The barriers many people face when trying to improve their lives by improving their financial situation are formidable. Limited cash-flow, a lack of collateral, a lack of any credit history or poor credit; cultural differences and language problems are overwhelming obstacles. A lack of role models growing up creates a void, one that lacks a frame of reference for managing finances. It is extremely difficult to find a place to begin. A lack of understanding of budget basics and even how to pay taxes can undermine a persons' confidence in their ability to create a promising financial future.
For the most part, those who continue life in the grip of generational poverty and disenfranchisement, do so because they do not know another way. Many of us make decisions for irrational reasons but couch the explanation for our choices in logical language. It is the emotion that drives the decision and our logic pretends to make sense of it. While everyone operates in this way to some extent, it is a dominant mode of operation for those living in impoverished circumstances.
If a person is not aware of the need to make rational, future focused financial decisions, they do not see the need to save money nor do they believe they have any money to save. People remain in the throes of the emotion of the moment, spending at will, doing what they have always done and always seen done, thus suffering the same consequences that serve to create on-going financial difficulties.
According to a recent USDA report, in 2012, 46.5 million people lived in poverty in the U.S., a rate of 15 percent, "the largest number seen in 54 years." The poverty rate in Washington State is 12.9 percent. Whatcom County is above the national and state averages at 15.8 percent.
In 2011, the Federal Deposit Insurance Corporation conducted a national survey on unbanked and under-banked households. Here are some of the rather startling results:
- 8.2 percent of U.S. households are unbanked;
- 20.1 percent of U.S. households are under banked;
- 29.3 percent of households do not have a savings account, while about 10 percent do not have a checking account;
- One-quarter of households have used at least one alternative financial services product in the last year, and almost one in ten households have used two or more types
Following are a few examples of alternative finance solutions being used. If an individual is unbanked, they must pay to have their paycheck cashed. Fees range from $5 to $10 if they cash their check at a financial institution. According to Brookings Institute, "The average American 'unbanked' worker pays $40,000 over a lifetime just to cash their paycheck."
Payday loans are small, short-term, very expensive consumer loans. According to the MoneyTree website, borrowing $500 for 14 days will cost $75, the equivalent to 391.07 percent annual percentage rate.
Another popular loan is a car title loan. These loans are marketed as small emergency loans. They require no credit check and are given to people with the poorest credit history. A car title loan can be completed online in a matter of a few hours. Typically a car title loan payment is due within a month, carries a triple-digit annual interest rate, and often is for an amount that is far less than the value of the vehicle. If payment terms are not met, cars are taken and sold. Regardless of the amount of the outstanding loan, the lender keeps all the money from the sale of the car.
Often people are not taught how to overcome poverty in a practical way. If we are to help, we must assume the responsibility for understanding our client's values, dreams and frame of reference, respecting the limitations these guiding principles may impose on our work and their acceptance of what we are offering. We want to help them grow and deepen from inside-out - so they can prosper and realize their dreams. Sustainable change does not come from the outside as handouts or charity but rather from inside-out. Barriers are lifted when the unbanked discover how to become bankable. They begin to understand the need to schedule, plan and budget in tandem with the importance of overcoming the very human tendency to give-in to instant, emotion-driven gratification. They become aware of the rewards available to those who stop devaluing the future. They begin to learn, integrate and practice new and better habits.
ABOUT THE AUTHOR
Diana Morelli is director of community development at North Coast Credit Union, which has branches in Bellingham, Ferndale, Mount Vernon and Sedro-Woolley. She develops products and services for people who are underserved and under banked.