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Most people are not super wealthy, but we all have an idea what it might be like to be a wealthy
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person. We watch them on TV, we follow them on Instagram, we read their blogs and autobiographies.
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Unfortunately, that awareness of how the other half lives doesn't happen much in the other
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direction. Though many of us have probably described ourselves as “broke” or “poor”
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at one point or another, very few have an understanding of what real poverty feels like.
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And it's not just a matter of having less money. Once you get below a certain threshold,
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a whole new set of rules apply that actually make day-to-day life more expensive. If you've
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never struggled with real poverty, you might not be aware of the many hidden costs and
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financial traps that conspire to keep poor people poor.
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It's very hard to make your way through modern life without access to basic financial
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services like checking accounts, ATMs and personal checks. But the less money you have,
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the more these things will cost you. That's because banks make their profits by accruing
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interest on your money. So if your account balance is too low, usually under $1,500,
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they won't consider you a profitable client anymore, and they'll make you pay for their
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basic services in the form of a monthly fee.
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And heaven help you if you go below zero--each overdraft incurs a charge of about $35, and
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many banks will deliberately reorder your transactions for the day--from biggest to
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smallest--to drive you into the red more quickly and rack up as many overdraft fees as possible.
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If a bank is willing to extend you credit at all, the terms will be much less favorable
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than for someone with a rosier financial history. You'll pay more money in interest every
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month, and any late payments means more penalties and fees.
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Even cash can be more expensive if you don't have much of it. If you withdraw $100 from
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an out-of-network ATM, that $3 fee equates to a 3% service charge. But if you can only
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afford to take out 20 bucks at a time, you're essentially paying a 15% charge to access
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your own money.
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Taken together, this means that a poor person might end up paying hundreds or thousands
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of dollars a year for services that wealthier people virtually enjoy for free. It's no
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wonder, then, that a lot of low-income people avoid banks altogether--but even that comes
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at a steep price. Cashing a paycheck without a bank account costs money. Buying a money
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order to pay your electric bill costs money. And if that bill is due in just a couple days?
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Well, you can either get hit with a late fee, or fedex it--an extra expense that someone
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with a debit card and an internet connection never has to worry about.
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If you think that dealing with credit card debt is bad, thank your lucky stars you've
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never dealt with a payday or car title lender. These businesses are often the only recourse
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for people without credit cards, and their interest rates reach upwards of 800% annually!
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Not only does it cost more to borrow and spend money, but what you spend it on is often more
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expensive! If you have to feed a family on a tight budget, buying in bulk at a supermarket
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is usually the best option--but one not available to many poor people. Even if they had the
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cash on hand to buy weeks' worth of food in one trip, how is someone who depends on
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public transportation supposed to get it home? On their lap on the bus?
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Big food retailers--ones with enough purchasing power to offer low prices--are notorious for
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avoiding poor neighborhoods, and people who live in these so-called “food deserts”
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often lack the mobility to cruise around town bargain-hunting. Instead, they're stuck
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with local convenience and corner stores, where prices are much higher. Or they rely
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on fast food, which can seem cheap in comparison, but is actually more expensive than cooking
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at home, to say nothing of the long-term health risks.
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Rent can also be more expensive. Most landlords require a security deposit between $500 and
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$1000 to move in--an impossible sum for people barely scraping by. In that case, your only
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option (other than homelessness) might be a low-end extended stay motel, which typically
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don't require deposits, but cost way more than an apartment in the long run. And they
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often lack amenities like kitchen appliances and laundry that save apartment-dwellers time
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and money.
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They say “time is money,” and the less money you have, the more time you have to
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spend on everyday tasks. Waiting at the bus stop, waiting at the laundromat, waiting at
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overcrowded clinics and public offices. This leaves much less free time to take care of
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one's family, pick up extra work, or strategize a way out of poverty.
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It gets worse. Inflation, the general increase in prices, tends to hit things like food,
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gas, and rent the hardest. The lower your income, the greater percentage of it goes
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to those costs, so a poor person will see their year-over-year expenses go up at a higher
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rate than a wealthy person.
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All these pressures take a toll on one's psyche that only makes things worse. Imagine
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having to constantly make tough decisions about where to spend your last few dollars:
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Pay the water bill or buy food for dinner? Put gas in the car or see the doctor? This
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relentless burning of mental energy leads to a deterioration in the quality of one's
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judgement--a phenomenon psychologists call “decision fatigue.” It's why someone
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might visit a payday lender when they know it's a bad idea--they're so exhausted
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that they'll settle for a quick fix even if it will lead to more problems down the
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road.
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Closely related to decision fatigue is the “scarcity trap,” which is our tendency
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to fixate on the resources that we have the least of, to the point that we lose sight
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of the big picture. Running low on diapers, for instance, can create a feeling of panic
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that compels a poor mother to buy 6 months worth of Huggies--only to realize afterwards
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that she didn't set aside enough money for rent.
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Some might think that poor people just need to work harder and spend smarter. And while
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it's true that improving your financial situation requires these things, it also requires
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having at least a little bit of extra cash to move around, and access to decent spending
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options.
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If you can't choose where you shop, where you live, or where you bank, you become a
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captive customer to predatory businesses. If you don't have any extra money to save,
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invest, or budget, you can't make a financial plan. And when are you supposed to think about
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tomorrow when you're constantly putting out today's fires?
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Next time you describe yourself as “broke,” remember that having just a little bit of
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wiggle-room is infinitely better than none at all. It can make all the difference if
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you're trying to improve your financial situation.
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So if you do have that wiggle-room, be thankful and don't waste it!
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And that's our two cents!
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Missing one payment can quickly spiral into a pit of debt.
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Has this ever happened to you and were you able to escape it?
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Share your story in the comments.