By Domingo Ramos
My life has been one of constant observation. I’m fascinated by how we are sold the idea that everyone can make it if they are smart enough and they try hard enough. But the reality is that our environment is a critical factor in determining our fate.
This is not to say that we can’t overcome any bad hands we might be dealt, but it does mean that there is less room for error.
Growing up, I observed 3 constants in our communities which I felt held us back:
1) Liquor Stores
2) Check Cashing Establishments
3) Predatory Lending
Now, I’ll set aside the topic of liquor stores for another day (this is a financial site after all), but I wanted to dig a little deeper on the theme of “Access to Financial Resources” which hits on items numbers two and three.
What’s also important to note is that our environment isn’t just about the things around us, but also the things that are absent…like banks.
In the following paragraphs I’m looking to explore the way these things disproportionately impact our neighborhoods and how folks can make strides towards a better financial situation. And even if there is no magic sure-fire solution we can provide to solve all these problems, we can look at making steps towards progress.
My Check Cashing Story
As I was growing up there were two things that I wanted, but were out of reach: a video game system and the latest Air Jordans.
My parents were a little old school, so they were never (ever) going to buy me a video game system no matter how much I begged.
And growing up in Brooklyn, the latest sneakers were the fashion statement that all kids wanted to make. It was sneaker culture before the world understood what it meant. But spending over $100 for a pair of sneakers was also not something remotely under consideration for my parents. (Sidenote – the fact that some people were literally getting killed for them made any pleas I might make moot)
*fire up the car to go to Payless*
It wasn’t until the summer of 1995, the first year I could get a real tax-paying job, that I could “rectify” this situation.
When I got that first $4.25-per-hour paper check, I made a b-line to the fastest way I could convert it to cash in Washington Heights–your friendly neighborhood check cashing place.
For those that don’t know, check cashing spots are like a bank…if a bank felt like a pawn shop and you were desperate to make the next utility payment.
My 14-year-old-self paid them 7% for the privilege of converting that paper check into cash.
And that establishment was all too happy to help me do so.
When I Realized It Was a Problem
I wish I was able to tell you that I only went to the check cashing place once. But I was still a teenager and needed that immediate Scrooge McDuck feeling of cash-in-hand. I went there all summer.
Later that year I got my first W-2 and saw the cumulative impact of the taxes I was paying. I didn’t think much of it whenever I got each check, but it made me wonder about the impact the 7% fee I was paying to the check cashing spot.
Is it that bad? What if I only used check cashing for all my earnings instead of a bank?
I did the math.
Updating the figures to make it current, over a lifetime the take home pay of an individual in the United States is $1MM (after the tax man takes over $500K). [1]
Now, if we multiply that figure by the 7% I’d be paying over a lifetime…$70,000!!! Yikes.
That’s a hefty price to pay for “convenience.” At that point, to paraphrase Martin Lawrence, “I ain’t paying the seven.”
None of us can afford to just give that much way. And to make matters worse, check cashing establishments tend to set up shop in low-income neighborhoods where banks are scarce and where every cent matters.
Where Are The Banks?
If you grow up in a situation that is disadvantaged, you may not realize it. For some, it’s a good thing because they don’t see it as a setback (you can’t miss something that was never there in the first place). But for most it means a lack of resources that could catapult them out of a tough situation.
When I was working as a teen in Washington Heights, it never dawned on me that there was a lack of banks (where account holders could cash checks at zero cost). But almost every block had a check cashing establishment. As a kid seeking immediate gratification, I [foolishly] did not make a distinction.
To understand where banks choose to set up branches, you have to understand how they make money. In short, they want people depositing as much money as possible into the bank so they can then lend that money to other people at a profitable interest rate.
That’s a double whammy for low-income neighborhoods.
On one hand, the folks in these communities don’t make enough for these banks to see them as attractive clients for deposits. On the other hand, people in these neighborhoods tend to have lower credit scores which also makes them unattractive as clients that want to borrow for a home, business, etc. This bears out in the data.
13.8 percent of Black and 12.2 percent of Hispanic households are unbanked, relative to 2.5 percent of White households.[2] And, as you may have guessed, Black and Hispanic households are more than twice as likely to have used a check-cashing service or money order than White households. (You use what you have at your disposal, right?)
And when the financial institutions do lend to us, it sometimes comes in the form of terrible terms…
Predatory and High Interest Loans
Three types of lending in particular are particularly harmful: pay day loans, high interest credit cards, and high interest bank loans due to poor credit score. (Like Mos Def once said, “beef is high blood pressure and bad credit, need a loan for your home but you’re too broke to get it.”)
The major problem with these borrowing mechanism is that they are not only harmful, they’re also the only ones we might have access to.
PayDay Loans are designed in a way that keeps the borrower in a borrowing cycle that’s hard to break. According to Bankrate, “80 percent of borrowers who were tracked over 10 months rolled over or reborrowed payday loans within 30 days.” And, to make matters worse, in states like Idaho the average APR (the % the lender charges) is 652%. [3]
That’s. Insane.
High interest credit cards are not much better. Let’s say the APR on a credit card is 14.55% and you put $1,000 on it. If the card holder only makes a minimum payment of $25 per month, that’s over $375 in interest they end up paying on that $1,000. Not to mention it could take almost 5 years to pay that off. That’s a burden we should try not to carry around.
And lastly, high interest bank loans. According to a 2022 Pew research study, a greater percent of Blacks (7% of loans) and Hispanics (4%) were paying over 8% interest on personal loans vs their White counterparts (3%). This is in large part due to the way creditworthiness is determined – by credit score and income. [4]
We can do better.
Why It Matters
How does one break out of the cycle of poverty? For most, the answer is to create generational wealth. When you do so, it mean you can take care of yourself and you can pass down resources to your kids that let them avoid the stuff like predatory lending we talked about.
Unfortunately, many of our families are caught in the same cycle:
1) Work hard to support our families.
2) Make sacrifices to help our kids have it better than we did.
3) Have little to fall back on as a result.
4) Seek help from our kids to take care of us in retirement. (And we might say “no, don’t help us” but our kids would suffer seeing us struggle…so they help)
Then, where does that leave our kids?
1) Work to support their families (including their parents)
2) Make sacrifices.
3) Have little in the end.
4) Look to their kids for help in old age.
There is a romantic notion about being close to your family in the latter years, but the key is to have it be a blessing and not a burden.
It’s like the emergency instructions they give you when the flight is about to take off— “In case of an emergency, make sure to secure your oxygen mask first before assisting your child.”
On the plane, it’s much easier to secure that mask on your daughter if you’re not about to pass out due to lack of oxygen–put your mask on first. And it’s much easier to hang out with your kids after retirement if you’ve taken care of yourself financially first.
But because many of the financial resources we need to break the cycle aren’t readily available (like having access to banks instead of check cashing spots), the cycle continues for many.
However, it is possible to achieve the promise of the American Dream (so long as you’re not giving your hard earned cash to Check Cashing or predatory lenders)
Remember the lifetime cost if you just used check cashing? $70,000 would go a long way towards the purchase of a home and a step towards creating generational wealth.
Breaking out of the Cycle
The things we need to do for better personal finance seem simple as concepts, but the reality is that we all face different pressures.
I was once on a team that was looking to put together a Marketing campaign around investing. We wanted to bring in more customers, many of whom had never invested before.
The focus groups told us in a few instances “I don’t have enough time.”
Our head strategist scoffed at the idea. “If they have time for all these other things in their lives, why can’t they do this? I’m not buying it,” she said.
She was absolutely wrong in that thinking. (Not to mention that she hadn’t even opened up an account for herself– ironically, in a separate conversation she’d mentioned that she hadn’t gotten to it.)
I say this because many of the things that may make personal finance challenging (lack of time, feeling like you don’t know where to start, loved ones derailing you, etc) are all valid. But it is important to understand the downside of putting it off (some of which was covered here) and knowing which options you have available to you.
But the one overriding factor I’ve seen in those that break out of the cycle?
Discipline.
This means being able to stick to a long-term plan for saving and investing. And, once you’ve put together a nice little nest egg, it is also about having the discipline to say “no” to the things that may take you off of your long-term goal.
[1] A Life of Tax: What will Americans pay in tax over their lifetime? https://www.self.inc/info/life-of-tax/
[2] Community Development Innovation Review: The Racialized Roots of Financial Exclusion https://www.frbsf.org/community-development/publications/community-development-investment-review/2021/august/the-racialized-roots-of-financial-exclusion/
[3] Payday loan statistics, https://www.bankrate.com/loans/personal-loans/payday-loan-statistics/
[4] Mortgage Interest Rates By Race: The Differences Are Significant, https://www.financialsamurai.com/mortgage-interest-rates-by-race/