Spend less than you earn, save your money, and—poof!—your financial problems are solved. If only it were this easy. Being broke sucks enough on its own, and then there are obstacles that make it extra hard for poor people to fight their way to financial security. For example, here are a few expenses that actually cost more for low-income individuals.
Toilet Paper and Other Staples
Even if you’ve never heard the phrase “the toilet paper effect,” you’re undoubtedly familiar with how it works.
A study from the University of Michigan tracked the toilet paper purchases of over 100,000 American households for seven years. Researchers found that high income households bought toilet paper on sale 39% of the time, compared to 28% for low income households. They also bought more rolls on average compared to low income households. Overall, the study found that low income households pay about 6% extra per sheet, and here’s what the researchers concluded:
the inability to buy in bulk inhibits the ability to time purchases to take advantage of sales, and the inability to accelerate purchase timing to buy on sale inhibits the ability to buy in bulk. We find that the financial losses low income households incur due to underutilization of these strategies can be as large as half of the savings they accrue by purchasing cheaper brands.
In other words, as the study’s title points out, Frugality is Hard to Afford. We’vediscussed this phenomenon in detail, too. It’s not just toilet paper. When you’re poor, it’s not easy to buy stuff in bulk or buy high-quality items that will last. There are a lot of hidden, systematic ways poor people pay more for stuff, and there are some expenses that aren’t so subtle.
I’ve written about this before but banks take advantage of the poor with higher rates
Bank fees make it expensive just to maintain your money in an account, which is ridiculous. They’re easy enough to get around, though—if you have the money.
For example, Bank of America’s regular checking account comes with a $14 monthly maintenance fee. It’s waived if you have a minimum daily balance of $1,500 or more, which is no easy feat if you’re poor. You can also get around itif you sign up for their credit card and qualify for a certain tier. This might be a decent option if you have solid credit. Some banks let you get around it if you have a direct deposit in a certain amount. That’s a decent option if you have a job that earns enough and also allows you to sign up for direct deposit.
The point is: there are solutions, but in practice, those solutions don’t seem to work well when you’re flat-out poor. Studies show there are fewer financial service options for lower income individuals, so they rely on costly alternatives: payday loans and other debt traps.
For example, a study from the National Poverty Center found that 17% of the unbanked say their application to open a bank account was denied. Many others find their existing bank accounts closed because the minimum balance was too low. Whatever the reason, not having access to these accounts makes it even harder to save, work toward financial security, or build a nest egg. The reasonable mainstream services that are available to most of us just aren’t as accessible for low-income households, which means they pay a lot more for alternatives.