

This experience gave me an insight into why many marginal people stay marginalized.  It is one thing not to make enough money, but completely another matter to live beyond your earnings even when you have no social pressure to do so.  No one living on her street or even her family expected her to spend so much on gifts, but she does this on her own and finds herself drowning in debt.  Even if the TFR household forgives her loan, there are many that won’t.  One day, this will fall like a ton of bricks on her.

Poverty can be a curse, but it is sad to see people compound their poor income problem with even poorer spending habits.  In Asia, counting on the generosity of a benevolent ‘master’ employer is fairly common.  This culture binds many into a lifetime of manual labor and mounting debt.  In developed countries, it is a lifetime dependency on payday loans and long-term public welfare programs.  This stops them from taking even a small step towards financial independence.  The poor, unfortunately, stay poor.

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15 comments on “Why The Poor Stay Poor”

  1. By Lin

    While have by no means have ever been considered rich or wealthy, we’ve always managed to stay within our means economically.
    There have been several friends and family over the years that have asked to borrow money, be gifted money and brought us hand written ‘notes’ in an attempt to get a loan.
    We’ve diligently shown them the ins and outs of how money works, an unbelievable number of people do not comprehend this basic concept, living within their means, how to avoid financial pitfalls and each and every one has returned to the ‘less money than month’ standard of existence. Only to complain and grumble that the world is against them, how they were never born to be anything but poor.
    In some cases, poverty is a grueling, lifelong drudge of life, unfortunately do to circumstances completely outside of one’s control. For these people, my heart truly goes out to them.
    In some cases, many cases, it is nothing more than bad choices and poor impulse control. For these people, they have yet to learn and perhaps never will.

    • By TFRadmin

      Thanks for sharing an insightful comment with personal experience, Lin. It’s all about choices at the end, indeed.

  2. By Finance Solver

    Very interesting post. The poor definitely stay poor partly because of their own choices and partly because they probably started poor.

    Human stubbornness will never die off, because changing ourselves is so difficult to do. I have a personal view of having optionality and being adaptable to change has the best chance of survival because change will always happen, whether we like it or not. Really thought provoking!

  3. By Full Time Finance

    In addition to the lack of financial education and the self fulfilling cultural aspect, there have also showed that the presence of the pressure s of being poor lead psychologically to worse decision making as you don’t take time to think things through. It truly is a tough cycle to break.

  4. By Raju

    Really nice post and analogy. I must say that poor people are not born with disabilities, but they lack confidence and innovation. Poor people should try to come in to the light of society and try to do something different. Education is also a major factor which is the reason why poor people stay poor. I think they should try to educate their children by sending them to proper schools which offer free education.

  5. By Financial Panther

    It’s an interesting perspective and unfortunate to see happen, but I’d take a bit of an exception to that title. I’d argue that the poor do not stay poor because of their spending habits. The poor are poor simply because they do not make enough money or have the opportunity to get out of poverty.

    I don’t really know how far her income stretches in Asia, but assuming this is truly middle class income in Asia, then yes, this woman is the equivalent of a middle class American with too much debt (think of your typical middle class American with the McMansion and two expensive new cars, while making not enough money). If she really had all the opportunity in the world, at least part of the problem then lies with her.

    But in general (and while far too nuanced for a short comment), the poor, and I mean the truly poor, stay poor because being poor is a huge disadvantage. Poor education, unstable housing, dealing with crime, small mistakes that knock you down much more than those who are better off. These are things you, I, and most in the personal finance community didn’t have to deal with and likely will never have to deal with.

    There aren’t many in the personal finance community who are truly poor. Being poor isn’t the product of poor spending habits. It could be a partial factor, but there’s much, much more to it – things that we don’t even think of because it’s not even a factor for us.

    There are a number of poverty books that I might recommend if you are interested in exploring this topic further. For a recent book, I might recommend “Evicted: Poverty and Profit In the American City.” That book discusses the major instability in housing that results from being poor and not only how destructive that is to getting out of poverty, but also how expensive it can be as well. You may also want to take a listen to Malcolm Gladwell’s recent podcast called Revisionist History, in an episode called “Carlos Doesn’t Remember” which also discusses how difficult it is to get out of poverty because of the many factors out there pulling you off the path out of poverty.

    Again, it’s a good post you wrote and one that shows an interesting story of a potentially middle class woman in Asia squandering her money away, essentially in the same manner as a middle class person here in the US. If she’s truly middle class, then yes, much of the fault lies with her poor spending habits. If she had better spending habits, she could probably build up a middle class life. But if you’re saying she’s making a middle class income in Asia, then she’s not poor, is she?

    • By TFR

      Thank you for this detailed comment. The ‘lower middle class’ is a technical definition using PPP and WHO parameters, but if you saw her, her family and other lifestyle markers, you wouldn’t hesitate to call her “poor” because in many ways, she certainly is. You are a financially savvy lawyer in the western world, so you are orders of magnitude higher than even the poor in America, leave alone in Asia.

      I understand that low income is the main reason for poverty but people that don’t hesitate to spend and take payday loans compound the problem manifold. Thanks again, FP, for stopping by and adding value to this discussion.

  6. By Mustard Seed Money

    Wow this story is so heartbreaking. She has the available resources at her finger tip through your financial acumen and to let that slip by is horrible.

    She could have potentially broken the poverty cycle and altered the way generations of her family lived and decided on the wants of today.

    Anyway, I really appreciate your perspective on this subject.

  7. By Mr/Mrs H &3

    I grew up in Asia. Most of the housekeepers I’ve been around with are from the same family/area that my parents also had when they were younger. Reputation is a housekeeper’s resume. When yours did not pay her loan after you kindly offered it during difficult times and she had the audacity to request more, she would be let go before the week was over. Her behavior was unacceptable. Mismanaging a household’s trust, can sever employment for her and possibly her relations too.

    • By TFR

      So did I, H. The circumstances were mitigating though, she was on the hook for her sister which is an emergency she never thought she would face. It’s a cycle that’s difficult to get out of. The way they maintain trust is by being honest and doing good work in general. Normally, they would pay back the loan before asking for another one, but she probably felt she could squeeze us a bit more as transient employers.

      • By Mr/Mrs H &3

        You were kind employers. She sort of won the lottery in employment. Others would not have let her borrow and not payback something.

  8. By The Green Swan

    Wow that’s an interesting experience you had in Asia, thanks for sharing that, TFR. Quite a cycle they get into, that’s for sure. And as you describe it, it seems largely due to negligent decisions which is a shame. Not sure what the answer would be… Improved education or financial literacy? But it seems like your maid denied your attempts and so perhaps that attitude is just ingrained in the culture.

    And for different cultural influences, that maybe the same driver in the poor population in the U.S. I think people here that get in the cycle are in denial of their situation and lack accountability. But I think that is a small percentage of those who use payday loans. I think the payday issue is a different animal and hard to paint with a broad brush.

    Good post, thanks!

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