Two weeks ago Alvin wrote about investing for his mother. As an experiment of sorts, he has received a token sum of $2000 from his mother. The sum will be invested and returns tracked. He has compared the various options available to retail investors, amongst them reits, ETFs and corporate and Singapore Savings Bonds.
For a start, I was impressed by the sheer number of options available. Even for a relatively small sum, there is no lack of variety. And we are not even in alternative investment territory (landbanking, wines, peer to peer landing etc) yet.
The second thing that struck me was how expensive it is to invest a small sum of money. The transaction cost adds up and becomes very prohibitive.
The implication is this – as the sums invested becomes bigger, the investment becomes cheaper. When sums are small, investments become more and more expensive.
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It got me thinking – investments aside, is it ‘expensive’ to be ‘poor’?
Is it really expensive to be poor?
Conventional logic dictates that it is. Let us take food for a start.
Buying in bulk lowers food cost significantly, but for the low income worker living from paycheck to paycheck, that is hardly feasible. He would be more concerned about making his money last until the next payday rolls in, rather than thinking of stocking up and saving money in the process.
Had he bought rice, cooking oil and sugar in larger quantities instead of smaller ones, he would have made substantial savings. Unfortunately that option is simply not possible.
And we look at the example of a man who needs a van for work. He needs his own vehicle to ferry samples, and to reach far flung industrial estates. Because he had no spare cash, he went for the oldest and cheapest van to buy. As compared to a newer and more well maintained van, his van burns more fuel and requires much more upkeep.
He drives the tyres bald and the brakes to their thinnest because he cannot afford to replace them. He also puts off regular servicing and refuses to change the engine oil. Eventually the van breaks down and requires an expensive engine overhaul, one which he might have avoided if he had the resources to do it.
For almost all banks, opening and keeping a savings account is free. However, most of them also charge a fall-below fee whereby a fee is imposed when the average daily balance falls below a certain amount.
For POSBank, a minimum charge of $2 is levied when the balance falls below $500. For Citibank, their ‘Total Relationship Balance’ should not fall below $5000 failing which a fee of $10 will be charged.
For the rich, this is nary an issue. Even if they were to accidentally drawdown their accounts and overlook the balance for the month, the charge is but a drop in the ocean.
The poor though, watch their finances like a hawk. A charge of $2 slapped on an already anemic account is not good news at all.
When I was in primary school ages ago, I remembered a fire safety campaign with the tagline – Fire is a good servant but a bad master.
The same applies to credit cards. When used appropriately, credit cards can be extremely useful. Cashless convenience aside, cards offer a free line of credit. You can purchase a product now and pay for it a month later, at no cost. Some will say it encourages indiscriminate spending amongst individuals, but for other more disciplined shoppers and for many small businesses, credit cards eases the cashflow and they are an indispensible tool.
Some cards also offer cashback or good frequent spender programmes. The more you spend, the more you save, and using them to pay for groceries, utility bills and petrol can end up very rewarding over the long run.
For those with no access to credit cards, they end up living a slightly more expensive life.
Nevertheless, it is the ‘poor’ with access to credit cards that often end up paying the highest price. With easy credit on hand, the temptation to purchase something you do not need or cannot afford is high. In dire situations, credit is often rolled over amongst cards.
Once a payment lapses, the card issuer piles on the interest on top of the late charges. The amount owned balloons. The card mutates from a meek servant to the controlling master.
There is no doubt that everyone ought to have some form of insurance coverage. And there is no better time to be covered than now.
For two very simple reasons. Firstly, the very purpose of insurance is to provide coverage for the unexpected. And tomorrow IS the unexpected. It is too late to hanker for more hospitalisation coverage tomorrow if for any reasons you need to be admitted.
Secondly, it is cheaper to purchase insurance now than later. For most forms of insurance, as we age, the cost increases.
Fortunately for many types of insurance, cheap is actually good. Term insurance is the cheapest form. Despite costing a lot less than Life insurance, it provides significantly more coverage without any of the frills. Louis wrote an article comparing the two.
The government has also rolled out good hospitalisation coverage in the form of Medishield Life. The aim is to provide basic coverage at a very low cost.
But try telling that to the low wage worker struggling to make ends meet. If he has an additional $50 a month, he would be more inclined to spend it on paying the utilities or putting better food on the table or even splurging on a new pair of shoes for his kids.
Insurance is so intangible and the need for it is so far flung that it is often relegated to way down the list for many. If the person remains healthy and safe, all is good. If an illness or incident were to happen, the lack of proper insurance coverage will prove to be extremely costly.
‘Poor’ is relative
By now, you would have realised that my definition of ‘poor’ is not restricted to people down to their last penny. Poor is a relative term. If your neighbours are Bill Gates and Warren Buffett, you would feel like a pauper even with millions in the bank.
And by now, you would also have realised that being ‘poor’ is a vicious cycle. The ‘poor’ have lesser resources than the rich. Yet we live in a society which confers on the poor even less and demands from them even more than it would from the rich.
From basic neccessities such as food and transport to financial services and access to protection and resources, it is expensive to be poor. In our quest to be rich, we should not lose sight of the needy poor.