America's Poverty Trap: How A Small Financial Setback Can Spiral Into An Inescapable Disaster
When you are living a financially fragile life, it seems like someone somewhere is trying to keep you poor. Why is it so hard to get ahead? Well, because the system is rigged against you when you’re living paycheck to paycheck with fee after fee after fee. Because what makes more sense than charging someone who already can’t pay their bills even more money?
Land of the Fee
First, there are the fees. We’ve written here about undisclosed fees that most people are being hit with, but bank fees are even worse.
If you bounce a payment by so much as a penny, then you are hit with a charge from your bank and most times, a charge from the business that was taking the payment from your account. Most banks charge anywhere from $25-$38.50 when you have non-sufficient funds for a payment. Businesses charge in the same range, so that means that if one payment goes awry, you can lose $50-$77 in the blink of an eye.
Banks love NSF and overdraft fees. Why? Because in 2017, Americans paid $34 billion in fees for not having enough money to cover a payment.
Some of these fees come from the automatic payments that come from our accounts. Mortgage, car payments, insurance payments, and other bills are often automatically debited. Other fees come when a person has “overdraft protection” on their debit cards. This is when a person doesn’t have enough money in his or her account for a debit to go through but their credit union or bank covers it anyway.
The government’s Consumer Financial Protection Bureau explains just how insane these fees are. (Emphasis mine)
So to be clear, the banking system is set up to take the most money from people with the lowest balances.
One NSF or overdraft fee can unleash financial chaos.
Imagine you have a bill that attempts to debt from your account twice, costing you $50. Then another payment, a smaller one, that would have gone through if the other bill hadn’t gotten there first, bounces too. Now you’ve lost $75. It’s pretty easy to see how another payment – even one for a few bucks, could bounce next. Now you’ve lost $100.
By the time you actually have the money to cover all the fees, how on earth are you supposed to pay the bill that put your in the negative in the first place?
I know what a lot of you are thinking. “I’ve never bounced a check in my life” or “these people need to get control of their spending and they wouldn’t have these fees.”
But this vicious spiral can be caused by something as seemingly trivial as a person’s pay being direct-deposited one hour late on payday. It can occur when payday is on a Saturday but your funds won’t be deposited until Monday but your debits are still coming out regardless that it’s a weekend. It isn’t always personal irresponsibility that causes a person to be unable to cover the payments coming out of his or her account.
Once you’re in the hole for a couple hundred dollars in NSF or overdraft fees, how in the world do you get out? If your financial situation is so precarious that one bounced payment causes this cartwheel of non-sufficient funds, how are you supposed to ever get caught up?
And that’s not the only fee a person struggling financially can expect.
Next, there are late fees and the re-connect fees.
If one of the payments that went awry in your overdraft avalanche happens to be a utility bill, things get even worse for a person who is struggling. Particularly if you aren’t able to cover the bill in sufficient time to keep your utilities from getting shut off. How much you’ll be charged varies by company but if they really feel like you’ll have trouble paying in the future, they stick it to you, making it nearly impossible to get your power or heat turned back on. Here are some examples
They can be charged late fees by all sorts of businesses. Now they’re really in trouble.
How do they bail themselves out of this mess?
A payday loan can be one way a desperate person chooses to get out of financial trouble.
Now a bad situation has gotten even worse. You’re only getting a portion of your paycheck which means that you’re not going to be able to meet future bills. You’re going to face more late fees, more NSF charges, and more overdraft interest.
The cycle is vicious.
If you’ve ever wondered why broke people tend to stay broke, this is why. Unless the person in financial trouble gets some kind of windfall, they’re going to have great difficulty getting back on their feet. In many cases, it’s impossible.
And that isn’t the only bad part of the war on the poor. Homelessness has been practically criminalized. Here are some examples of how poor or homeless people can get in trouble with the law.
Of course, not all people financially struggling are out on the streets. Many are quietly struggling in middle-class neighborhoods, in nice homes, driving a late-model car. If they’re upside down in their mortgage or car loan, selling those items is not an option because then they’ll still be making the payments but be without a way to get to work or a place to live.
If they file for bankruptcy, good luck to them getting a cheap place to reside.
Things get harder.
How to avoid these traps
You may already be in financial trouble, or you may just be in a situation with no emergency fund. If that’s the case, you should know that it only takes something small to send you straight to financial disaster.
Here are a few tips to help you avoid the pitfalls of poverty.
Know that you aren’t alone if you’re facing these kinds of problems. Many people in our country are deeply in debt, living paycheck to paycheck, and struggling to pay for basic necessities like food, rent, and medical bills.
Don’t look for things to become more affordable or for your paycheck to magically increase. That’s not the direction we’re going in America. Your only options are to reduce your expenses, eat cheaper food, and bring in some extra cash. If you get a windfall, use it wisely to build a financial cushion.
The American poverty trap keeps poor people poor. And it’s easier to fall into than you think.
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