When a shock isn’t a shock (or the perils of being poor)

Over the Columbus Day weekend, reports emerged that some low-income families had lost access to their cash. They had loaded their paychecks onto pre-paid cards as a way of helping them manage their money. But that weekend, their cards started to fail, because of a technical fault with the card provider. At grocery stores, when they were trying to buy food. At drugstores, when they were trying to buy medicine.

What are these cards? Well, without a decent credit score to get a credit card, or a bank account (which requires you to be in credit at all times, despite fluctuations in income), many of the 25 million “unbanked” people in America have turned to alternative means of helping them manage their money securely. One way is with a pre-paid card. Holders load their cards with this week’s paycheck. These cards are accepted at most retailers. The money is deducted, a bit like a debit card. And low-income families are able to store their money safely and go some way towards making their paycheck last a bit longer.

But here’s the thing. Low-income families get stuck if their only means of accessing the financial system fails. They have no back-up plan. They have no ability to ask for an extension of credit from their card company or bank. They have no insurance to absorb the shock.

Lack of insurance manifests itself in a lot of ways. On a recent visit to New Orleans, I was reminded of another type of insurance that low-income families don’t have. Slack. Spare things to keep them going in an emergency. Cans of food. A rainy day fund. A back-up generator or candles. When those who could not evacuate were moved to the Superdome, they were asked to bring supplies (albeit for two days). But a low-income person running their household on a tight budget has no room for excess. Even two-days’ worth of excess. In the end, they were kept at the dome for longer than two days. Most families would not have been able to prepare for that.

Why don’t the poor have insurance? One reason is that their time horizon is too short. They’re thinking about today — juggling bills and work and childcare — and so they simply don’t look beyond the immediate. The poor are focused on dealing with today’s problems. And even though focus is good, the flip side can be neglect. Behavioral economists have called this tunneling.

I think another reason might be a person’s historical experience of shocks. The purpose of insurance is to protect against extreme events. Things that don’t happen very often. So I protect for burglaries or fires because (thankfully) I have had little experience of them. But people on low incomes have plenty of experience with shocks. All the way from a new coat for their growing child to a break-in in their apartment. These events are not shocks, they happen far more frequently, in part, because the working poor are forced to manage their money on a week to week basis because of the nature of their paychecks, and in part because the poor live in neighborhoods or buildings where break-ins or fires are more likely. So why pay a premium for insurance, when you could use that money to deal with an immediate shock, knowing that you’ll deal with the next shock when it comes?

In reality, those on low incomes cannot cope with big shocks. The kind that can move them from above the poverty line to below. The kind that devastate their houses and force them to move out. They need help, just like the rest of us. But how do you engage someone on something that is outside of their tunnel? The answer, simply enough, is to bring it into their tunnel.

So when those on a tight budget are at the grocery store, trying to fit as much as possible into their weekly budget, we should offer them a chance to put the change from their bill onto a savings card. That might only be pennies but those pennies will eventually add up to an amount sufficient to manage small shocks. And when people have just received their paycheck and are experiencing a momentary window of calm, that’s the time to offer them products that help protect them against major shocks, like health insurance. It’s just as important to decide when to intervene as it is to decide how to intervene. In doing so, we can help those on low incomes manage shocks just like the rest of us.

Originally published at tellingtimes.me on October 21, 2015.

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