Saturday, March 16, 2013

How the poor can (and should!) save money


Although my Atlantic column on wealth inequality got a lot of publicity, the comments were mostly negative. Almost all of them said one basic thing: "The poor don't have any money to save!"

Now, first of all, this means that a lot of people just glossed over the column itself, and instead just guessed/assumed the message from the title and picture. These people assumed that my column was calling for the poor and middle class to help themselves instead of relying on society to help them (in other words, basically an "angry conservative uncle" column). Whereas if they read it closely, they'd find me saying this:
[O]ne obvious thing we could do to make wealth more equal is - surprise! - redistribution. It turns out that income redistribution and wealth redistribution have much the same effect on the wealth of the poor and middle-class. Income redistribution is probably a bit better, for two reasons. First, people with higher incomes tend to save more, meaning they build wealth more rapidly. Second, people with higher incomes tend to have less risk aversion, meaning they are more willing to invest in assets like stocks (which get high average rates of return, although they are risky) rather than safe assets like savings accounts and CDs that get low rates of return. 
In other words, giving the poor and middle-class more income will boost the amount they are able to save, the percentage they are willing to save, and the return they get on those savings. Part of the reason America's wealth distribution is so unequal in the first place is that our income distribution is very unequal.
So obviously I do realize that the poor have very little money; this is why I suggest that we tax the rich to give the poor more money, in order that they may save more (and consume more, of course)!

But it's also true that if we mail checks to poor people, they will still have to save part of those checks if they want to build wealth. 

Now here's where we come to the question of how, exactly, the poor can save money. Saving is not all about belt-tightening and going hungry. In fact, for the poor, it's mostly not about that at all! For the poor, the most important way to save is to avoid taking out high-interest debt

Remember, saving and borrowing are exact opposites! A dollar not borrowed from a payday loan or credit card is a dollar saved.

Take the case of payday loans. This is one case in which I think it's fairly obvious that debt is used to extract wealth from the poor. Payday lenders exploit poor people's ignorance and behavioral biases to trick them into taking out loans that they don't need to take out

To see this, go and read the recent Pew report on payday lending. Some of their most important findings are:

1. Most payday loans get paid back within a year. Since payday loans charge insane rates of interest (thousands of percent!), this represents a substantial loss to poor people.

2. Most payday loans are taken out to cover regular expenses (bills, etc.), not emergencies. 

3. If they couldn't use payday loans, most borrowers would either cut back on expenses or borrow from family and friends.

4. Payday loan borrowers typically repay their loans by...cutting back on expenses and borrowing from family and friends!

In other words, combining these findings, we see one simple truth: Most poor people, if they didn't take out payday loans, would not die. They would not be out on the street or crippled or starving. Instead, they would simply be wealthier. For this reason, many states, and the federal government, are all actively looking into legal restrictions on payday lending; some have already done this.

Regulation can help, but tricksters are ingenious. Poor people need to learn how to avoid the tricksters. My column was suggesting that government, through public school and through awareness campaigns, can help people avoid the tricksters just as fast as the tricksters can come up with new tricks. 

And this probably applies to middle class people as well, who almost certainly borrow way too much on credit cards. 22.5% interest?? You have to be kidding me! The whole credit card industry survives only because of the large number of people who make only their minimum payments and end up getting trapped in high-interest credit card debt for life. Some of those people borrow for emergency medical expenses, but even in those cases - where borrowing makes sense - I'm sure people could find much cheaper ways to borrow.

The point is, avoiding unnecessary high-interest debt is equivalent to saving lots and lots of money, while consuming the same amount overall. In other words, it;s a free lunch for people, as long as they known how to grab it.

Anyway, I think a lot of people saw my column as an "either/or" thing - they thought I was arguing that we should encourage self-reliance and ignore the social aspect of wealth inequality. But I don't see these things as substitutes. I see them as complements. We want society to help the poor and middle-class as much as possible. And we also want the poor and middle-class to help themselves as much as possible. That way, the poor and middle-class get the maximum amount of total help possible. There is no trade-off!

And remember, if you live in a corrupt, predatory kleptocracy, you want to A) fight to change your society for the better, and B) at the same time, rely as little as possible on the goodwill of the corrupt kleptocracy to provide you with your daily bread. "Just save your money" is not a cure-all for the poor. But "save your money while fighting to change the system" is way better advice better than "spend all your money and borrow at 3000% and pray for the revolution to come soon".

54 comments:

  1. Anonymous10:43 PM

    I've worked with people struggling to pay their bills extensively. I've never worked with anybody who took out a payday loan purely for regular living expenses. What typically happens is that some extraordinary expense (car breaks down) happens, they have to pay immediately in order to get the car fixed, and then faced with bills they no longer have the money to pay, resort to payday lending. With the specific wording of the question that Pew asked, "which of the following best describes what specifically you needed the money for?" almost all of the people I know who got into the payday mess because of unexpected expenses would have replied that they needed to pay a regular expense. Why? Because mechanics and (increasingly) doctor's offices require payment at the time of service, and unless they are at the time of the month just before they get paid, they're likely to have money that they would otherwise anticipate spending on rent, bills, or groceries. Then when it comes time to pay that rent, bills, or buy those groceries, they don't have the money, and resort to the payday loan.

    It's the same sort of argument about how many bankruptcies came from medical bills. They may not have had medical debt on their bankruptcy, because in order to get ongoing treatment, they had to pay the medical bill, and ran up other debt in order to be able to do so. But it was still the medical bills that pushed them into bankruptcy.

    Maybe the kind of people who just think that paying their regular bills with a payday loan this month won't cause them any problem paying their bills next month don't come to my social service agency, but really, the people I used to work with weren't that stupid.

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    1. Well, what you say directly contradicts the data gathered by the Pew report...

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    2. The Pew study shows that the payday loans are generally repaid by cutting back on expenses and by borrowing from family and friends; in other words, the exact same things that borrowers would have done had they not had access to the payday loans. So the people's consumption still ends up falling, but they pay 3000% interest.

      Better means of financing for consumption smoothing are available, and should be used.

      States in which payday lending has been restricted have not seen noticeable drops in the welfare of the poor, have they?

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    3. Anonymous1:54 AM

      I'm not saying that payday loans are great things and I'm all in favor of restricting how much interest can be charged. But "cutting back on consumption" doesn't mean skipping your morning latte at Starbucks, it means things like cutting back on healthier (more expensive) food, stretching medication or just not filling prescriptions, stealing toilet paper instead of buying it yourself (really!), etc.

      Borrowing from family and friends frequently ends up either putting them in the same situation you're in (they money they lent you can't be used to pay their bills now), or you have to patch together a large number of lenders each lending a small amount. It makes you feel like shit, so I'm not at all surprised that people would prefer paying exorbitant fees than have to go around hat in hand to friends and family. Many people really don't like having to take charity or beg help from friends and family. I once had clients who had recently had a baby with a heart condition, were living in their car because they couldn't pay the rent after all the baby's medical bills, had to pawn the baby's heart monitor (which they couldn't use anyway due to lack of a place to plug it in) in order to get the car fixed so the husband could get to work in order to have any income at all, and only finally turned to us when they were running out of time to get the money to redeem the pawn ticket on the baby's heart monitor.

      Really, I would suggest that you volunteer with a social services agency, preferably one that actually visits clients in their own homes and works with them to ensure they understand the root of the client's problems. Yes, we often managed to help people out by getting them onto payment plans for their electric bill (consumption smoothing!), or in touch with programs for low cost weatherization, etc., but god, all too often it was getting blindsided with crap that put them in a bind, and much of this was well before the explosion of the payday loan industry.

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    4. The study is obviously valuable, but I think Anonymous' hands-on experience gives him/her some real insight into where its methodological limitations lie. Working out the limits of a study's methodology is pretty much essential when its conclusions contradict received wisdom (and isn't a bad idea when they don't, either). As Anonymous mentioned, the way the questions are worded lent themselves to a dichotomy of expected vs. unexpected expenses that rarely accounts for the full complexity of the respondents' respective, unique situations. For many people currently without savings, the two categories are indeed very fluid, and this partly affects the validity of some of the conclusions Noah cites.

      There is a dangerous tendency among many economists and social scientists to swear by "the data" without properly examining how the ways in which the data is collected necessarily tell only a partial story. This can lead to a false sense of comfort that empirical research is all one needs to understand an issue. I especially see this among people with a background in STEM fields who are fully aware that social realities aren't like the mathematical equations that reliably explain physical phenomena, yet in economics/humanities are too quick to dismiss the insights gleaned through lived experience when there's some empirically collected data handy. One needs both for understanding. I agree with Anonymous that some volunteer social work would be valuable if you're really scratching your head as to why so many people voiced similar, seemingly wrong-headed objections to your Atlantic piece.

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    5. But "cutting back on consumption" doesn't mean skipping your morning latte at Starbucks

      I smell a troll... ;-)

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    6. Doc at the Radar Station9:55 PM

      "...mechanics and (increasingly) doctor's..."

      I have and have had friends who aren't making much more than minimum wage and these two things are THE reasons why they end up on a debt treadmill. Single-payer health insurance and public transportation investments would make a HUGE positive impact here (for everybody).

      "A dollar not borrowed from a payday loan or credit card is a dollar saved."
      Absolutely! We need to ban payday loans and restrict interest rates/fees on credit cards. I agree that people would be better off if they didn't even have access to them.

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    7. Single-payer health insurance and public transportation investments would make a HUGE positive impact here (for everybody).

      Agree x1000000000

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  2. Noah, you are usually very good about looking at issue from a macro perspective. But in this case it seems to me that you are taking a very micro sort of view, and thinking of wealth-building through investment mainly as a thing individuals do, and as something that is an individual responsibility no matter what one's station in life.

    Let's start with the broader social perspective: For a society to build wealth, that society cannot consume all of its output as it is produced. Not only must it save or conserve some of those goods to spread out consumption over time, but it must invest them. It needs to use some of them to produce new goods that are more valuable than the sum of the values of the goods that were used up in their production. And it must then take some of those new goods and invest them too. If it is fortunate enough to be able to do this, then through this process of investment and reinvestment it can get richer and the society as a whole will benefit over time.

    In a modern economy, most people are not building a lot of wealth by investing actual goods that they, themselves produce in their own personal enterprises. We're not an agrarian country of small farmers. People exchange labor or goods for money, and then use the money to buy shares of other enterprises and the output of those enterprises. They are then given some of that output - usually in the form of money after the output is sold. This is the case even if all we are talking about is a savings account. These account holders are not just "saving" that money, but putting it into a pool where it is used to buy a share of capital goods and equipment, and the wealth that is being produced by that capital. So when we talk about "wealth-building" we usually mean purchasing a share of the wealth created by others.

    Now how is this picture affected when we turn from society as a whole to the incomes people are allotted over their lifetimes as their share of the national output? The fact that we are even talking about how the poor should behave is contingent on the fact that we live in a society in which there is such a thing as the poor. We permit a society in which many people are allotted teeny, tiny portions of income while others are permitted to take great heaping gobs of it. So are we then also going to say that if the poor want to have some additional share of the output generated by the society's capital investment, they must buy that share, by setting aside and investing a portion of their already extremely small incomes? An alternative would be to let the poor consume all of their income as they receive it, and then for the more fortunate - who have the luxury of a surplus income and the luxury of being able to commit part of that surplus to the investment in wealth production - just to give a share of the generated output to the poor. The society should build wealth, but given the fact that the poor are already inexcusably poor, it deems doubly draconian to make or expect the poor to contribute some share of their very small incomes to the wealth-building project.

    Rather than say "the poor" need to save, maybe a better way of putting is that the poor shouldn't be expected not to consume all of their paltry incomes, and if they receive more than their ordinary income that shouldn't be contingent on participating in the saving and investment system, but should just come in the form of relief or assistance. But if we succeed in making the poor not poor then as the incomes of the former poor grow and they emerge from poverty, so that they have what a reasonable person would regard as a surplus income, they will also need to adopt prudent behaviors for dealing with that surplus.

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    1. So, I'm not sure what you're saying, but I think it's something along the lines of "Wealth building is just not as important as present consumption for the poor, and this would be the case even if the poor were to have substantially more income than they currently do (due to income redistribution)."

      That was the argument Josh Barro made to me on Twitter, and I can see a case for that. Maybe what we call "wealth" just isn't that important for most people.

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    2. Yeah, I think I'm probably struggling just to make a simple point like that. I guess I'm thinking that the whole point of personal wealth building is to have more than one would otherwise have later in life when one's income falters. But the poor have criminally low incomes to begin with throughout their lives. If we are redistributing income anyway to relive the poor, then we should build the wealth and just give it to them later in life when they need it, instead of expecting them to set aside some share of their pittance to build a retirement nest-egg pittance.

      I guess some of my mental struggle is tied up with just how much redistribution we are talking about. If we are talking about enough redistribution to raise the poor completely out of poverty, then yes I suppose that once they are not poor anymore their behavior should be similar to that of other non-poor people.

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    3. If we are redistributing income anyway to relive the poor, then we should build the wealth and just give it to them later in life when they need it, instead of expecting them to set aside some share of their pittance to build a retirement nest-egg pittance.

      So we tax the rich, and put it into accounts for the poor, which are (hopefully) invested in low-cost highly diversified index funds of global stocks and bonds...and then we give the poor people that income when they're old?

      That actually sounds like a GREAT idea. I'm going to steal it, in fact! But I'll be sure to cite you... :-)

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  3. A few days ago the New York Times had an excellent article that paired findings from a new study about the increasing difficulty of Americans under 40 to save money long-term and interviews of young adults who were living that struggle. The person quoted most at length was my girlfriend, who lives with me and shares all the details of her finances.

    The story got over 500 reader comments, many of which offered financial advice, either in general or addressed directly to my girlfriend. A lot of this advice, based on a few brief sentences about her personal situation, was laughably inappropriate. One piece of data about her credit card debt was misunderstood by nearly every commenter who mentioned it. She was also told to bring lunch from home to work once a week (she already does it every day) and to avoid extravagant brand-name items culturally associated with liberals (most of which she doesn't own or need). She didn't tell the reporter that she eats only a bowl of Trader Joe's cereal for breakfast each morning, but so what? That breakfast costs her just 80 cents a day. Yet I know that if that if her fondness for "Joe's O's" instead of Cheerios or a cheaper store brand were in the article it would have unleashed a torrent of recriminations. All because it's not the "right way" to be frugal, in someone's view.

    The bottom line is that articles whose titles scan as "How To Solve Other People's Financial Problems" or "How You Should Be Saving Money" (even when they really are about how public policy should encourage frugality, and simple Robin Hood redistribution is explicitly part of a possible solution) might not be intended to be draw on stereotypes about how poor people spend and save differently than rich people do, but one's existing narratives about poverty do creep in. Dan Kervick is right in his when he suggests that how we choose to understood poverty makes a big difference in what sort of advice we give, whether "we" means newspaper readers or public agencies. It really does seem presumptuous, on the basis of one study and not much more (see above), to say "this way of encouraging saving is better than that way of encouraging saving" when everyone's situation is unique and a variety of options (including payday lending regulations!) can peacefully co-exist.

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    1. I don't know anything about your girlfriend or her saving difficulties...I know that I am good at saving money, but I'm not sure how much my example generalizes, so I'm not sure I could offer any good advice...but just in case, got a link to the article?

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    2. I know you think you're being helpful, but it sounds like you're misreading my comment as a request for more advice on saving. My whole point was the opposite; it actually feels a bit insulting that you didn't get the message, which is that generalized financial advice that sounds good to you isn't necessarily good advice for others. If you're not sure how you're generalizing, the only recommendation I can offer is to meet a dozen actual strangers to whom your advice is directed. Listen more than talk. The goal is to dispel your preconceptions rather than dispense your wisdom.

      The article is here, for what it's worth:
      http://www.nytimes.com/2013/03/15/business/younger-generations-lag-parents-in-wealth-building.html?ref=business&_r=1&

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    3. generalized financial advice that sounds good to you isn't necessarily good advice for others

      Well that is sometimes true, which is why I said my advice wasn't likely to be a huge help!

      But of course for many people that is not true, and generalized advice is actually very helpful.

      The goal is to dispel your preconceptions rather than dispense your wisdom.

      Sounds like you're just mad at people other than me, and taking it out on me! Go ahead, I don't mind. ;-)

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    4. I've been teaching personal finance at the University of Arizona since 2005. It's my main expertise, so there's a lot I can say. For now, I'd like to make two major points:

      1) Knowledge (not just degrees), especially today, is really powerful.

      2) One of the biggest things you can invest in for very high returns is not just money in financial assets like stocks and real estate, it's effort, improvement, and knowledge in yourself, and in many cases especially, your children – and this often doesn't take much, or any, money.

      Let's start with (1): It looks like your girlfriend is Pearl in the New York Times article, at;

      http://www.nytimes.com/2013/03/15/business/younger-generations-lag-parents-in-wealth-building.html?pagewanted=all

      Quoting:

      "Ms. Brady, for instance, earns about $1,800 a month in take-home pay. But she paid for her undergraduate and graduate education in part with loans, which cost her about $400 a month. She also is trying to pay down her credit card debt, which requires about $500 a month."

      End Quote

      Now, note how powerful knowledge is: She spends $400/month on her student loans. She works for a union, which is a non-profit, which qualifies for the government's Public Service Loan Forgiveness Program. This program is for federal direct student loans. It allows you to go on the Pay-as-you-Earn income-based payment program and after just 10 years on this program, if there's any remaining balance it's 100% forgiven.

      Now your payments are income based, but at a very low level – 10% of adjusted gross income at most, and often much less, or even zero, yet after 10 years even if your balance is still $200,000, it's 100% forgiven. What would Pearl's payment be? With $1,800 in take home pay, I'll estimate her adjusted gross income is $30,000 (and less if she puts money into a matching 401k with her employer, which she absolutely should). You can plug this information into the Pay-as-you-Earn payment calculator with some other information like marital status and number of children (which adjusts the income-based payment down a lot). The calculator's at:

      http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn/calculator

      For Pearl I got $110/month as a childless single – and after 10 years on this, the any remaining balance is gone even if it's $200,000. So, already I found a way for her to save $290/month. That's $3,480/year, so below the $5,000 limit for a Roth IRA, so the whole thing could go in in a highly diversified stock mutual fund, like one which tracks the Wilshire 5000. The average return on such a fund is about 7% plus the inflation rate, so a 7% real rate. At 7%, saving this $290/month for 40 years will yield a total of about $700,000 today dollars, that can be withdrawn tax-free.

      If she has federal government FFEL loans that don't have Public Service Loan Forgiveness, she can consolidate them with the Federal Direct Program and then she qualifies – and gain, the power of knowledge. If she has private student loans – one of the worst mistakes anyone can ever make. No income based repayment, often unconscionable interest rates, and since the 2005 bankruptcy law, impossible to discharge in bankruptcy with extremely rare exception. These are the worst and most rapacious predators of our young.

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    5. Next, I'd ask does she have a car payment? If she's like most young people, she does, and I wouldn't be surprised if she bought new. It would not be unusual for her to have a $250/month car payment and an extra $100/month from collision and theft insurance. That's $4,200/year. Instead, she could save up $2,000 - 3,000 (like with her student loan savings above) and buy an old, dependable, high mileage Japanese economy car like a Toyota Tercel.

      And first she should read up on how to buy well and maintain well an older used car. If she does, repairs will be about $200 – $300/year, and she won't need collision and theft insurance. So, she saves another $4,200 - $250 = $3,950/year. This will pretty quickly bring her credit card balance down to zero, then she can start saving for a house or condo downpayment – but only buying at the right time, and keeping in mind that stocks a vastly better investment than a house, so you keep the home as inexpensive and small as reasonable, and only buy when you have a 20% down for lower mortgage interest, when you aren't going to have to move and sell for at least five years, and other caveats. Again, the power of knowledge, and you can learn all of this just about free on the net and with inexpensive books.

      Now, she doesn't want to be seen in a 1998 Tercel, etc. You see the power of the pink elephant of economics, positional externalities. But she has to fight that. It's very doable, and especially for any future children.

      I could go on. You see the power of knowledge. Get on the internet about personal finance. Get books. The best, by far, is "All Your Worth", by Harvard bankruptcy and financial distress expert, and now Senator, Elizabeth Warren.

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    6. Now let's take (2) One of the biggest things you can invest in for very high returns is not just money in financial assets like stocks and real estate, it's effort, improvement, and knowledge in yourself, and in many cases especially, your children – and this often doesn't take much, or any, money.

      It is true that in many cases it is, to a large extent, too late and hopeless. I've seen many cases like this – a single mother in her 40s, poor health, huge private student loans from a predatory for-profit school, working at a Wal-Mart type job. She's not going to be able to go back to school and get a bachelor's degree at a real university any time soon at all, and it would take an enormous effort with her health, working full time, and being a single mother. And even if she did it, employers are going to consider someone like her vastly less desirable for the good jobs than an energetic healthy youngster who did everything right on schedule, getting his bachelors from a real university at 22.

      But what she can invest in very well is a huge asset, her kids. Every day she can impress upon them the importance of education. She can constantly do homework right alongside them, setting an example taking a community college or free internet course. She can fill the house with books for children and adults, as used books bought smartly are cheap. She can research the best free charter schools to send her kids starting in kindergarten – In Tucson we have many, for example ALL, near many poor areas, is one of the elite K-12 schools in the country, picked by the Washington Post as one of the 22 elite schools in the country. Most of the students go to ivy or public ivy colleges, and it's free as a charter school.

      She can also breast feed as much as possible, and a lot of very nutritious food for her childrens' development is affordable, like whole grain brown rice and beans and fruits and vegetables in season when they're 50 - 80% cheaper, and frozens.

      In this way her kids can become dentists or nurses or engineers and break the cycle of poverty, and certainly her life becomes much more financially secure having children who are dentists and CPAs.

      You may not have money to put into the stock market, but there's so much you can still invest in your greatest potential asset, your kids, and this is a way to make a fantastic contribution to your country and the world.

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    7. Richard, this is all awesome stuff. Want to co-author a follow-up Atlantic piece?

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    8. Sure, email me at serlin@email.arizona.edu.

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    9. Well, it's almost all awesome. However, for some reason, the combination of:

      "Now, note how powerful knowledge is"

      with the original article's

      "Ms. Brady, 28, a Brooklynite"
      [Emphasis added]

      and

      "Next, I'd ask does she have a car payment? If she's like most young people, she does,"

      struck me as funny. I'm weird like that.

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    10. Tiercelet6:06 PM

      Wow. That's some of the most patronizing and generic advice about saving money that I've ever seen.

      Not to mention that your information about IBR is inaccurate and may be inapplicable--labor unions are explicitly excluded from public service loan forgiveness (http://www.ibrinfo.org/what.vp.html). And if she consolidated her loans to include any form of parental loan, then the consolidated loan would not be included. And depending on when those loans were originated, they may not be eligible or payments made may not qualify.

      Look, personal finance is *complicated*. Intentionally so, because the more complicated it is, the more the programs preferentially benefit the rich, who have extra resources to devote to figuring them out. Nobody can survive while poor without learning the generic basics already; beyond that you have to delve into the details of someone's situation and navigate an intensely complex system of options. What time is left over for people who work two jobs to make ends meet is not sufficient to include mastery of the incredibly complex series of rules that might allow them to improve their financial situation--but believe me they'll know the basics.

      The parent's original point was that the kind of advice Richard has provided is little more than privileged richsplaining.

      If I could offer one more link:
      http://whatever.scalzi.com/2005/09/03/being-poor/

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  4. Noah,
    there wouldn't be any payday lenders if the poor had a reliable source of cash (e.g. a citizen's income) because they could then borrow through official channels - that are otherwise closed to them.

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    1. I think if you look at the people studied in the Pew report, you'll find that many or most of them do have reliable, albeit modest, sources of income.

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    2. How reliable? As reliable as one guaranteed by the state?

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  5. Is there a way for the government to help?

    What springs to mind:

    1.) Providing a small fixed amount directly through a "social bank" (say 1000 USD). The bank can also collect small forced savings in 1 year time deposits, so it can fund itself and help building saving habits. In times of crisis the amount can be extended (like that FLOC idea).

    2.) Also don't have poor people pay (the same) tax on their bills, or reduce their taxes in other ways. And France actually pays 40% of the utilities bills of its poor.

    However this puts in place some bad incentives for the environment - if electricity is too cheap, people will not insulate their houses.

    Interestingly you are talking about bills and poverty a month after the austerian government of Bulgaria resigned over it faced huge and bordering on violent protests over electricity prices.

    * In BG the electricity is taxed heavily, which makes it a huge expense for the poor, both working and unemployed.

    * people are convinced that energy monopolies adjust their bills to be higher, while the government has provided no assurance of protecting their rights as consumers.

    * unemployment is 12% (thank you currency board and deficit-reducing government)

    * We also have a faux flat-tax system, where income and corporate taxes are at a flat rate of 10%, and they provide just 14% of tax revenue.

    * The only progressive tax are the payments for social insurance, but they are capped at 2000 BGN (€1000), which provides a third of tax revenue, the rest of the revenue is from 20% VAT and various types on excise taxes on fuel, electricity and others.

    * The end result is obviously a regressive tax system and very low income for the middle class.

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    1. Anonymous8:26 AM

      Please excuse my grammar here, I typed the thing way too quickly than I should have.

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  6. What about all those economists that argued the poor were better off with unregulated interest rates? Should we adopt Singapore's forced savings programs to assure this?

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    1. I'll have to look into this idea, but it sounds promising...

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  7. I don't know if price controls are the way to handle high rates on payday loans. The problem is a lack of competition in the market for such loans. Wertheimer says that exploitation, even if it's mutually beneficial, occurs in any market that is not perfectly competitive. How many paydays lenders are there other than Wonga and like a few others? You bring more competition into the market, you solve the problem. If there are regulations limiting competition among payday lenders, then they should be removed.

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    1. Actually I doubt this will work, since payday lenders already make no more profit than other local lenders. Their cost overhead is high.

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  8. No Noah. We (or at least "I", but I am guessing a lot of "we" too) read that part.

    We just also read: "They are dwarfed by factors 3 and 4 -- savings rates and rates of return", and figured (fairly, I thought) that you were downplaying distributional issues in favor of savings issues.

    And we thought you should have probably done the reverse.

    Savings behavior is certainly important, but it seemed more sensible to say that that was dwarfed by constraints on earning potential - the available good paying jobs and problems with human capital investments facing low income families.

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    1. We just also read: "They are dwarfed by factors 3 and 4 -- savings rates and rates of return", and figured (fairly, I thought) that you were downplaying distributional issues in favor of savings issues.

      And we thought you should have probably done the reverse.


      No I shouldn't have, because A) redistribution is something everyone knows about already, and B) I was exactly right to say that in the long term, saving dwarfs income as a predictor of wealth.

      Savings behavior is certainly important, but it seemed more sensible to say that that was dwarfed by constraints on earning potential - the available good paying jobs and problems with human capital investments facing low income families.

      That would only be more sensible to say if it were true.

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    2. Savings may dwarf income as a predictor of wealth, but as a predictor of savings I would guess that income is pretty good. Of course, savings may be a good predictor of savings, but that's a tautology. Come to think of it, the idea that savings is a predictor of wealth is itself pretty tautological.

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  9. Blissex1:06 PM

    «this is why I suggest that we tax the rich to give the poor more money, in order that they may save more (and consume more, of course)!»

    Thar is politically and economically losing advice, because:

    * the majority of voters think that the poor are despicable parasitic losers.

    * the rules of the "market" are heavily rigged to favor incumbency, in particular incumbency in wealth.

    Consider for example the 3000% payday loans of a few hundred dollars for poor people desperate to make ends meet versus 0% trillion dollar loans for banks to speculate with to generate the compensation they are entitles to.

    Conservatives who are rather more astute that our blogger here have spent considerable lobbying effort and money to ensure that the rules ensure that their pre-tax income is rather higher than otherwise, and then have excellent success arguing that redistribution by taxation is dirty socialism to give the lazy and stupid poor a luxurious lifestyle (cadillacs for welfare queens, t-bone steaks for strapping young bucks, all-luxury-expenses paid affirmative action scholarships, free CRA mansions, ...).

    Dean Baker has come to realize this too, and has written a book about "loser liberalism":

    http://deanbaker.net/books/the-end-of-loser-liberalism.htm

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  10. I have to say, I feel like you elaborated on your position here in a way that was valuable and not entirely present in your Atlantic column. The column would have been better for some of this information.

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    1. Maybe your're right!

      But then again, remember that I don't get to choose the titles and pictures of my columns...so I wrote what seemed to me to be a balanced column covering lots of points, and then the Atlantic guys put in the title and picture that they thought would get the most attention...They accomplished that task quite well, but the attention was mostly negative, and the title and picture slightly distorted what the column was really about...

      But I think you're right; my original column didn't emphasize things like predatory lending enough.

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  11. I was reading the post and comments over my coffee this morning and am chuckling to myself reading over the advice from Richard to andrew.

    But now I feel sorry for andrew and his girlfriend. Here he was just lamenting about getting specific advice from people who don't know the details, and then there's more.

    I mean; the advice about having a used car. Now I'm sorry but I don't have time to read the article in the NYT- but it seems car expenses weren't mentioned. My assumption is that she might not even have a car.

    My girlfriend (now wife) and I were in this situation for a long time, so I commiserate. She tells me how she used to read these articles "10 ways to save money", only to find we were already doing all those things. She used to nag me not to take money out of ATMs, 'cause we couldn't afford the $2 fee-something I only did 1-2 times monthly (that's not advice, just to say "I been there").

    So for specific advice, I don't have much. I suppose if she hasn't looked into consolidating student loans that I agree it will help.

    But struggling young professionals might feel better if they took Noah's larger point to be - even if you aren't saving money, if you are keeping your debt down, that is really the same thing.

    What with kids and other expenses we did not have savings to speak of until I was 48 years old (really). We all have this feeling that we should be working towards stability, that our life should be somehow getting incrementally more and more stable. And yet, to all appearances we don't seem to be getting anywhere. But, that progress might be invisible; if what we are doing is avoiding more debt rather than actually growing savings.

    I do have this advice- if any financial counselor gives you advice that you do not understand (at work or whatever)- do not take it. From my experience: in the early 2000s when we were looking into how to maximize my retirement account, we could not understand what the person was telling us about investments. I mean, we are not stupid- we think we are pretty smart and we understand numbers. Also, we asked "What if stocks go down?" Our counselor looked at us as if we were stupid and said "stocks always go up". So, we didn't understand the financial instruments and we didn't like that answer. We kept our money in boring funds and whatnot. The crash and recession later on affected us not at all.

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    1. Anonymous4:01 PM

      It's definitely best for unsavvy investors to stay out of anything but index funds.

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    2. What about the advice of going on the Public Service Loan Forgiveness program, as she's already working for a union. That saves $300/month with no sacrifice and her loans are gone in 10 years.

      And if she's like most people, she has a car payment and collision and theft insurance.

      She should also consider bankruptcy on her credit card debt. That would mean an extra $6,000/year for savings in a well diversified stock portfolio, a giant amount over decades. And given the abhorrent predatory behavior of credit card companies, I have little sympathy for them with their drug dealer low initial rates that then soar to 35% when your balance is too big to pay off.

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    3. Your "counselor" sounds like a salesman to me, just trying to get you to buy the product that gives him the biggest commission. This happens all too often.

      But for investing over 20+ years, a well-diversified index fund of stocks is best. Ideally, you'd jump out when P-E's soar, but that takes some sophistication, and pure long term buy and hold still has a great expected risk adjusted return, as Wharton's Jeremy Siegel shows in his book, "Stocks for the Long Run".

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    4. And if she's like most people

      This is a tell; you're not listening.

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  12. PS
    Maybe the people in the data Noah mentions and the people Anonymous sees are two different populations (or one is a subset of the other, or some overlap...). Anonymous does mention this could be the case

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  13. "Now, first of all, this means that a lot of people just glossed over the column itself, and instead just guessed/assumed the message from the title and picture."

    Or maybe you didn't write the article clearly enough and simply should have acknowledged directly that it is difficult for people with very low incomes to save anything.

    Or maybe they were also reading your Twitter feed, where you said:

    "But it's just bullshit. If Chinese people making $5000/yr PPP can save, then Americans making $15,000/yr PPP can save. Period."

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  14. OK, I admit that I have not worked for social services. But I have lived, for five years, in a poor neighborhood of a blue-collar low-income city in Massachusetts. You know, the one were you can see the prostitutes walking up and down Main Street from your bedroom window, where getting a visit from a police officer (one time to inquire about a shooting outside my front door, another to inquire about a burglury of the appartment below) is considered normal, where there is a designated crackhouse every five blocks, and so on. Frankly, I find the statement that poor people cannot save unless they cut down on healthy food ridiculous. This may be true for SOME poor people. However, I have seen people use their food stamps to buy vegetables and fresh meat, and others using them to buy frozen meals and large bags of Cheetos. In the end, much is about the choices people make. Most of my otherwise poor neighbors managed somehow to afford 50-inch TV's (I had one of those 12-inch small ones with a built-in VCR) and quite a few had a dish to watch foreign channels through sattellite (many were immigrants like myself). So the idea that all poor are poor only because they can't afford to save and not also because of bad financial decisions is at odds with my own personal experience.

    My personal experience also suggests that at least some people make bad financial decisions because of their liberal ideology. Here is a conversation I once had with a lower income (yet admittedly not truly poor) person:
    Him: Look at how well these rich folks are doing. The stock market is booming while we struggle.
    Me: OK, but, don't you also have some stocks?
    Him: Are you crazy? The stock-market is controled by the rich. I am not going to give them my money.
    In the mind of this person, the vehicle that makes the rich richer somehow designed to also make the poor poorer. By keeping his saving in a low-interest banking accout, he allowed the gap between him and the more affluent to grow further!

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    1. Anonymous3:17 PM

      It's been my experience that you really can't tell whether someone is making a "smart choice" by looking at a snapshot. In the case of what choices people make at the grocery store, what you think might be the best bang for the buck might not be. Combine a grocery store loss leader with a coupon and those frozen dinners can be mighty cheap. I remember one time I was in line at the store, and the guy in front of me started to throw a fit about what the woman in front of him was paying for on her EBT card. She had pre-shredded cheese, and he was going on about how she should buy block cheese and grate it herself. Well, it turns out the store was having an advertised special on the grated cheese that made it cheaper than the block cheese. Also there is no guarantee that someone will have the kitchen tools necessary to do something like grate cheese.

      In certain areas of the city, things like entertainment devices (TV, cable subscription, video game console) were considered absolute vital to have. Why? Because they enticed the latchkey kids to stay indoors instead of going out where they could get shot or mixed up with gangs. Woe to the newbie volunteer who might suggest to a client that they should sell the Gamecube (am I dating myself here?) when the mom knows that is the only thing keeping her teenage son out of serious trouble.

      As for someone not putting their money in the stock market, it doesn't take hearing many conversations about financial people talking about the "dumb money" to make you leery of putting your money in their hands.

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    2. You make some interesting points. Except that the grocery stores I go to usually have offers not only for Cheetos but also for healthy items. Moreover, judging by the weight of some such shoppers, it seems that this was not a one-time thing. I also question the benefit of having gaming consoles that keeps kids away from gang activity by having them spend hours playing "Postal" or "Grand Theft Auto". And in any case they don't need to do it on such large screen TVs.

      To be clear, I support funding towards an increase in the earned income tax credit, public pre-K that will put kids to school from an earlier age and extension of the school year. But, downplaying that, with some guidance, less afluent people could be making better choices is, in my opinion, a mistake. This is also the way to address the issue of dumb money!

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  15. Anonymous7:10 PM

    In France, by law there is a maximum interest rate. it's exactly 20.56% per year.
    Check it out, it's called "taux d'usure", if the loan is for by real estate, it can't be higher than 7% ! http://www.banque-france.fr/economie-et-statistiques/changes-et-taux/taux-dusure.html

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    1. Which could lead people who can't get loans at such rates from turning to the black market, that is, to illegal loan-sharks.

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    2. Is that somehow worse than legal loan-sharks?

      It seems to me that this is often the argument, some restriction or other leads to what is being prevented (which everybody agrees is bad in some sense) happening illegally instead of legally. So removing the restriction makes the bad legal.

      Now in some cases, (e.g. prostitution or drugs) you can make a reasonable case that the enforcement is more costly than its value. But I don't think that is a general principle.

      I get particularly annoyed when this argument is used to say that political corruption is inevitable and so we should allow it. No, market exchange needs to be free from force and cheating (of all sorts) in order to beneficial and that means you need a reasonably impartial refereee and clear fair rules. Corruption is a bad thing, and can't be fought with market processes.

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  16. We actually do have a compulsory savings program for the less well off (and most others for that matter). It's called Social Security. It carves a chunk out of any paycheck which is matched by your employer and invested in treasury debt and is intended to provide support in retirement. Of course, it is under assault by the wealthy who would like to see everyone's savings in their own bank accounts. If we are serious about increasing the savings of the poor, we should jack up their compulsory savings. In fact, we should eliminate the income cap on SS payments and increase national savings overall.

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  17. Noah,

    I find a disconnect between the attitudes of progressives towards issues like payday lending when compared with an issue like abortion. Most abortion rights advocates place high value on the right of an individual to control their own body and make their own decisions. This stands in stark contrast with the stance of liberals, like yourself, who see payday lending as "abusive."

    Your blithe support of highly intrusive paternalism strikes me as highly dangerous given the reality that it puts the lives of the most vulnerable people at the mercy of whoever happens to control government. One day, it's liberals who want to change the behavior of poor people "for their own good", the next day it's conservatives want to control other personal decisions (abortion, sex outside heterosexual marriage) "for their own good."

    Also, even the pew study acknowledges that 16% of payday borrowers state that they do so for emergency financing. Are you willing to deprive one of every six destitute people of the only type of legal financing currently available? Returning to the abortion comparison, many abortion rights supporters point out that abortion bans force women into getting dangerous illegal abortions. What about dangerous illegal loansharking?

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  18. Yeah, I think I'm probably struggling just to make a simple point like that. I guess I'm thinking that the whole point of personal wealth building is to have more than one would otherwise have later in life when one's income falters. But the poor have criminally low incomes to begin with throughout their lives. If we are redistributing income anyway to relive the poor, then we should build the wealth and just give it to them later in life when they need it, instead of expecting them to set aside some share of their pittance to build a retirement nest-egg pittance.

    I guess some of my mental struggle is tied up with just how much redistribution we are talking about. If we are talking about enough redistribution to raise the poor completely out of poverty, then yes I suppose that once they are not poor anymore their behavior should be similar to that of other non-poor people..Strategies wealth building

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