What the World’s Poorest Can Teach Us About Money Management

For much of the last half-century, one of the biggest struggles in the poverty-fighting business has simply been knowing the audience. Who are the poor? Statistics tell us they are the 1.4 billion — or about a fifth — of the planet’s 6.7 billion people who live on less than $1.25 a day. And 2.6 billion people live on under $2 a day. The numbers are already adjusted for purchasing power — say, the number of pesos or yuan you would need to buy $1 worth of food, clothes, or medicine. So, in a world where a Starbucks coffee rings up at $4 a cup, how can so many live on so little?

Answering that basic question is fundamental to figuring out how governments, foundations, and charities can reduce poverty. But the economic lives of the poor — their daily choices, opportunities, and constraints — remain largely out of view of the policymakers and philanthropists who aim to help. After tracking the spending, borrowing, and yes, savings, of the poor across a full year in slums and villages, my colleagues’ research reveals that the poor are often complex financial consumers. These "financial diaries" tracked penny by penny how families managed their money. And what we found is surprising: Many poor families are, arguably, far more adept at money management than even your average Western consumer. Offering them the tools to make saving and borrowing easier would go far to help the poor help themselves.

Those $1-a-day and $2-a-day figures might be partly to blame for why we’ve missed seeing the poor as sophisticated financial consumers. It turns out, such measures hide as much as they reveal. That $1 a day is an average, obscuring the reality that farm families may receive much more than $1 a day during peak harvest seasons but nearly nothing for a string of slow months. Rickshaw drivers and roadside vendors have busy weeks followed by terrible weeks. Their challenge is to make sure there is food on the table every day, not just on the days when income arrives.

Dhaka, Bangladesh, is home to some of the best examples. In one slum described in the study, most residents live on less than $2 a day and earn their way through a patchwork of odd jobs and self-employment. Hamid, for example, was a part-time rickshaw driver who was lucky to secure an on-again, off-again job. His wife, Khadeja, helped out by taking in sewing by the piece while she looked after their son. Between them, their family earned an average of $2 a day per person. Yet their financial diary reveals that, rather than living hand-to-mouth, Hamid and Khadeja — and even similar families living on $1 day or less — were borrowing and saving actively with an eye toward the future. Hamid and Khadeja used a wide variety of facilities to save, from contributing to Khadeja’s microfinance bank account to simply asking a friend to safeguard some of their spare cash.

Such observations turn the assumptions that have been guiding policymaking for decades upside-down. They debunk the idea that typical poor families are living hand-to-mouth and are so desperate to meet subsistence needs that they are unable to exhibit much agency at all. And Dhaka is certainly no exception; in India and South Africa, everywhere the researchers went, poor families were living active financial lives, not despite being poor, but because of it.

One of the most striking findings is the extent of savings among the poor. Take the example of Nomsa, a 77-year-old woman in a South African township. Her daughter had died of AIDS, and Nomsa was caring for four grandchildren on a monthly government stipend of about $120. Still, she managed to save about $40 each month. Informal savings clubs were the key; Nomsa contributed a fixed amount to a communal pot each month in exchange for a big payout at the end of the year. For example, one of her clubs required $9 of savings each month, adding up to $99 by Christmas after 11 months. Elsewhere, others in the same community relied on local "deposit collectors" who earned their money by charging a fee for making daily visits, collecting a few pennies each time, and returning the accumulation at the end of the agreed-on period. For those of us used to earning interest on our deposits, it seems odd that people are paying to save. But given how valuable such a safety net is, and how hard it can be to accumulate, paying to use it makes sense. While the salaried members of the world’s richer half take advantage of automatic payroll deductions to pension accounts, the poor are left to devise their own mechanisms. Ironically, it is these poor households — who face the most financial risks — who have the fewest reliable tools through which to save and prepare.

That observation helps us imagine a new and different future for microfinance, the global movement founded by Muhammad Yunus that offers microloans to jump-start local small businesses. Khadeja in Dhaka, for example, used microfinance loans to run her sewing sideline. But the financial diaries of the poor show that such a vision is too limited. Among Yunus’ Grameen Bank customers, for example, the research found that more than half of the families in the sample mostly used the loans for things other than business. One such case was Ramna, a frequent user of "top-up" loans from Grameen, which allow borrowers to get a cash infusion by returning the loan balance to the initial loan size once they have paid some of it off. Ramna used her loans to buy food, stock up on grain for the coming monsoon season, pay down a higher-interest private loan, and pay for medical expenses, school fees and funeral expenses. Although Ramna’s borrowing was not used for business enterprise, the value of such credit was clear.

Simple tools, like new savings accounts and loans for family emergencies, are now being introduced by microfinance institutions. Grameen Bank has introduced a new suite of such products that has proven so popular that the bank today takes in more in deposits than it lends out. Of course, no savings device alone is likely to take Hamid and Khadeja, Nomsa, or Ramna out of poverty. But better tools can do something perhaps more fundamental: help poor households make the most of what they currently have — and offer reliable ways to cope with life’s ups and downs.