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Why Being Poor is So Expensive

Being poor is tough. Waking up every morning worrying about how you will pay last month's rent, or if your utilities will be shut off, or even if you have enough to buy food for the day is stressful. With very few exceptions, almost nobody wants to be poor, yet getting out of poverty is difficult. Being poor is expensive, and those who try to get out of poverty must overcome multiple challenges and setbacks that the middle and wealthy classes do not face. Getting out of poverty is like trying to swim up a waterfall, but if you understand the challenges and know how to overcome them, you can swim your way to calmer waters.

Being poor is expensive. The first challenge to getting out of poverty are the constant fees and interest. Everywhere you turn, you will find "poor fees". If you activate a cell phone, you pay a fee. If your electricity gets shut off, you pay a reconnection fee. If you open a bank account, you pay monthly fees. If you don't have a bank account, you pay check cashing fees. If you can't pay your rent, you pay late fees. If you get a credit card, you pay annual fees and a high interest rate. If you get a payday loan, you pay high fees and extremely high interest rates. Fees and interest seem to be a part of life. The truth is that they are only a part of life for poor people. The middle and wealthy classes don't pay fees, and they pay very low interest rates. Not only do the wealthy not pay credit card fees or interest, but they get hundreds or thousands back every year for using their credit cards. They get free airline miles, free upgrades, and a wide range of perks and discounts.

In addition to the obvious fees, poor people pay hidden fees you may not even be aware of. Groceries in poor neighborhoods cost more than the same groceries in rich neighborhoods. Banks often won't open branches in poor neighborhoods, leaving the poor to rely on more expensive options for loans and check cashing. Businesses do not purposely discriminate against the poor, the higher prices reflect the increased costs of doing business in poor neighborhoods. These businesses pass the higher expenses on to the customers through higher prices. Higher crime also imposes substantial hidden fees on the poor, as theft and vandalism prevent you from building wealth.

Being poor is expensive. The second burden the poor must overcome is that of taxes. The U.S. has a progressive income tax, meaning that those with higher incomes pay a higher percentage of their income in taxes, while the poorest pay no income tax at all. In reality, the poor pay much higher taxes than you may realize. Any time you pay a cell phone bill, a water bill, or fill up your tank with gas, you pay taxes. These taxes are the same whether you are rich or poor, but they represent a higher cost to the poor in relation to annual income or net worth. Likewise, sales taxes are the same rate for everyone, but take a larger bite from those who spend their entire income paying for their basic needs. Just as poorer people pay hidden fees, they pay hidden taxes with every purchase. When companies price their products, they factor in the costs of the materials, labor, transportation, taxes, and other expenses before adding in a profit at a level that will keep their product competitive. When you buy a shirt for $20.00, for example, you pay for all those expenses, including the taxes incurred by everyone involved in the production and sale of that shirt. Corporate taxes are a myth; businesses simply pass on their tax burden to the customer, who ultimately pays the tax. If the corporate tax rate were to go up, the shirt would cost more, while if the corporate tax rate were to go down, the shirt would cost less. High corporate taxes hurt the poor the most, as they result in more expensive products. To remain competitive, companies move their businesses away from high tax areas, taking jobs with them.

The highest tax burden on the poor comes from payroll taxes. Politicians like to present payroll taxes as a benefit to the poor and the elderly, but in reality, payroll taxes hurt the working poor the most, while providing them with very little benefit. Payroll taxes consist of 6.2% from your paycheck for Social Security and 1.45% for Medicare, plus a reduction of your salary due to your employer matching those rates for a combined total of 15.3% of your income. These taxes hurt the working poor the most, as poor people tend to start working sooner and die younger than rich people. This means they spend more time contributing to the system, and less time withdrawing from it. Payroll taxes are subject to the wage base limit, which was $137,700 for 2020. This means that you pay 15.3% of your entire income, while the rich only pay for the first $137,700.

Social Security is the biggest scam ever perpetrated against the American people. To put it bluntly, Social Security is the government telling you that you are too stupid to be trusted with your own retirement, so they take 12.4% of your income by force and throw it into a system that is guaranteed to fail. You can take a look for yourself. Go to the Social Security Administration website and see how much you have paid into the system so far. Make sure you add both your contributions and your employer's contributions, as you ultimately paid that through a lower wage. Think about what you could have done with that money. Could you have used that as a down payment for a house? Could you have paid for schooling or medical bills? Could that money have kept you from paying a reconnect fee when your power got shut off? Could you have invested that money? Even if you used that money to buy government bonds, you would be better off than with the returns you might get with Social Security.

Whatever you would have done, the government took your choice away when they took your money before you even saw it. Now look at your estimated retirement benefits. Could you have a better return if you were to invest that money yourself? How much more would you get if you invested 12.4% of your income into a balanced retirement portfolio?

Social Security is a Ponzi scheme that hurts the poor the most. While Bernie Madoff serves a 150 year prison sentence, politicians secure their careers by doing the same thing to you.

Being poor is expensive. Politicians make it worse with their intervention. When markets operate freely, they appear chaotic and disorganized, but ultimately prove to be extremely efficient. When people attempt to manipulate the markets through artificial external influence, the markets inevitably become less efficient, and sometimes collapse. We see this time after time, when people with presumably good intentions interfere with the market, causing the opposite of what they had intended. When politicians attempt to keep rent costs low through rent control, they cause housing shortages and higher rent. Moratoriums on evictions make it much more difficult for poor renters to find homes for rent, and lead to higher security deposits and rent. Minimum wage laws don't actually raise the minimum wage, they simply ban all jobs under that level. This exclusively hurts the poor as they now have to compete for fewer jobs, which increases unemployment. Unemployment and welfare benefits further hurt the poor, as they prevent people from advancing. These programs strip you of your freedom, increase your economic fragility, and make you dependent on the politicians. The circus bear gets free food, free clothes, and free housing, but he is not free. Centralized medical care increases the cost of medicine by forcing people into medical plans that do not match their needs, and forces people to take coverage they would not have chosen for themselves. Politicians may genuinely want to help the poor, but history has shown over and over that government interference hurts those they are trying to help.

Being poor is expensive, and getting out of poverty is tough. Poor people face obstacles that the middle and wealthy classes do not understand, unless they were previously poor themselves. Getting out of poverty takes hard work, gaining control of your finances, and building financial resilience.

Many politicians and social justice warriors believe that every job should pay a living wage, and that no one should work "two or three jobs" to make ends meet. In reality, working a second job is the simplest and surest way to get out of poverty. The 40 hour work week may be the ideal for the middle class, but 40 hours a week will not get you out of poverty, and almost certainly will not make you wealthy. Working overtime will provide you long-term financial security, as it will allow you to gain experience faster, and will demonstrate to your employer that you are reliable, hard working, and promotable. Working a second job provides you with more resilience in case of a job loss, while opening you up for more opportunities. Even a low-paying job is better than unemployment, because low paying jobs provide experience and lead to higher paying jobs.

Your next step out of poverty is to gain control of your finances. One difference between poor and wealthy people is that wealthy people regularly review their finances, and make plans and adjustments accordingly. Poor people rarely take the time to do this, or they do not know where to start. Admittedly, it is much easier to think about finances when you have a large bank account than it is when you have overdraft fees, but this is an important part of gaining control of your finances. By reviewing your finances you can spot areas to improve, set goals to reach, and measure your progress toward those goals. Below are two simple spreadsheet that can help you track your finances. Feel free to download either of them and start tracking your finances today. If you want to track your daily expenses, use the Daily Personal Finance Sheet. If you only want to track your finances each month, use the simpler Monthly Personal Finance Sheet. You can find instructions and examples at After six months of tracking your finances, review your progress with someone whose financial advice you trust, or you can contact us for a free and confidential review of your personal finance sheets.

Daily Personal Finance
Download XLSX • 162KB
Monthly Personal Finance
Download XLSX • 7KB

When setting financial goals, start with eliminating fees. Remember, wealthy people don't pay fees. Fees keep you poor, and don't provide you anything in return. Make a concerted effort to pay all your bills on time to avoid these fees. Next, work on becoming cash flow positive. At the end of the month, your income should be greater than your expenses. It doesn't matter how much money you make, if you spend more than you make, you will remain poor. Becoming cash flow positive is more important than setting a budget, as budgets usually don't factor emergency expenses. Once you become cash flow positive, focus on eliminating your debts. Categorize each of your debts into Revolving, Installment, and Investment debts. Revolving debts include credit cards, payday loans, overdue bills, and any other debts not backed by an asset. They usually have the highest interest rates and fees. Pay this category off first, starting with your lowest balance, and continuing on until you have no more revolving debt. Pay off your installment loans next, starting with the lowest balance. These include car loans, appliances, or any other debt backed by an asset that will decrease in value over time. Pay off your investment loans last. These are debts used to acquire investments that generally will increase in value over time. Investment loans include student loans, mortgages, and business loans. Keep in mind that these investments may not always increase in value, so you will need to decide how much risk you can tolerate, and adjust your leverage accordingly.

The final key to getting out of poverty is building financial resilience. Poor people are much more vulnerable to economic hardship. A broken-down vehicle could lead to getting fired. Getting fired could lead to missing rent payments. Missing rent payments could lead to bad credit. Bad credit could lead to high interest rates. High interest rates could prevent you from buying a reliable vehicle. And the cycle continues. While rich people have emerged from the COVID lockdowns relatively unscathed, many poor people have suffered greatly. Financial resilience helps you to weather and even benefit from economic volatility.

Being poor is expensive, not because it costs so much money, but because it costs your freedom. When you are poor, you are dependent on your boss for your income. You are a slave to your creditors. You are powerless against politicians who choose to ration your rights in exchange for your loyalty.

Getting out of poverty is tough, but the benefits go far beyond financial peace of mind. Financial freedom takes a lifetime to build, but it brings you a longer life, provides you political freedom, and empowers you to pursue your own happiness. Decide today on a plan to build your financial freedom.


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