Solving Economic Inequality
On January 16th 2012 the nation celebrated Martin Luther King Jr. Day. An annual reminder of the great work he and other civil rights leaders did to promote equality in the United States. And while, as a nation, we've come a long way towards racial equality in the forty plus years since his assassination we still have a lot of progress to make in many respects.
One area where there is still rampant inequality is in American's knowledge of, and access to, financial instruments and institutions. Today's chief form of discrimination is not based outright on pigmentation but rather on access to information and capital. Economics is the new battlefield.
Banking is one area where the poor and financially unsophisticated have long been at a disadvantage. Low-income households are less likely to meet minimum balance requirements for checking and savings accounts at many banks; often never being able to open an account or being hit with monthly low balance fees in other cases. The sad reality is that it is often those that can least afford a $5 or $10 monthly ‘maintenance fee' that are most likely to end up paying them.
In the absence of banking relationships, many of the nations un-banked are turning to expensive check cashing establishments that charge a percentage fee simply for cashing a check. Worse yet, many use so called pay-day loan firms that charge exorbitant fees for small, short-term loans. These costs are real and they are large, only serving to perpetuate the cycle of financial ruin.
The government has stepped in on a number of occasions, in some cases regulating pay day loans and other services. Largely, however, their efforts have focused on housing and the merits of home ownership for the poor. While most of us can agree that there are benefits to owning a home (pride of ownership, personal responsibility, a sense of community, building equity, etc.), government programs instead focused on getting applicants approved for loans, that, in many cases, they did not have the ability to repay (see recent housing meltdown for examples).
The poor are by no means the only ones affected. Those that are uneducated in financial matters are equally susceptible to various injustices, many brought on by their own lack of knowledge. These can include paying too much for a home or car loan, where total excess costs can add up to tens of thousands of dollars. Using credit poorly is another problem. It can generate high monthly costs as the borrower struggles to make ever higher minimum payments and also often leads to a poor credit score which impacts borrowing costs and can even potentially prevent an applicant from landing a job. Even the seemingly well-to-do are victims of their own lack of education as they are susceptible to being taken advantage of by unqualified financial advisors or outright swindlers guaranteeing returns on investments. Even simply paying too much for investments can cost tens or even hundreds of thousands of dollars in lost earnings over a lifetime.
Many resources are available at little or no cost to help educate the financially illiterate, but the best defense is still a healthy dose of skepticism. When being pitched a financial product ask yourself who stands to gain and how much? Confirm with trusted advisors, be they friends or family before signing anything. Be wary of financial products, guarantees or anything that seems too good to be true. Inquire about costs and don't accept vague answers or ballpark estimates. Walk away from a hard sell. Read the prospectus of an investment and all accompanying material. Don't invest in anything that is too complicated for you to understand.
Solving economic inequalities among the population is a huge undertaking because of the different things it means to different people. How do we even begin to decide what constitutes a fair solution? For this reason it is critical that we take steps to educate ourselves to ask the right questions and understand the corresponding answers. Waiting on a legislative solution is not only a waste of time but will ultimately prove to be unsuccessful. Only through our own efforts will we be able to make well-reasoned, intelligent decisions with our money and ultimately narrow the gap of financial knowledge and ultimately the wealth gap as well.
About the author: Michael Prus is the President and Founder of Scale Investment Group, LLC, a registered investment advisory firm based in White Lake, Michigan. The company manages money for clients and is a consumer advocate, most notably championing greater transparency of the investment advisory industry and lower fees for investment products as well as portfolio management services. Contact Michael directly at firstname.lastname@example.org.
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