What Happens When The Poor Is Given Free Money? A GiveDirectly Study Exposed

giving moneyWe came across an interesting article from NPR.org that raises the question, what happens when you just give money to poor people? The article introduces a non-profit organization known as Give Directly and this particular charity group focuses on the poor people from developing countries. They give free money – without requiring anything from the recipient!

The procedure to give through this organization is simple. You donate through their site or you send a check to their bank. They look at poor households in the countries of Kenya and Uganda. They use the census data of the high poverty regions in these countries. They look for the villages with low quality homes and look for the poorest households. At present, the website of Give Directly have given to households that live on $0.65 a day (on an average). Of the selected homes, they get their respective numbers or provide them with a SIM card so they can register. The recipient receives a notice of the free money through their mobile phone. It is then transferred to the nearest M-Pesa agent near them (usually a local shopkeeper) who will exchange the transfer for cash.

Once the money is given, the organization does not really care how the recipient spends it. But being on the other end as a giver, it is something that we all care to find out.

Give Directly, having started back in 2008 in Cambridge, MA, have the right idea but their way of giving raises a couple of important questions. We do not question if the money goes to the recipient or not. But we are interested in what happens to the money if it is given for free and without any obligations? More importantly, how will it shape the life of the recipient?

The poverty situation in the US – should we give them free finances?

It makes you wonder about our own situation here in the USA. While things may not be as bleak as the poverty situation in developing nations, there are many people living in poverty and there are countless more that are poised to join them. Based on an infographic from the Census.gov, the following information is revealed:

  • Based on the official poverty measure, 22.3% of children under 18 years are living in poverty. 9.1% of 65 years and older are also under the poverty range. This measure is based on pre-tax money income.

  • Based on the supplemental poverty measure, 18% of children under 18 years are in poverty. 14.8% of people that are 65 years and older also live in poverty. This measure is based on pre-tax money and the cost of goods, services and benefits coming from the government.

  • People are kept from being in poverty primarily because of Social Security benefits that amount to $26.6M, refundable tax credits at $9.4M and food stamps (SNAP) at $5M.

  • Poverty is rampant because of several factors. The tops three are: out of pocket medical costs (-$10.6M), work expenses (-$5.9M) and Federal Insurance Contributions Act (-$3.6M).

We’ve only taken a look at the children and seniors of this country and a lot of them are in poverty. These are the people with whom the majority cannot work for themselves. What about the people between the ages 19 to 64 years? They will make this statistic a lot bigger. And given how the debt ceiling issue in 2014 could take away some of the benefits that are keeping citizens from poverty, you will question how this poverty statistic will rise in the future.

That makes it a good question to ask: should we give our poor people free money to help them raise their chances of survival?

What happens to the money given to the poor for free?

A lot of people fear that if you give the poor money as a gift, it can lead to a lot of bad financial habits that will end up making them a failure. Before we jump to conclusions, let us see what happened to the poverty stricken countries of Kenya and Uganda.

Give Directly published a report that tracked some of the households that were given free money. Based on their findings from the “Policy Brief: Impacts of Unconditional Cash Transfers,” the following effects were evident:

  • Recipients were able to increase their assets. The average increase is PPP USD 279 – which is approximately 58% from their usual asset holdings. It is also 39% of the average money being given to them. Most of the increase went into the improvement of their homes or more livestock.

  • Recipients were able to consume more. With the free money, the household is now able to afford goods and services that allowed them to consume more. These include food (increase of 20%), health care and even education. The report saw an increase even if social expenses.

  • Recipients did not spend the money on vices (alcohol, tobacco or gambling). There is no reported increase in spending on vices.

  • Recipients used the money to invest in livestock or start a small business. Income increased by an average of 48% (livestock) or 38% (small business) because of the transferred money.

  • Recipients and the rest of the household ends up with a better psychological well being. There is an observed increase in happiness, life satisfaction and reduction of stress.

All of these seem to suggest that free money results in a positive reaction. However, you have to take into consideration the cultural differences of the poor people in Kenya/Uganda and here in America.

For one, developing countries are resigned into thinking that poverty is a part of their lives. It is the life that they are used to and any money that is given to them for free will be received with gratitude. Also, they will not think that it is something that will happen again. That will make them more cautious about how they will spend it.

On the other hand, the people living in the US have a better standing because they receive a lot of benefits from the government. At least, it is more than what the developing countries will receive in their lifetime. It is probably not safe to assume that our reaction will be similar if we are given free money. Take for instance the winners of the lottery. Not everyone ends up being smart about it – and that is a very big sum of money that they got out of nothing.

Solving the poverty problems – giving money may or may not work

That does not go to say that we will not give them free money. We can – but under the right context and with the right tools. If you want to help poverty stricken households, you need to give them money lessons will keep consumers from money problems. Do not just give them money for free. Make sure you also teach them how to manage it. Here are some of the important lessons that you need to teach them.

  • Investing. First and foremost, teach them how they can grow that money that they received. They need to be taught that it should not be spent on food and groceries alone. These are necessary but it will make the money a one time solution only. Part of the money must be invested in a business that they can manage on their own. This way, a continuous supply of income will be the end result of that free money.

  • Budgeting. The next lesson is budgeting. Teach them to live within or below their means. Let them improve their lifestyle but never beyond what their generated income can afford.

  • Saving. Lastly, you want to teach them the value of saving. At least, you want them to build up their emergency fund. This will keep them from being forced into debt when an emergency situation strikes. Not only that, it will give them money in the future that they can use to improve their lifestyle even further.

Bottom line is, we have to teach them how to achieve financial security for themselves so that they will not rely on free money all the time. If you think about it, giving money is easy. But giving it constantly can take its toll – especially for the taxpayers.

Here is one suggestion. Instead of spending too much on food stamps for the children living in poverty, why not invest in their education? Right now, you cannot take away the food stamps because starving kids will choose food over education. But in the meantime, channel funds from elsewhere and fund both food stamps and education. If you do this, you will be bringing forth a generation of educated children coming from low income families. That means they will have the means to support themselves through jobs that they qualify for because of the education that the government helped them get. Eventually, you will see a decrease in the need to finance food stamps.

It is a long process but you really have to start somewhere – but you need to do it right. The free money will help – but it will not be enough.