The consumer-driven market has done more with its “buy now, pay later,” slogan then create a national epidemic of credit card debt. Low wages offer big incentives for poor families to make bad financial decisions. There are a number of ways people can save money without seeing an immediate benefit, and to gain a better financial picture, families must ask, “What are the long term costs of this decision?”
Poor Financial Decisions
Taxes: Many low income families opt for over-paying taxes throughout the year so that they can get a nice refund at the end of the year. The long term costs of this financial decision may be small during a bad economy, but this decision is one of many that can prevent people from saving money. Why give the IRS a portion of your paycheck each payday without earning any interest? The IRS will not pay out the interest earned on your overpayment of taxes, so the long term benefit of that tax refund is negative.
Store and Catalog Credit: If someone is making minimum wage or just above minimum wage, saving money is difficult. Trying to buy holiday gifts with no money in savings and $40 in a checking account can tempt someone into those nice sales pitches that declare, “Pay only $7 a month!” A good deal of those catalogs that offer those very low monthly payments already overcharge for the items, plus that monthly payment is charged at an interest rate. In the long term, a $60 baby toy can end up costing over $120 or more.
Savings vs. Credit Debt: Sometimes, low wage earners honestly try to save money. It can be rewarding to have money in a savings account with three zeros at the end, but if the savings account interest rate is much lower then the interest on the credit card, that money in savings is costing more in the long term. With a credit limit, it makes more sense to pay off the credit card debt, then start replenishing the savings account once the debt is paid.
Paycheck and Retirement: There can be lucrative investments for people with a good amount of money to save for retirement, but when someone is making close to minimum wage, ideally, an employer matched 401(k) is very beneficial. Those accounts allow a low wage employee to save more than he would without one. Low income families want to have bigger paychecks, so they reduce or refuse putting money into those accounts. The long term benefits of a retirement account are difficult to see at the moment, but it is really important to strive for that financial security.
Buying Small: In some ways, in can be more costly to be poor than it can be to have an extra financial buffer. With only $4.50 in the wallet, a low-income family who needs to wash clothes might buy one of those two-load detergent boxes from a vending machine instead of paying for the $8.00 bottle or box of detergent that can complete up to 50 loads of laundry. Once someone is in the habit of spending that way, it can be hard to get out of the cycle.
Renting Furniture: No one really needs to rent furniture aside from wealthy folks with seasonal vacation homes, or people hoping to stage a home for a sale that will profit them significantly. For some reason, many low income chose to rent furniture because the monthly payments are much lower then full price of the furniture, and because they don’t have good credit. Used furniture works well, and all furniture depreciates. Renting furniture gives absolutely no return, and it only increases a monthly expense.
Premiums: Some monthly payments can be paid through larger premiums. Not always, but in many cases, paying the premium can reduce the overall money spent. For example, a car insurance payment per month could be around $75, but the six month premium might be $390. If someone opted to pay the $75 a month instead of shelling out the $390, they’d actually pay $450 for the entire six months. Pay the premiums, and use the following payment-free months to save money.
In short, spending money should require planning. Sometimes, all it takes to get something that the family needs, is to hold off on buying it. Timing is important with spending, because in the long term, a low-income family can lead a comfortable life with less expenses.