I just finished reading “Portfolios of the Poor” written by Daryl Collins et al. It is a study of how the world’s poor live on $2 a day. The authors studied 50odd households in India and Bangladesh and another 150 in South Africa. Their findings are quite intriguing.
As we would expect, poor families have incomes which are small and irregular. A vegetable vendor can earn Rs. 200 one day and half that amount the next. For those involved in agriculture, incomes are also seasonal. So the biggest financial challenge faced by the poor is cash flow management: How can they run a household and meet their basic needs when income can vary dramatically day to day and month to month.
This is very different from financial objectives of the non-poor, namely, building wealth and net worth. For the poor the focus is on meeting the financial needs of the present and short-term future.
A single emergency can deplete 3-4 years worth of financial progress. I observed this with my maid over the last year. A year ago, she had an accident. She was boarding a local bus but it began moving while she had one leg on the steps and one still on the road. That resulted in a fall and a bad knee injury.
So for the last year, she has taken loans worth about half year’s salary and another grant worth several month’s salary. And yet, she is falling further and further behind financially because she can no longer work to her previous capacity. She used to work in 3 houses and is now limited to just one. That “work” too is notional because we are paying her full salary even though she is actually not working. I think of it as our private disability program of sorts.
Daryl Collins et al, note similar situations in the households they study where an injury or health issue becomes a debilitating event for the family. Yet, they note that health insurance may not be the answer. I was surprised by this at first until I understood better what they meant. Insurance is single emergency product. So you’d need health insurance (for paying for medical expenses), disability insurance (for guaranteeing income in case of disability), life insurance, etc. But if you have limited amount of cash, you would rather spend it on multi-purpose instruments than single-purpose instruments. This means relying on savings and credit rather than insurance.
This brings us to the next question: Are the poor able to save? And if so, how?
More on this next time. [Next post Portfolios of the Poor, Part 2]