"If you don't have any money, then what's the point of managing it?"
That's a question that Stuart Rutherford encounters a lot. And, he says, it's a common "trap of thinking." People who have money think that people who are extremely poor — living on less than $1.25 a day — don't have even a penny to put away for a rainy day or a daughter's wedding or a fund for a new home.
Last week, I reported a story on the U.N.'s pledge to wipe out extreme poverty by 2030, and I fell into that trap. Sure, I thought, the poor can't save money!
Rutherford and other experts gave me a very different perspective. So I realized there's another story to tell: how the world's very poor vigorously manage their scant funds, using a set of unorthodox tools.
For the last 16 years, Rutherford, author of The Poor and Their Money and Portfolios of the Poor, has bounced around the globe meeting with very poor people to compile detailed accounts of how they make, save and juggle money to meet their needs. (He also started a micro-finance cooperative in Bangladesh, lending money to low-income people living in and around the capital city of Dhaka.)
Just like the non-poor (as the experts call them), the poor have to pay for everyday expenses like food and shelter, unexpected health care costs, education, weddings and funerals. But they have to do so with irregular, unreliable and small income.
"The point about being very, very poor is that you face more difficulties in a much more direct way almost every hour of your life," says Rutherford. "Some people are quite good at coping with that, psychologically and practically, and other people are less good." Regardless of personality type, he says, the need to manage money is much more critical for very poor people because they have no cushion to fall back on.
But most people in emerging markets do not have formal bank accounts. Many banks, he says, "don't want to do business with poor people," because they view meager accounts as not worth the operational cost or worry that middle-class customers will be turned off if they see poor people hanging around. Research by the Consultative Group to Assist the Poor noted that small savings accounts of poor and low-income customers are "the most costly for financial institutions to maintain." In extreme cases, uniformed guards will keep poorly dressed people outside. In other cases, banks are just too much of a hassle to get to, or there are account and withdrawal fees that a poor person couldn't afford (this applies to low-income folks in the U.S., too). For people with an erratic income, loans can be hard to get.
So how do they do it? Often with a collection of strategies that enable them to make the most out of what little they have — and that involves shuttling money from one place (or one person) to another, over and over.
Poor people take out tiny loans from NGOs or borrow money from neighbors and friends. They might save in a sealed clay pot, under the mattress, or by paying a trusted "money guard" — usually a relative or friend — to take care of a sum of money. "You find them in any country," says Rutherford. Money collectors may stop by each day to collect a few coins, and, for a fee, return it at the end of the month, to keep it out of temptation's way, and out of the hands of thieves or frivolous family members.
Then there are the creative types, like Mohammed Alfazzudin in Bangladesh, who planted trees on a small plot of land he owned and will cut them down and sell the wood to pay to build a house on the very same ground.
But the most ubiquitous form of alternative finance is the informal savings club, known in the financial world as a "rotating or accumulated savings and credit association" and in many African countries as a "merry-go-round." In one version, members pay monthly deposits to the group, which then doles out the full pot to one member each month, who can use it for a large and perhaps unexpected purchase or expense. In another version, the group money is used to make loans that are paid back with interest, so that the group pot grows over time.
"Savings clubs are vigorously running in every single country that I've worked in," says Rutherford. There are Vietnamese hui, South African makgotlas and stokvels, sou-sous in New Jersey and tandas in southern California. There are chamas in Kenya, osusus in Nigeria, susus in Ghana, or ekub in Eritrea and Ethiopia.
The real test of managing money comes when a life cycle event looms. "In almost every culture, there's one ceremony that tends to be very expensive," says Rutherford. "There's a huge ceremonial expense that every poor family has to worry about."
In South Africa, funerals can cost almost a year's income: 4 out of 5 poor people in South Africa belong to burial societies, a kind of informal insurance for funeral expenses. The society has a pot of money that comes from its members' donations. A member can tap the pot for a family funeral. And members also pitch in to help if there is a death in one person's family.
In Bangladesh, daughters' marriages are a big deal. And if one doesn't involve a feast, decorations, music and a gold dowry, then it's not a real wedding. "It's about getting the right boy," Rutherford explains.
The prospect of her daughter's wedding left Kamala Rani of Kapasia, Bangladesh, stressing and saving up for years. But a wedding is a wedding, and despite the difficulty, talking about the event still makes her smile.
Check back with Goats and Soda in the week ahead to learn how, despite living in deep poverty, Rani managed to put away enough money to pay for her daughter's wedding.
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