Why do the poor stay poor?

Posted by Maneesh Sethi :: August 14, 2007 @ 11:58 am

It's never a good time to be poor—in America, the gap between the rich is not just evident, but growing. The rich are getting richer, and the poor are staying just as poor or getting worse. What's going on?

For a long time, like a lot of people, I blamed it on the poor people themselves. I just assumed that they didn't take the time to get educated or that they willingly subjected themselves to high-interest loans. I've seen people portray the widening gap as a result of social Darwinism – the poor are only getting poorer because they deserve it.

But that can't explain it. The poor aren't stupider or less able than the rich; they have less luck. I researched this and found that in order to break out of poverty, people need a seed: activation capital.

In her great book Nickel & Dimed, Barbara Ehrenerich wrote about how she chastised one of her co-workers at Wal-Mart for living in a motel instead of in a much cheaper apartment. What was her co-worker’s reason? To get an apartment required a down payment, a security deposit, and time to search for a good one—luxuries she didn't have. If she could have saved up a few hundred bucks, she would have been able to move into a cheap apartment and rapidly save much more. The only problem was that she had no ability to save the few hundred bucks.

Taking loans is one way to get the activation capital. However, the hard part isn't getting the money—see my previous post on high interest loans – it’s repaying the money. If someone in the above person’s situation takes one of those 100% APR loans, chances are that she won't ever be able to pay it back. Once in debt, it's a lot harder to get out.

Investments such as bonds, stocks, or lending your money on Lending Club can help you make sure you always have some money in reserve. In my next post, I'll talk about how to save for a rainy day or for when you need some activation capital yourself.