Sunday, February 28, 2016

Portfolios of the Poor

I am reading this book, titled "Portfolios of the Poor" by Collins et al. It's an interesting book because it studies the poor, defined broadly as those living with 2 USD per month or below, in a few continents like South Africa and India. We are talking about people who have irregular income, living in slum cities, plagued with various health issues and still have a family to support. They are living with less than $2 US per month on average, meaning that there are months they earn a little more and months where there is no income at all. The most interesting part about is that the book talks not about the census statistics but drills deep into the assets and liabilities (i.e. balance sheet) and cash flow of the poor, hence the title of the book.

I'm about 50% through, but there is already some interesting findings about it that I think can apply to my life already:

1. Remittance to your family, is it counted as an asset or an expense?

First of all, the book makes an important distinction between remittance of various nationalities. If you're remitting part of your income back to some distant relatives that is not going to help your immediate situation, that remittance is counted (in the book) as expenses. If you're remitting back to your own family back in the hometown, that is counted as an asset. I thought that is an important revelation for me, as I would have counted all remittance as an expense.

Going back to my own situation, I gave a portion of my income to my parents. It's not a small sum, and it is easily the 3rd or 4th biggest expenses after mortgage, food and insurance. I've counted it as an expense all the time, until the revelation hits me. To be honest, sometimes my parents would buy me some food stuff and help me to get some stuff done when I couldn't be at home. In other words, you can treat this 'expenses' to parents as an asset that you can utilize when you need to.

Now to qualify it further, I think it's important to distinguish between parents who can help you and those who can't. I'm not trying to be mercenary, but it's an important difference to make when you are considering to call upon the help of your parents. If you're never going to ask help from your parents because they are not competent enough or your relationship with them is just not that strong, but you're still giving them an allowance to fulfill your duty as their child, then please treat this as an expense.

2. Most of them take microloans with huge interest. Isn't that financially unsound?

Whatever I'm talking about in point 1 is an informal asset. If you talk to an accountant, they are going to tell you that since you're paying money with no immediate benefit, it's an expense. But the poor studied in the book really utilized such informal assets very frequently. They will have to because their income is unstable and comes in only at certain months of the year, but they have to eat every day. Hence cashflow to them is very important.

To tide through months where they have negligible income, they take microloans with huge interest (easily 30% per month). It seems a lot, but these are actually simple interest loans with flexible period of payment even though it's stated clearly the duration of the loan period. Their system is flexible and sometimes the lender (all of them are not licensed but do it out of obligation or just trying to help their fellow villagers) will forgive the interest or principle if they deemed the borrower had paid enough.

I'm not saying we should all go and take out microloans with huge interest, but I think I'm starting to understand their perspective a little more, instead of just saying they are not financially wise to do so. If you have family to feed daily but your income drips in every other month, you do what you can to settle the most immediate concerns now.

I start to see the role of such microlenders to provide cash flow for the poor. I do not expect Singapore's microlenders to forgive the debts and to have simple interest with flexible payment period, but to sweep all of them as devils trying to profit from the desperation of the poor seems a little harsh. They do serve a niche area where the bigger institutions like banks are reluctant to do because of the higher risks involved. It's precisely because of the unstable income that they need to borrow money to provide a stable cashflow but it's also the same reason why the banks refuse to lend them. If you remove the microlenders or put harsh penalties to drive out them out of business, then who is going to step in to provide the still needed service? Loan sharks?

3. The things we take for granted.

When I read that a lot of them deposit money in banks every month for a year, so that they can take out slightly less than the total amount put in, I was stunned. The system we're used to here is that we get paid for depositing money, but they are paying for the right to deposit money. What's the issue here?

Firstly, there's a lot of places worse than putting in bank. If you place it under your mattress, you risk having it stolen or burgled. If you hide it in your home, you risk having your home burnt down in a slum fire or washed away by floods or demolished by the government trying to control the spread of the slum cities. This sort of stability is something we take for granted.

They also have multiple savings clubs where their schemes are so ingenious that I might take a whole article to spell it all out. One of the more simple ones is where each month they give $10 to a person, and by the end of the year, they can take out $120. This is way more convenient than walking 2 hours to the nearest bank, but you run the risk of the money getting robbed/stolen/embezzled. Might be safer with the banks with a small cost, isn't it?

Secondly, the drudgery of life makes it easy and tempting to focus on the immediate and forsake the longer term future. Without the discipline instilled in putting a sum every month in the bank, the poor people will have a hard time saving up for major milestone event like wedding, funeral, buying of seeds for harvest etc etc. In other words, they are paying a small sum for the discipline that is forced down onto them, to make sure they save up so that they have a lump sum payment at the end of the maturity period. This really opens up my eyes. We're complaining about the low interest rates here for saving deposits...wait till we have to pay to deposit money (aka negative interest rates).

I think this is one of the most interesting books I've read this year regarding finances. It really opens up my eyes on how the poor people studied in the book manage their financial life. If you ask me, they are astute cash flow managers, being able to move cash in and out multiple times of their networth. This means networth is not really their concern over there, cash flow is. Isn't that the same for us? This book is much more significant to me as I'm also a self employed with variable income. Whatever they do to alleviate the stress of not being able to bring in money during their off peak months, I can also follow.

Another 50% more to go to complete the book.


Createwealth8888 said...

ha ha. My wife already plans to give back the children's monthly allowances as gifts for their new home and wedding. Now, the children can treat them as "discounted" assets as it is uncertain how much is returned back. LOL!

Createwealth8888 said...

wealth = asset value + cash flow

No large asset value but has sufficient cash flow, one can still survive through

Sillyinvestor said...


When I first saw the title, I thought of the content in the Singapore context. But it is indeed mind boogling... I treat my allowance to parents as allowance and I need to prepare for "impairment"- high medical expenses. But it goes to the point of what I want to say about poor in Singapore.

If u watch joy truck, have u noticed how the children of unfortunate families seem so damn sensible? Having thought some FAS pupils, i have the same "conclusion"
My portfolio for a Singaporean Poor Family:

Money for provision of education to children.
Money saved from food and dinning out.
CPF money, especially medisave

Children who had a hard life but saw how their parents provide for them despite the "tough" circumstances are made of steel. They are also grateful and wanted to pay back their parents whenever possible. While it is never a conclusion, I have seen children sucking their parents dry simply because their parents are "able" financially.

No. 1 portfolio is a must have. It provide pension by children for life. And even if u dun get it, you are happy that your children are better off than you. In the unfortunate circumstance your child is ungrateful, you can go with a peace of mind I let no one down.

Singapore Man of Leisure said...

LP and temperament,

I wonder do we still have tontines in Singapore?

I guessed that was the "informal" banking and investment veicle used by Singaporeans with more modest means...

A kind of shadow banking I must say.

Rolf Suey said...

Hi LP,

Interesting to give a diff perspective.

In India there are many usd1 man, who earn only a dollar a day and cannot afford to stop working even when they are sick, bcos for that day, they will have no income which means no food for either themselves of the family. Their portfolio is truly cashflow just to feed themselves n their family. Their asset is not getting sick n ability to still work everyday!

Sidetrack, I rem my mum use to "Biao Hui!" when she need to buy a fridge or when we need to buy a new tv! In some instances, the leader will just embezzle the funds n disappear! terrible!

But having said that, at least they provided my family with TV n fridge... :-)

la papillion said...

Hi bro8888,

Haha, that's very nice :) Give more to get back more, everyone wins!

la papillion said...

Hi SI,

I agree with you. Education is the easiest and best way to escape the whole cycle. I think we all try our best lah, even for our parents. The book did mention about insurance for the poor family, but those developing countries, the insurance products are not very good. Even if it's good, it's prone to scams, so they don't buy a lot of such products. They come up with their own though, like their own funeral funds, or health funds. They do the same as insurance, collect 20-30 people from their own village (so they can't run since everyone knows who is who), and when someone kena, they will pay out from there. Works very well, haha

la papillion said...

Hi temperament,

Wah, borrow to hilt? Not for me lah, I won't be able to sleep well. I guess it's a very personal thing. Actually the rich businessman also turn over their networth a lot. It's called the velocity of money, haha

So I guess the poor and the rich turns over their networth multiple times, but for different reasons.

la papillion said...


Never heard before leh. Explain a bit leh, sounds very interesting :)

la papillion said...

Hi Rolf,

Thanks for sharing your perspective :)

I guess all of our main asset is still our time and our health. Without health, everything falls apart, perhaps more so for those without financial assets. Haha, I've heard of biao hui, but never participated in one before though :)

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Snowcap said...

US $2 a day. Not US $2 a month. Big difference.

la papillion said...

Hi snowcap,

Ah yes, thanks for the correction :)