American families forgot how to save in the 2000s. So how do families living on $2 a day put away enough money to pay for thousand-dollar weddings, funerals, and unforeseen tragedies? In 2005, something remarkable happened in the United States that hadn't occurred in 70 years. Americans spent all of our money.
The personal savings rate that year dipped below zero for the first time since the early 1930s. For every $100 the Americans made, we spent $100.50, reaching into our savings or taking on more debt to buy expensive items like homes (this was the tip of the housing bubble) and cars.
Not saving felt perfectly natural to Americans in 2005, the annus bubblicious of the 2000s. But in the sweep of history, it seems positively insane. The richest nation in the history of the world, in its richest year on record, couldn't afford to put away a little money for a rainy day -- or for this, our rainy decade?
Acknowledging the American aversion to saving makes it all the more fascinating to consider the challenge facing the two to three billion people in the world living on $2 a day or less and forced save quite a lot of it. In poor countries without national health care or retirement programs, families have to conserve what they can to guard against the possibility that a family member will get hurt, fall ill, or no longer be able to earn a living. The typical Chinese family saves 30% of its income, according to a Credit Suisse study. The typical Indian family saves 15%. How do families in poverty save?
Creatively, collectively, and conservatively, according to Portfolios of the Poor: How the World's Poor Live on $2 a Day. Ten years ago, authors Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven collected financial
diaries from more than 250 households in Bangladesh, India, and South
Africa, to learn how the world's poor saved, spent and invested money. What they found is that even without the ability to do basic math, some of the poorest families understand the importance of diversifying their lot.
Consider the case of Hamid and Khadeja, a couple profiled by the authors who live under a tin roof in a Bangladesh slum with their young son. Hamid drives a rickshaw. His wife part-times as a seamstress. They share a bathroom with eight other families and live on about 80 cents daily per person. "Despite their modest income, Hamid and Khadeja are active money managers," the authors write, splitting their income into six different financial instruments, including a microfinance savings account, a small life insurance account, and savings with a so-called "moneyguard," a friend charged with holding extra cash. Most amazingly, the couple is both illiterate and innumerate, lacking in basic math skills. Here is their balance sheet for the month of November, 2000:
Hamid and Khadeja were lucky, in a way. Their son was too young to be married in an expensive ceremony, and they didn't have to pay for a funeral. Thousands of miles to the west, Thembi, a 50-year old South African who also participated in the Portfolios project, was living off $169 a month when her brother died of tuberculosis. Funerals typically cost more than half a year's salary in South Africa at this wage level, the authors write, and Thembi was responsible for all the entire $1,414 ceremony. Here's how she did it:
Thembi held memberships with an informal burial society, a type of insurance for funeral expenses, but it didn't cover the whole cost. She also belonged to a saving club, but didn't have enough savings to cover the remaining expenses. Thembi patched together additional informal loans from relatives and grants, but still fell $92 short. She could have sought a formal loan from a bank, but her lack of steady income and the small amount needed made her an unattractive loan candidate. Thembi decided to avoid the costly expense and added stress of visiting the bank where she would most likely be rejected anyway, and took out an interest-bearing loan from her savings club.
The greatest threat to a family living on less than $2 a day is that the breadwinner will fall ill. That's exactly what happened to Feizal, the patriarch of a ten-person family in northern India. When working at full strength, his monthly income in 2000 was only $36 -- or 12 cents per person daily. When Feizal fractured his leg, he couldn't go to work for eight months. The family scrounged together enough money to pay for his treatment by drawing down almost all of their $210 of savings with banks and money-guards and asking their son's employer to pay him early. "In the end, though, the costs of the accident--both the direct cost of treatment and the indirect cost of lost wages--pushed the family deeper into poverty," the authors write. "If Feizal could have relied on an insurance product, paying small amounts dispersed over time, he would have had the incentive to seek early, high-quality care at a much lower cost."
Portfolios of the Poor is not a comprehensive survey of the 40 percent of the world living in $2-a-day poverty. Such a thing isn't possible, and it would be foolish and over-simple to pretend that the lessons of Portfolios lets us know the lives of two billion people. But as these three illustrative examples show, at a time when saving is only slowly coming back into vogue in the United States, some of the poorest families have found ways to save for life, death, and injury in economies that are too poor to provide the kind of wage and medical insurance that is common in the United States and Europe.