Low-income families are getting terrible financial advice online

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There’s plenty of financial advice available for people with a little extra money to spend — put more money in your 401(k), create a rainy-day fund, start planning for your child’s college education.

But where do you go for tips if you’re struggling to make ends meet?

That’s the question one commenter asked in a recent Reddit post. “Is there anything out there that is geared toward actually helping someone who is poor and in a broken home (no support) to become stable?” Domic462, asked.

The advice started pouring in, ranging from “use a milk crate from a grocery store instead of a nightstand” to sharing some cheap recipes. “There’s so much shame in going to food banks … but that’s what they’re there for,” one person said. “No one needs to have ‘sleep for dinner.’”

But those types of tips miss the mark and don’t address some of the root causes that push people into poverty and keep them there, said Ann Huff Stevens, an economics professor at the University of California, Davis, who researches poverty.

In fact, people who are living in poverty often do a better job of tracking where every dollar goes than those at higher income levels, she said, because every dollar matters for them more.

The stereotype that poverty is a result of ignorance, a lack of financial literacy, poor budgeting or a lack of willpower is often wrong, said Clifford Robb, an associate professor at the University of Wisconsin-Madison who studies financial literacy. “If you look at our financial system, we’ve shifted increasingly to one that places more risk on the individual consumer,” he said.

Why typical financial advice doesn’t help

When people are suffering in poverty, they actually have a harder time making rational decisions, according to researchers at Princeton University, Harvard University, the University of British Columbia and the University of Warwick in the U.K.

Although it may seem obvious to others that taking on a high-interest loan, eating unhealthy foods or not taking steps toward preventative health care (like regular checkups) are bad ideas, it’s harder for those living in poverty to have enough time and energy to make those decisions, they said.

It’s hard to make significant long-term changes when you’re worried about whether to make a car repair, feed your family or finally purchase new shoes for a child, said Emory Nelms, a senior researcher at the Center for Advanced Hindsight, a behavioral economics lab at Duke University. For example,

At minimum, constant financial pressure can cause a lot of stress and unhappiness, said Kristin Seefeldt, an assistant professor at the University of Michigan who studies poverty. Workers are worried about unpredictable hours and their futures with their employers, she said.

Stress and shame about poverty are a treacherous combination

Stress about finances can even result in people feeling physically ill.

Some of those in poverty are resistant to using resources like food pantries because they feel there must be someone else who is worse off. “There’s this idea that as long as you have a roof over your head, you shouldn’t be availing yourself of those things,” Seefeldt said. “When the whole community is under a lot of financial stress, people keep it to themselves.”

Another issue: Unpredictable incomes. Families who experience big ups and downs in their incomes, known as “income volatility,” have a tough time making long-term budgeting plans, because most financial advice is built on the assumption of a steady paycheck.

When people are desperate for loans, things usually get worse

Many households struggle with debt, and when they don’t know where else to turn, they sometimes take on even more debt from payday lenders, with sky-high interest rates. That situation can start to feel hopeless, Seefeldt said.

“Some people make peace with the fact that they’re always going to be in debt,” she said. “There doesn’t seem to be any other financial future they can see.”

The chance to create a little financial slack, even if it’s in the form of a dangerous loan, can create some mental space for those living in poverty, Nelms said. A loan can give people “a minute to exhale,” he said. “You start to think, ‘I can solve my short-term problems and then move on.’” With interest rates of 30% and over for some of these loans, however, the opposite happens.

‘Some people make peace with the fact that they’re always going to be in debt. There doesn’t seem to be any other financial future they can see.’

—Kristin Seefeldt, professor at the University of Michigan

The best financial resources for those in poverty

Family, friends and community networks can be a short-term solution for those in a tight spot, Robb said, especially when those connections are willing to lend money or help with child care. But this is often a short-term solution.

Nonprofit organizations such as the Mission Asset Fund, based in San Francisco, work within communities to help people in poverty, Seefeldt said. There are similar organizations across the country, including Chicago-based Heartland Alliance and Prosperity Now, a nonprofit in Washington, D.C.

These “asset-building” organizations help individuals find ways to save and navigate emergencies, Huff Stevens said. One success has been teaching more individuals about the earned income tax credit, and tax preparation services can help them do that.

There are also programs aimed at getting low-income households to save very small amounts of money.

Community organizations also provide a social safety net

Churches and other places of worship also often offer financial assistance and literacy programs, Robb said. Universities, especially state universities, also often offer those resources, he said, so it can pay off to contact a university extension that is in your community.

Beware of any resources that offer to negotiate debt for you, and then become your creditor, Robb said. And any organizations that require you to pay up front are probably not trustworthy.

When seeking debt help, look for debt management agencies rather than debt settlement companies, Nelms said, The former category includes non-profit organizations that belong to the National Foundation for Credit Counseling, while the latter are usually for-profit. Also, see if the agencies are reviewed by the Better Business Bureau.

Financial technology companies are focusing on the poor

FlexWage and ActiveHours let employees cash out their paychecks, even before it’s actually payday, in order to help people avoid taking on payday loans.

ActiveHours receives donations from users in the form of tips. It doesn’t charge consumers fees or interest, but users must reimburse ActiveHours for any fees associated with a failed transaction or fees incurred in attempting to collect the amount of that failed transaction.

FlexWage charges $5 for a money transfer. It has PIN transaction fees of 50 cents each and $2 AllPoint ATM transaction fees (with two free AllPoint ATM transactions per month.) Both companies market themselves as an alternative to payday loans, which can have triple-digit interest rates.

Consumers can also sign up for notifications, either from banks or third-party apps, when their bank accounts run low. And some companies, including Grameen America, part of the Washington, D.C.-based nonprofit Grameen Foundation, give “microloans” to people in need.

“There’s a lot of promise,” Nelms said.

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