Wednesday, December 3, 2008

Financial Advice for Low-Income Mothers

Lately I'm sure it's dawned on those of us who have retirement accounts that these are products that have been sold to us. In fact, they're not for everybody. An economist, offering volunteer financial advice at a women's shelter, has a counterintuitive perspective on spending priorities. Some of these principles would make sense for middle-class families as well.

First, though, I was impressed by the fact that she did not presume to make the choices for her clients or even to volunteer for the purpose of "helping".
I said I volunteered because I thought that learning about how these women respond to their extreme financial constraints would be interesting. Everyone else said they thought their experiences would be helpful (most were lawyers or in human resources). I realised I was the only one who did not say I was there to help homeless women. I wondered if that made me a bad person. But (and I may be rationalising here) I found something presumptuous about the idea I could swoop in from my comfortable life and sort out these women’s financial woes. I might know about economics and finance, but I know nothing of what it’s like to be a homeless single mother. I genuinely hope to help these women, but expecting that I can feels naive.
While the lead volunteer stated that cell phones were a luxury, the mothers disagreed for reasons of safety and the need for contact with day care. Instead, the economist suggested using pre-paid plans which are much cheaper than the standard contract plans. There was a lot to unravel with these clients. A young pregnant woman she was helping was maxing out credit cards instead of going on welfare, a recipe for ruin.

IRAs and education funds for college have been marketed to the poor as well which only exacerbate their financial burdens. Her advice to parents on schooling is particularly interesting, which is to put their resources into education while the children are young and to rely on state aid later.
The poor have different saving needs from the rest of us. They do not need to save much (if at all) for retirement because the state provides them with a generous pension relative to their lifetime income. They also have less incentive to save for their children’s education. American universities practice nearly perfect price discrimination: having few assets entitles poor students to more financial aid. Resources are better spent on education while a child is young, ensuring he’s well prepared for university in the future. The women at the shelter have low or no income and children to support. Saving might be a better idea in the future, when they have some income and are less dependent on state benefits.

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