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We all make mistakes with our finances, but the poorest pay the heaviest price

13 Jul 2016 | David Hilferty

Jonathan Morduch, Professor of Policy and Economics at New York University, opened his seminar on the hidden lives of low income households with a single, straightforward question: how do people on low incomes do it?

Arguably, this is a question that we do not ask often enough. As revealed by the financial diaries kept by 235 low income households across the US, the answers received when we do ask can be deeply disconcerting.

In the subsequent hour and a half, Morduch provided an unprecedented and meticulous insight into the finances of those on low incomes. Perhaps unsurprisingly, we quickly learned that the experiences of households in the USA closely mirror those of their counterparts in the UK.

Insecure employment, stagnating incomes, the hollowing out of the skilled workforce – all of these factors are just as much the everyday experience of low income households in the US as those across the UK.

The seminar – held by the GCPH in collaboration with Glasgow Caledonian University’s Yunus Centre for Social Business and Health – took place in the same week that the latest Scottish Government data revealed that one in every five children in Scotland are still living in poverty. In Glasgow, the situation is still more desperate with recent data indicating that one in every three children live in poverty.

Yet, stark as these figures are, the realities of the hardship and hard choices facing the poorest is still not fully understood. Morduch argued that the annualised data typically collected fails to capture the realities of the inherent volatility of life on a low income. Households on the lowest incomes get by day-to-day and week-to-week and these fluctuations that take place across the course of a year are lost or “smoothed out” when we examine annual data alone.

This creates a gap in our understanding of what constitutes life on a low income. Perhaps the key lesson that policymakers can learn from the research is the danger of making assumptions about the financial lives of those on low incomes, as Morduch went on to debunk a sequence of prevailing myths about the financial lives of the poorest.

All too often, however, similar misconceptions about the finances of the poorest can take root much closer to home.

In the UK, we know that households in the lowest income quintile are more likely to be over-indebted. Personal debt in the UK continues to climb steadily. The total outstanding consumer credit debt – this excludes mortgages and student loans – stands at £184.3bn. The last time personal debt hit this level was in February 2010.

The debt to disposable income ratio is also creeping back towards pre-recession peak levels and Bank of England Governor Mark Carney recently voiced concerns that “the number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions” following the unexpected EU referendum result.

Yet evidence suggests that people are turning to debt to meet the basic costs of living, rather than as a mark of profligacy or excess.

In much the same way, it is sometimes suggested that those on low incomes are not saving enough due to low levels of financial capability or irresponsible spending. Data from the ONS shows that households in the UK are indeed saving less than at any time since records began in 1963. But this all corresponds with a significant and protracted squeeze on disposable incomes that makes it near impossible for the poorest to build up any kind of financial resilience. Morduch’s research also suggests that those on low incomes are saving, but that they were saving for ‘soon’ rather than having a long term goal in mind.

Time and time again, the debate on tackling poverty and inequality is typically focused on the health, social and education disparities that are rife throughout our society. Money Advice Scotland’s Manifesto 2016 drafted prior to May’s elections called on the Scottish Government to put financial inclusion at the heart of its attempts to address poverty and inequality. In our view, it is important to recognise that financial exclusion is also a kind of inequality that, left unchecked, will continue to inflict extra costs on the poorest.

As Morduch’s research makes clear, we all make mistakes with our finances, but the poorest pay the heaviest price.

Jonathan Morduch presentation.

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