As featured in The Wall Street Journal, Money Magazine, and more!

August 2013

Need more evidence that the financially disadvantaged are in a worse position to succeed in education and work than those without financial concerns? A new report published in the journal Science shows how financial constraints, particularly poverty, impede cognitive functioning.

I find one of the experiments interesting not only because of the results, but because the methodology involved visiting my local shopping mall. In fact, I may have even been asked to participate in the experiment on a recent shopping trip, but I generally ignore people with clipboards at malls asking me questions. This mall is a great location to find experiment subjects; the center is in the process of a renovation, bringing in “higher class” shops (because the businesses can pay higher rent, naturally).

Yet, the mall’s proximity to low-income communities provides one of the only locations in the area where you can find people of all social statuses going about their business. In other words, to complete this experiment and find a good mix of participants, the researcher from Princeton University had to get off campus and out of town.

The researchers’ hypothesis was that being poor prevents people from concentrating on the tasks and goals they need in order to get out of poverty. The concept sounds like it would be true. After all, we are aware that financial problems cause stress, and stress prevents success, but that’s not good enough for scientists — in order to determine what is true, you need to test hypotheses and measure the results. The results were surprising in the magnitude of the effect financial concerns have on cognitive ability.

In a series of experiments, the researchers found that pressing financial concerns had an immediate impact on the ability of low-income individuals to perform on common cognitive and logic tests. On average, a person preoccupied with money problems exhibited a drop in cognitive function similar to a 13-point dip in IQ, or the loss of an entire night’s sleep.

The results show that it’s not necessarily the fact of poverty that causes cognitive distress. It’s the concern about poverty. Low-income individuals who had no concern for their financial well-being were just as competent as they might be if they were not in poverty. In a sense, ignorance is bliss, and I’ve found this to be true in my own life. It’s much easier emotionally to avoid problems, like I avoided taking care of my accumulating speeding violations and like I avoided thinking about my increasing debt load in the years following college. I was protecting my sanity and my emotional functioning my pretending there were no problems and things would work themselves out.

It turns out I was most likely protecting my cognitive functioning, as well, although the idea that “things can work themselves out” might indicate my cognitive abilities were not at their highest levels.

My first assumption was that there’s a third-party variable standing in between concern for financial stability and cognitive functioning: stress. There seems to be something else at play, according to the experiments by Eldar Shafir, a psychologist at Princeton University.

The mental tax that poverty can put on the brain is distinct from stress, Shafir explained. Stress is a person’s response to various outside pressures that — according to studies of arousal and performance — can actually enhance a person’s functioning, he said. In the Science study, Shafir and his colleagues instead describe an immediate rather than chronic preoccupation with limited resources that can be a detriment to unrelated yet still important tasks.

“Stress itself doesn’t predict that people can’t perform well — they may do better up to a point,” Shafir said. “A person in poverty might be at the high part of the performance curve when it comes to a specific task and, in fact, we show that they do well on the problem at hand. But they don’t have leftover bandwidth to devote to other tasks. The poor are often highly effective at focusing on and dealing with pressing problems. It’s the other tasks where they perform poorly.”

And it’s been clear to me over the last several years writing about personal finance, change, and other topics of personal development that the lack of financial resources specifically — that is, not stress — created restraints on what people can focus on. You can’t plan for the retirement if your primary concern is getting through the day. You can’t achieve financial independence if you are stuck when trying to satisfy the lowest level of needs, like shelter and food.

The fallout of neglecting other areas of life may loom larger for a person just scraping by, Shafir said. Late fees tacked on to a forgotten rent payment, a job lost because of poor time-management —- these make a tight money situation worse. And as people get poorer, they tend to make difficult and often costly decisions that further perpetuate their hardship, Shafir said.

In a nutshell, this is why financial literacy doesn’t work. We as a society, or the middle-class or upper-middle-class segment of American society, seems to think that if only we could provide education about money management to the neediest communities, and if only they would take our advice and make better decisions, we would no longer have a problem with poverty.

Education, especially education pertaining to an idea like financial independence, is useless to someone who is dealing with day-to-day financial difficulties. There’s no cognitive capacity to consider the idea of saving even just one percent of income when every cent goes towards food for the children and there isn’t enough left for rent, so month after month you have to find a new place to live.

The larger topic of study for researchers is the scarcity of cognitive resources; that is, the human brain has a limited ability to process issues. Financial problems provide a convenient topic for use in experiments dealing with cognitive limitations.

“When you’re poor you can’t say, ‘I’ve had enough, I’m not going to be poor anymore.’ Or, ‘Forget it, I just won’t give my kids dinner, or pay rent this month.’ Poverty imposes a much stronger load that’s not optional and in very many cases is long lasting,” Shafir said. “It’s not a choice you’re making -— you’re just reduced to few options.

You can read more about the study or read the research directly in the journal Science.

Photo: Flickr


In Naked With Cash, seven anonymous Consumerism Commentary readers publicly track and analyze their finances on a monthly basis. For almost a decade, I tracked my own finances on Consumerism Commentary; now I’m sharing the benefits of public accountability with the participants. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.

LastDollar is on Team Neal, with Certified Financial Planner Neal Frankle. Get up-to-date on LastDollars’s progress by reviewing her update from last month.

LastDollar’s own analysis and comments, including her thoughts on education and college planning, are followed by feedback from Neal Frankle.

Neal Frankle, CFP appears courtesy of Wealth Pilgrim and Wealth Resources Group.

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Most financial experts agree that if you need a car, buying is almost always a better financial decision than leasing. Even if you have to borrow money for the purchase, traditional financing is a better option than making payments for a couple of years and having nothing to show for it unless you’re willing to pay even more. The same attitude leaves home renters with the feeling that they’re throwing money away when compared to homeowners, but the analogy isn’t completely accurate.

Subscription payments — recurring monthly or annual payments — have a place. Consumers pay for certain services on a subscription basis. Newspapers, magazines, and television are all traditional media-based services that operate their businesses using subscriptions. In return for a monthly fee, consumers receive new media content, on-demand or on a regular schedule. Media companies are increasingly using subscription programs as a replacement for selling individual items, and it’s great for them. Rather than one-time income, companies are setting up systems that generate a stable income stream. In theory, these companies can then put the guaranteed revenue into the development of more content.

But for more and more companies, the subscription model is just a big cash cow. Organizations claim that their customers prefer the model over one-time purchases of content, and that might be true. People like when the things they consume cost less money up-front, despite a long-term draining of financial resources. Companies are coming up with clever ways to turn products into services, services consumers will pay for on a recurring basis instead of products consumers will own.

When I would find a musical artist I like, I used to buy his or her albums. The music would then be mine, to listen to whenever I like, without advertising interference, forever. I could do whatever I like with recording, including sharing it with friends, as long as I didn’t cross a legal line in terms of copyright infringement. This arrangement worked well for me and millions of other consumers.

Maybe due to the development of digital media and increased unauthorized duplication and distribution, the music industry needed to find a way to change its model. They tried digital rights management, and that was a complete failure. The music industry has its solution: subscription service. With a subscription to a streaming music service, consumers never own the music they buy (though that option is still available).

Music streaming and movie streaming doesn’t seem to be a bad value compared to what you might spend on buying media you’d like to enjoy on a repeat basis, but you leave control in the hands of the media supplier. If they want to remove your access or increase your monthly subscription fee, you lose everything you “bought.” If I start relying on Netflix streaming rather than buying personal copies of films I enjoy, if I decide to cancel my Netflix subscription, I end up with nothing to show for my hundreds or thousands of dollars spent on the subscription except memories of sitting in front of a television screen.

Leaving control of personal media in the hands of the companies that provide it has already caused problems. Customers of the Kindle book-reader have seen Amazon change or erase purchased digital copies of books. You don’t own anything when you buy books with a Kindle account or a similar service. The financial model is a little different for consumers, and in this case you do pay a price for each piece of media which is then supposed to be “yours,” but you’re severely limited in your own control of that piece of media.

A few months ago, Adobe Software, the maker of PhotoShop and other important software for media professionals, decided to stop its long-time process of selling software updates each year. The company now offers its most popular software in a subscription model only. “Software as a service” is the now industry-standard model of requiring users to pay an ongoing fee — effectively renting software rather than buying it. It’s quite profitable, primarily because most consumers of software are actually businesses, and it’s much easier for businesses to justify an expense than it is for hobbyists or people who do not make money from their use of the software.

The end result of this is that consumers decreasingly own what they consume. There is no asset received in return for spending. With a subscription service for music, I’m no longer building a collection of CDs that I could at some point in the future sell (at a great loss) if I were desperate for cash. Maybe decreasing clutter, eliminating “stuff,” is a good thing, but even in this subscription culture my clutter doesn’t actually seem to be decreasing. (Maybe that’s because I still prefer to own my own media.)

You can see the changes. Quicken may be the financial software of a previous generation, but it’s still what I use. At one point, I could buy one version of Quicken for $20 and I could theoretically use it forever. Then Intuit introduced features that expire after a few years, and perhaps rightly so, stopped supporting versions older than a few years. When was introduced, it followed the software as a service model. Today it’s free, and it doesn’t offer nearly the same feature set as Quicken, but it sets the company up to eventually replace the buy-and-upgrade Quicken model with a subscribe-indefinitely model. The company is on that path with QuickBooks, accounting software for businesses, so it wouldn’t surprise me if Quicken followed that model within a few years.

In the case of software as a service, the cost for me as a consumer, and probably you, will increase greatly. It won’t feel bad because each payment is lower than the traditional one-time payment. And as any late-night infomercial marketer knows, it’s that advertised initial price point that drives sales, not contemplation of the total cost.

Are you fine with the gradual transition to subscriptions for everything you use? Is this just an inevitable progression of business economy? Is there enough dissatisfaction with this type of payment plan for the market to generate alternatives or will consumers just smile as they pay out more money for less substance over time?


In Naked With Cash, seven anonymous Consumerism Commentary readers publicly track and analyze their finances on a monthly basis. For almost a decade, I tracked my own finances on Consumerism Commentary; now I’m sharing the benefits of public accountability with the participants. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.

Calvin is in his early 40s, earning an annual salary of $120,000 plus bonus as an IT project manager in New Jersey. He recently finalized a divorce and has a teenage child. Read his bio here. Calvin is on Team Sara, with Certified Financial Planner Sara Stanich.

The net worth report below and following commentary refer to the last full month, July 2013. Last month’s report analyzed Calvin’s progress during the month of June. Continue reading this article to see Calvin’s latest net worth report including his own analysis, and his response to July’s theme of education and college planning.

Calvin’s thoughts are followed by Sara’s feedback and advice as well as thoughts from budgeting expert Jacob Wade from iHeartBudgets.

Sara Stanich, CFP appears courtesy of Stanich Group and Cultivating Wealth.

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