I know what it’s like to make $750 a month. And at the time, I learned something important: When you’re poor, most financial advice does not apply to you. When you need to skip lunch to afford train fare, talking about the best stock picks or structured deposits is just a cruel joke. It’s like giving a cookbook to a starving hobo. In this article, I look at financial methods that actually work for the poor:
Would you please hide that pay cheque? Our cat saw it and died of embarrassment.
1. Think Income, Not Investments
If you make less than $1200 a month, you need income before investments. You need to be immediately, right-this-minute making more money.
The reason? At under $1200 a month, a single emergency can wipe you out. Maybe it’s a bad fall, or maybe your work laptop broke. Whatever the case, the cost of one accident can destroy your investment plan. If you have an insurance policy, for example, that broken laptop is almost guaranteed to make it lapse.
No, no, I want the bills. I'm eating paper until my investment matures.
Also, most investments take three to five years to mature. Can you guarantee no accidents will happen in that time? Yes? Then Google Jupiter; that’s where you left your grip on reality.
When your income is limited, don’t fantasize about investments digging you out. Spend more time looking for side income, or finding a better job. If you try committing money to a monthly investment, odds are you’ll fail.
2. Don’t Hole Up
It’s reflexive; when you’re poor, you act like a hermit crab in need of therapy. You want to never go out, because that costs money. If you go to a restaurant or something, you’ll have to make up a sad excuse to not eat. I get it; it’s embarrassing to admit you’re poor.
But here’s a reality check: Everyone probably already knows it, okay? Compared to poverty, your head being on fire would be easier to hide. Your friends are just waiting for you to admit it so they can offer help. Because it’d be rude to try and intervene otherwise.
So grow a thick skin. Ask for help, and do go out. Because when you’re poor, you need to network more than ever. The more people you meet, the greater your chances of finding a better job or side-income.
I can't get lunch with friends any more. The bird will hear us all coming.
3. Don’t Gamble
The average low wage earner can’t afford investment schemes (see point 1), or owes so much that bills can’t be paid in full. In light of that, the lottery seems to make sense. At least it’s a half-decent chance right?
Problem is, gambling only rewards the rich:
Let’s say I earn $2000 a month, and you earn $700 a month. We both gamble at the same table. Two things to consider:
Of course I have a financial plan. The plan is to not lose.
(1) If I lose $100, it’s no big deal. But if you lose $100, it’s more than 10% of your income. Your risk is always higher.
(2) The more you can lose, the more rounds you can play. Assuming it’s $100 a round, I can lose around 20 rounds whereas you can lose around 7. And you know what determines the chances of winning? The freaking number of rounds you play.
And that’s why gambling when you’re poor means you’ll stay poor.
By the way, I’m not just talking about casino tables. Yeah, I’m looking at you, the try-hard Forex trader. It doesn’t work, okay? Until you can afford to go a few hundred rounds, here’s something to live by:
You can be winning just by not losing.
4. Don’t Take Informal Loans
Large, informal loans are the worst mistake you can make. They’re especially tempting when you’re poor, because banks won’t give you the loans you want.
But if you borrow cash from a friend or relative, ensure it’s a piddly amount you can repay at one go. If it’s $15,000 to buy a house or something, well, don’t be surprised when you end up in court.
Informal loans are seldom in writing. No one’s tracking how much or how little you’ve repaid. Maybe no one’s even qualified to do it. And there’s unnecessary stress on both sides: You’re worried if the other party will be honest, and vice versa. In the majority of resulting court cases, both parties lose money.
Yes, I did ask for a written agreement. You just really need IT classes.
If you urgently need to raise money, it’s better to ask for it. Forget about losing face; enlist help with Facebook fund raisers or something. Just never, ever borrow money.
Besides, banks know your debt servicing ratio. If they say you can’t repay a loan that size, they’re probably right.
5. Don’t Rush to Sales
When you’re poor, you want to pounce on every discount you see. Walking through a mall is downright lethal; you’re like a crippled duck on the set of a reality show called 50 Ways to Kill a Crippled Duck.
You need to learn restraint. If you’re richer, you can have the mentality that, oh, I better buy this when it’s on discount. But when you need a budget plan to afford the 8th piece in your Yong Tau Foo, you better think twice. If you don’t need it, just don’t buy it.
I know we're vegetarian, but this on discount. Which is more important? Huh?
The best way to save is to ignore sales, and buy exactly what you need. If it happens to be on sale at the time, great. Otherwise, too bad. But you should have zero inclination to buy something just because it’s on promotion.
Are you working your way out of poverty? Comment and tell us how you’re doing it!
Get more Personal Finance tips and tricks on www.MoneySmart.sg
More From MoneySmart