Few things are more expensive than poverty itself. You can’t afford to be poor.
This is one of my main motivators for growing my bank account as fast as possible. One of the reasons I’m trying to outrun a middle-class lifestyle is because I can’t afford to stay there.
I can’t afford to be poor.
It’s too expensive. Wealth inequality is a growing. It’s a terrifying problem and I don’t want to be on the losing end of the deal. I’d rather we live in a more equal society when it comes to wealth distribution, but so long as we don’t, my singular goal is to get as far away from the bottom as possible.
No matter how my financial situation improves, part of me is worried I’m fighting a losing battle. I’m working hard at setting myself up for wealth, but it’s not entirely a matter of bootstrapping. The odds are stacked against me (and you). My greatest defenses against the challenges are living lean in one of the most robust economies on earth, but I’ll admit I’m mostly motivated by fear.
I’m terrified of being poor.
It’s too hard to be poor. Everything is too expensive if you’re below the median.
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And I don’t mean that when you’re poor you can’t afford to buy certain things. That’s true, but what’s really the matter is many things cost more for poor people to buy than the rich. If you find that statement confusing, read on.
Why You Can’t Afford To Be Poor
Someone that comes from a family with less money has to take out loans to finance things like their post-secondary education or a car. A rich person will just pay for those things outright. As a result, the person with less money has paid a premium on their purchases in the form of interest. The wealthy person did not have to pay this additional cost.
This is more than a small unfair advantage. The average person enters the workforce saddled with debt, which leaves them with less disposable income to invest. It robs them of years of returns and compounding that their money could be earning. The rich person not only avoided paying interest on the cost of their education or other major purchase, they don’t have to direct their future income to debt repayment. They can instead afford to invest and earn a return on their money.
This isn’t just for cars and houses, this is for everything. While it’s true that people with large incomes can still bankrupt themselves with reckless spending, it takes a lot more effort than someone that’s earning only $20,000. For a low earner, everything costs more because it’s such a substantial portion of their income. Everything from clothes to food takes a bite out of their take-home pay, leaving less and less to nothing left over for saving and investing.
Mind the gap
Mind the “gap” between what you earn and what you spend. Maximizing your income is key to financial success. Being able to live on $20,000 per year is awesome. But if you’re earning $21,000, you’re still stuck. If you’re living on $20,000 per year but your income is $70,000, you’re in a completely different position.
Living paycheque to paycheque also leaves you infinitely more vulnerable to financial catastrophe than someone who has more breathing room in their budget. For someone relying on 90-100% of their income to meet their financial obligations, it only takes one missed paycheque to put their credit, or even their home, at risk. Someone with a larger income definitely has more to lose if that income disappears, but if they haven’t financed their lifestyle with credit and have wisely built up savings behind them, they’ll be able to weather worse storms.
My number one financial goal is to get my investments to the point that they produce enough passive income to pay all my bills.
For my myself, this means I need to have at least $1 million in cash. It’s a big number, but in my mind, I can’t afford not to save that. I’m doing it for the insurance that should either or both of us suffer job loss, it won’t leave us challenged to keep a roof over our heads or food on the table. As for major purchases, we won’t be financing anything because we don’t want to pay extra. Paying interest for something I can’t buy outright is an unfair tax for not having enough money in the first place — I can wait until I have the money.
The buying power of the middle class is eroding fast, and it will cause problems for every income level. But it will always be more painful to be at the bottom, which is why I’m staying out of there. I can’t afford to be poor.
Why a million in cash? 🙂 Why not just $500K in cash? Wondering how you got to that number.. we had something similar as in $1 million saved for retirement (invested) and a home fully paid for.
By cash I mean investments — just not houses, etc. Financial assets > material assets.
Too funny. Reading this as I am calculating passive interest generation on my RRSP and listening to Sam Smith’s “Money on My Mind”.
Everything you are saying makes so much sense! It really is terrifying to be poor so let’s avoid that, shall we?
This post makes so much sense, I just never really thought about a lot of the points you made! I feel like I’m more terrified of being poor every day, as I focus more on my finances. I would love to see $1 million as a possible goal – right now that seems far away, but we’ll get there eventually!
The post may sound a little harsh but I think you did hit a very good point here. It really does cost more to be poor (although it is sad fact that a slim margin of people are really struggling to get out of the poverty cycle – and they’re really trying).
Fear can be a powerful motivator but I personally think that once we reach a certain point, we need to check and see if we’re running from actual fear itself, or merely a figment of our own imagination.
Otherwise, we’ll be chasing numbers. And numbers ever end.
You make good points here. But you forgot to mention that if you’re poor and have obligations to pay (house, car, student loans, etc) and you’re without a job, chances are you’ll get a worse job than if can afford to chose or negotiate the job conditions. Also, many students begin working under-paid jobs because of student loans and often have difficulty leaping to a good job.
You make some really great points here. I hadn’t thought about some of those things, like the premium you pay when you finance a vehicle versus being wealthy enough to pay cash. We are also working hard to build our financial assets, but mainly because we do not want to be tied to our jobs. We want to have the freedom to one day leave if we want to, and hopefully well before age 65!
Saying that you are terrified of being poor is one of the reasons you will probably become wealthy, it’s that chip on our shoulders that reminds us each day.
That’s an incorrect usage of “chip on your shoulder.” It would be more correct if you said you were poor but knew you’d be okay no matter what, the arrogance of thinking being poor is nothing to be afraid of.
The video alone makes this post worth a read.
Its great how you illustrate how poor people pay more when they choose to live outside their means.
This is why so many people can’t get ahead they choose to add the unnecessary tax of interest to their spending.
Mad props for this one.
It’s definitely too expensive to be poor. Life’s a lot easier when you can plan ahead, pay cash, buy in bulk, or have access to low cost, low interest capital markets. The truly poor can’t do any of those.
Wow, you took the words right out of my mouth. Your reason for getting a million is mine as well. Watching my mom stay at a job that made her miserable because she could not afford to quit taught me that I never wanted to rely on a job. I can’t wait till we hit our million as well. Good luck!
Wow, what a great perspective. I never really considered the fact that my loans mean I am, in a sense, paying more for my education than my full-pay classmates. I know how the interest works and all that, but never thought of it that way.
It’s amazing that you can provide great personal finance information while simultaneously showing such a lack of understanding of personal finance works and that it is the choices we make that cause us to stay poor. You’re absolutely right that everyone should be saving and investing to build up a cushion for security. And you’re right that somewhere near $1 M and $2 M will provide you the ability to go for a long, long time without a job if you manage your money right.
But you’re absolutely wrong that society is “stacked against the poor” or that the poor “need to pay more” unless you’re living in India or Vietnam where you really have no chance if you’re poor because there is no opportunity. If you’re in the United states, England, Taiwan, or another free enterprise economy, you absolutely have the opportunity to escape poverty.
There is nothing in the United States making anyone take out a loan to go to college or buy a car. If you truly can’t afford to pay for college, you can get Pell grants that don’t need to be paid back. If you’re not, you have the ability to finance your own education. You may not go to your first pick school, and you’ll need to work summers and maybe carry a part time job during school. You might need to go to a community college for the first couple of years and live at home to save on expenses, but you can make it out debt free. The University of the Ozarks in Arkansas doesn’t take student loans and thousands of people graduate from there every year debt free. It’s just easier to take out a student loan, spend six years going through taking the minimum number of credits, and then whine about your student loans when you get out.
There’s also nothing forcing you to take out a car loan. You can get a used car that runs great for $2000 and you’ll spend less than $500 a year on repairs if you have a shop fix it for you. If the transmission goes, you throw it out and get another $2000 car. People go get the $40,000 SUV from the dealer lot on a six year loan and then complain that they have a car payment.
And by the way, this isn’t just poor and middle class people making these dumb decisions. There are plenty of people making $300,000 per year who are keeping credit card balances and finance or lease new cars. In fact, many of the people you see in the ritzy neighborhoods with the shiny new cars are a paycheck away from missing their house payments. The American Express and Visa Black cards should be emblazoned with bright golden letters that say “moron” since that’s what you are if you carry that card and think you’re special.
It isn’t that “rich” people pay less for things. It is that people who avoid loans and save up for things get and stay rich. I haven’t made a car payment in 15 years because I decided to pay off the car and then drive it for the next 15 years instead of trading it in on a new one in three years. I now have $5000 per year that was going to the dealer going into retirement accounts and other investments. That’s $75,000, plus investment interest, I have that I wouldn’t have had otherwise. We paid off our home three years ago because we got a 15 year loan instead of staying in a 30 year loan and then worked hard to pay it off even earlier than that, delaying other things. We didn’t trade up to the huge McMansion after five years and start the house payment cycle all over again or upgrade the kitchen and bathroom every four years with a home equity loan. We did this so that now we have another $12,000 per year to save and invest. Between the car and the home alone we have about $1200 per month in free cash that people at my work with car and house payments don’t have. That’s $24,000 per year – enough to easily send a kid through college.
In the US it costs less than $400 per month to feed a family of four. That’s just over a week’s work even if you’re at minimum wage. And if you work hard at all and try to improve yourself at all, you won’t be working at minimum wage for very long. Hopefully you’ll learn to be a valuable employee and be at $15 or $20 by the time you’re 25. And if you don’t start a family until you’ve moved up the ladder enough to not be making minimum wage, and taken advantage of not having kids to take care of to get educated and learn skills to earn more money, you won’t need to try to raise a family of four for $20,000 per year. If you really want to see poverty, go to Vietnam with their “Communist” government that is supposed to provide for people or go to India and live with the Untouchables in India for a while. The income and the ability to become wealthy is right in front of you in other places. Just stop being a victim and take advantage of the opportunities.
BTW, please don’t take this as an attack – I’m just passionate about people living within their means so they don’t need to pay more and stay poor as you said. I’m hoping some people may read this, wake up, and stop being victims of the credit card and the car loan.
First of all, thanks for your comment. I don’t feel attacked, I think it’s great to hear this perspective!
I’m all for bootstrapping your way out of debt and creating wealth. I did pretty much everything you listed above: never had a car loan, chose an affordable school, funded my education with scholarships, worked part-time during school and full-time in the summers, etc.
However, I still disagree with you.
If I had been wealthy — or rather, if my family had been wealthy — the $75,000+ I’ve paid in post-secondary tuition would not have come out of my pocket. That amount would have been saved and invested and be worth more than six figures now. With that amount of wealth in my pocket, I would have even more options available to me now. That is, more options to grow that wealth even further. This isn’t a complaint, just an acknowledgement that I paid a lot for things many of my friends didn’t have to.
Of course, I’m lucky. I live in Canada so I don’t pay for healthcare. There’s no monthly health insurance expense in my budget, which means those tens of thousands of dollars I would have paid as an American over the past 10 years, have been saved and invested. Likewise, I got a top-tier education at an affordable price. The best schools in Canada don’t cost $100,000 for a Bachelors degree — I paid only $24,000 for all four years at one of the top 5 schools in the country. My MBA program is in the top 10 and only cost me $36,000 over 2 years. Imagine doing the same in the USA — how much would it have cost for a BSc. and an MBA from the best schools?
So I boot-strapped the shit out of my 20’s, and now a child that was born to two parents that never finished high-school and who probably never earned more than $50K in a single year each, is in the top 10% for education and income before she even turns 30. Good for me. But I made it because I had a lot of privilege, and I don’t pretend otherwise.
In the USA, the odds are stacked against you. And you can buy-in to the patriotic bullshit that you live in the greatest country on earth because every door is open to you, but the truth of the matter is, they’re not. Most children born into poverty will never get out of it. The University of Arkansas is not an adequate substitute for Harvard. Being forced to purchase a car because you can’t otherwise get to work isn’t fair. Being taxed when your income is low is robbery. Putting off children because of debt is a lose-lose equation (for you and for your country). So yes you shouldn’t piss your income away and it’s your responsibility to avoid debt, but don’t pretend that a person born into poverty has the same opportunities as someone born to the 1% because they don’t. They can’t, because they don’t have the same resources.
This is a great conversation. It’s really neat to see things from your perspective because I can see how the environment where you grew up influenced your views just as mine has influenced mine. It is like you grew up in a rain forest and therefore say it always rains, while I grew up in a desert and therefore say it never rains, and we’re both being perfectly logical based on our own experiences. Now please try to look at things from a different angle….
I could take nine out of ten people from a poor background, give them a million dollars, and in three years they’d have nothing again. (Look at how many million dollar lottery winners have anything left in three years. Almost none.) Likewise I could take nine out of ten self-made millionaires, zero out their savings and investment accounts, and they’d be millionaires again in twenty or thirty years. You’re absolutely right that someone born into a wealthy family does have a better chance than someone born into a poor family, but it isn’t because of the money. It is because the child in the rich family is expected to do well and is taught how to handle money and to stay rich, while most (not all) in the poor family are not expected to do well and are ridiculed if they try) and are taught nothing about money other than to spend it fast and to stay poor because they then get “free” money. Most in the middle class family are taught to get a student loan and get a car loan and get a home loan and get a home equity loan and run up credit cards and then bitch and moan that they have so much debt. They are never taught the most important lesson of all – if you can’t afford it, you need to save up and pay for it instead of taking out a loan and paying for it five times over.
You’re living proof that it is attitude and not money that makes the difference. You came from a poor background and parents that didn’t graduate from high school, but you didn’t decide to settle for whatever the government dole provides. You didn’t have the advantages and yet you didn’t let it stop you. You busted it and if you keep it up , you’ll be a multi-millionaire before you know it. Sure you may have had friends who didn’t have to work as hard as you did and if they had your attitude and made the kind of decisions you made, they would be way, way ahead of you. I’m sure you have some that do and are. But I’m guessing many of them didn’t and won’t and you’ll be passing them by before you know it. That’s what your readers need – the drive that makes them successful, not a pity party. Life sucks, get a helmet.
And since you mentioned “free” healthcare and “low cost” colleges, neither of those are free in Canada as you’ll learn if you are successful and you stay in Canada. Somebody has to pay for it because nothing of value appears out of thin air. Someone needs to build the hospitals, pay the doctors, and hire the professors. I suspect that if you make a decent income in Canada you pay for your healthcare and a bunch of other people’s. You just don’t see the cost directly. I also know that your health insurance may be cheap but your healthcare isn’t all that great if you’re sick because the good Canadian insurance includes coverage to come to the States so that you can get procedures without needing to wait in line until you are dead. That is called rationing and is a trick to offer cheap rates that people who are well think are great but then discover that there isn’t enough healthcare to go around when they get sick. I’m curious what Canadians will do now that we are adopting your healthcare system.
Also, we’re paying for a lot of the cost of your pills because companies sell them here to make back their research costs and then sell them elsewhere in the world for whatever they can as extra profit. You’re welcome. If we ever started re-importing them in large quantities and removed the pricing differential you’d see drugs either shoot up in price or become unavailable in Canada because, again, someone needs to pay for things.
Likewise, your universities are heavily subsidized through taxes, which you’ll pay for all of your life instead of paying for them when you go there. Harvard costs so much (probably $500,000 for a BS degree at this point, including all costs) because it isn’t subsidized by taxes and because there are people with more money than sense who are willing to pay for it. State-supported schools are in the $10,000 per year tuition range, which with living expenses gets to about $100,000 for a four-year degree. They are more than they used to be because states have been paying less of the costs, shifting the burden to the students. This would have needed to stop because enrollments would have stopped as the price rose, but people have instead been getting student loans so the university presidents have kept the $400,000 per year salaries and the private planes and they’ve kept building $100 M student centers rather than cutting costs to what people could afford.
It amazes me, however, to see you, with your background, thinking that privilege is what got you where you are. If you were the daughter of a rock star, living on a trust fund, I’d see where you got your viewpoint. You weren’t, however. You were “a child that was born to two parents that never finished high-school and who probably never earned more than $50K in a single year each” who “boot-strapped the shit out of your 20’s.”
Why sell your contributions and your ability to change your destiny short? Why tell your readers that they don’t have a chance because they don’t have privilege if you obviously did? What if you have a black kid living in the projects in Chicago who reads your blog? Should you just tell him he has no chance, because he certainly doesn’t have privilege. Should he just get skip school and play because he is preordained for prison or death? Or should you say “Tough luck. It just means you’ll have to work harder than some people, but you can make it because there is a path from that shit hole you’re living in to a better life.” I’m providing the latter message.
This is too long to adequately address in posts — we’ll be writing novels for ages, but I’m enjoying the conversation and I think this has spurred some future blog posts for me (hopefully for you too!). Anyway…
Just because I came from a lower-income background doesn’t mean I didn’t experience privilege. There are advantages I’ve had for everything from being white to being a woman (particularly a woman in STEM, and then in Finance, which translated to a lot of scholarship funding for both). I think we can both agree that I maximized my opportunities, but I think our opinion differs on the availability of those opportunities to everyone. It’s true I might have had some disadvantages that come from low-income and low-educated parents, but I didn’t suffer as much as a child that had abusive or drug-addicted no-income parents.
I can’t address the Canadian education/healthcare at length here, but when it comes to taxes what I want to point out is that Canada doesn’t tax it’s poor. Yes, I’m paying 30% tax on my income right now, but from age 18 to 28, I often paid very little, even no income tax (even when I was earning $50,000 to $70,000 per year). Having a low tax burden in my 20’s helped me get out of debt and save & invest in the years when it counts most, so I’m not actually angry about what I pay in taxes now.
I don’t think anyone is destined for anything, or that you don’t have control of your future, but I do think the battle is harder for some that it is for others, and I think it’s patronizing and dismissive to just tell people to “work hard” and “don’t be dumb with money”. It’s so much more complex than that. You mentioned wealthy kids typically do better not because of money, but because of parents that push them. That is still a type of privilege. That is an advantage they have that lower-income kids don’t.
Your perspective is very Randian, and since I still consider Atlas Shrugged to be my favorite book I don’t fault you for it. I held the same views through my early twenties, and, oddly enough, the more money I earned, the more my views started to change. I do want to push my readers to make the best for themselves, but packaging and selling a one-size-fits-all dream machine makes me feel like a fraud. I am proof that you can make serious socioeconomic class leaps, but I do also want to be honest that for some people, it will be much harder than it is for others.
I think it is important to play the game, but I also think it is important to understand that the game is rigged.
I agree this is getting too long and I have other things to do, as I’m sure you do. I also think we’re vigorously agreeing, even if it doesn’t seem like it.
Privilege would mean that there were barriers in place that some people could pass through that others couldn’t. You would have college admissions officers telling poor students and minorities that they couldn’t attend. You would have employers saying that they wouldn’t hire blacks or Hispanics. You would have government money going to rich districts and not poor districts. If anything, it is exactly the opposite.
The real barrier is expectation. People don’t expect those in poverty to do well. They don’t expect poor students to go to college, so there is no one pushing them to get their homework done and learn what they’ll need to do well. They don’t expect a child born to drug-using parents in Compton, CA to go to Harvard or become a CEO.
Thinking that your success is because of privilege sells you short and places a lower expectation on others. You’re the one who got by with less and made it work. You’re the one who studied hard. You’re the one who delayed pleasure so that you could squirrel money away. It is your behaviors that got you where you are and something put that spark into you that made you do the right things. Others can do the same thing, but they need to believe that they can. That there isn’t some mysterious shadow group standing in their way. But unless they start doing the things needed to succeed, they will stay where they are. You need to expect more from them.