Have you ever wondered how you can rise from a low income household? If you come from one, you probably understand the sentiment. Nobody wants to remain poor all their lives. They want to get out of the stressful cycle of living from paycheck to paycheck. But you have to understand that the circumstances surrounding the life of poor families make it tougher to achieve financial success.
This is a problem because the number of people in poverty is just too many. According to the statistics consolidated by FeedingAmerica.org, there were 46.5 million people in poverty back in 2012. Of that number, 16.1 million are 18 years and below. 3.9 million are aged 65 years and above. Based on the Supplemental Poverty Measure, the actual count of people in poverty is 49.7 million – which is 3 million more than the official measure.
We all want these people to have a fighting chance to enjoy the economic opportunities that the country is offering. But that is easier said than done.
How homes with low incomes spend their money
When you are living in poverty, your spending choices are different from the middle class and the rich families. According to the data gathered by NPR.org the top three expenses per income bracket are as follows:
Poor families that earn $15,000 to $19,999 a year, the top three expenses are housing (29.2% at $4,380 – $5,839), transportation and gas (20.4% at $3,060 – $4,079), and utilities (11.1% at $1,665 – $2,219).
Middle class families that earn $50,000 to $69,999 a year, the top three expenses are housing (26.7% at 13,350 – $18,689), transportation and gas (21.3% at $10,650 – $14,909), and retirement (9.6% at $4,800 – $6,719).
Rich families that earn $150,000 or more a year, the top three expenses are housing (27.5% at $41,250), retirement (15.9% at $23,850), and transportation and gas (15.5% at $23,250).
Take note that the order of importance for the top three expenses vary with each income bracket. For those living in a low income household, they spend more on housing, transportation and utilities. The middle class and rich households earn higher incomes so they do not have to spend that much percentage on utilities. It gives them more room to invest in their retirement.
This gives us a clear picture of what the poor people are up against. It is safe to assume that they want to invest in their retirement but they have no choice because they have to pay for utilities first. But it can also be seen that the transportation and gas are unnecessary expenses considering the limited income that they have. Instead of spending on the car, they should have invested in a retirement plan. Or the average low income household should have increased their savings.
The poor remains poor because they cannot save
Although the low income is what put households under the poverty line, it is their lack of savings that make them stay there. As we can see from the list of expenses above, the amount allotted for each necessity is already small as it is. You can expect that anything extra that they have will go to their usual monthly expenses – not in their savings.
But this is where those living in a low income household is wrong. You need to pay attention to your savings and prioritize it because that is what can help them improve their financial situation.
You may be wondering – why isolate saving? Why not smart spending or budgeting? Here are three reasons why you need to make sure that you prioritize saving money over the other financial habits.
It protects you in times of emergencies. When something happens, you have some money put aside to finance it. You can pay for medical treatments, a busted A/C unit and other important unexpected costs that you will encounter. It will keep you from the unnecessary stress that comes with trying to make ends meet and finance that emergency expense.
It keeps you from debt. In connection with the first, your savings will also protect you from debt. That means any emergency that is not saved up for previously can only be financed through a loan. In most cases, people who live in a low income household does not have a bank account or any credit history that will give them access to low interest rate loans. Their usual option are high interest payday loans. This will keep them in debt for a long time. Building up a savings fund can keep this from happening.
It gives them extra money to invest. The first two reasons are meant to protect the low income household from slipping further into poverty. This last reason, investing, will help them rise out of it. By saving money to invest, they can put it somewhere it can grow. It can be to finance their education that will make them eligible to receive a higher income. Or it can be to start a small business that can increase their monthly earnings.
These three reasons can help any low income household achieve the financial breakthrough that they have been wanting to reach.
It may be difficult to do this but it all boils down to how you react to you spending. If you lower your transportation costs, for instance, you can set aside some money to serve as your financial cushion. It will give you the breathing space that will allow you to grab opportunities that can grow your personal net worth.
The formula is quite simple. You track your spending so you can save money to live a better life.
Mindsets that will get you out of poverty
An article published on MarketPlace.org tells us some interesting stories about people who have to make tough choices because they come from low income households. For one family who had to live on a one income household, they have to constantly worry about the rent and the bills. For a single mother, she had to work hard to afford a home for all the children. Even if that means having them live in temporary homes while she finds work to help support all of them. She had to learn how to cut the hair of her kids on her own – just to make ends meets.
These tough choices of people in poverty are also brought about by certain mindsets that are keeping them resigned to their situation. Just like debt elimination requires a change in mindset, the same is true for those who want to get out of a low income household. Given that thought, here are some mindsets that you need to have in order to improve your financial situation.
A saving, no matter how small is still relevant. Some people are discouraged from saving because they can only put aside a small amount. Regardless of how small it is, you should save. It will grow in time as long as you commit to it.
Getting financial help is sometimes necessary. In most cases, people can manage their own finances but if you know that you are not one of them, just get professional help. There are financial planners who can help you pro bono.
A budget plan goes side by side with implementation. No matter how perfect your budget plan is, you have to follow through with implementation. Otherwise, your budget will be useless.
An increase in income should mean you can save more – not spend more. If you get an increase, do not be too quick to upgrade your lifestyle. Always prioritize your savings so you have room to grow your net worth.
Most growth comes with a risk. We are talking about investments here. You need to get out of your comfort zone and risk a portion of your money in order for it to grow.
Getting out of a low income household is tough but it is not impossible. Just make sure that you avoid the habits that will make you a financial failure. Also, do not think that you need to wait for an opportunity to pass by. Sometimes, you may have to create that opportunity for yourself.