I recently read that the income inequality gap in the US is twice as large as the income gap in Denmark, and that upward mobility in the United States has remained largely unchanged for the last twenty or so years. In college, I studied these numbers a lot. I even considered getting a PhD in behavioral economics and social mobility trends (which is truly a fancy way of saying personal finance blogging, but as a miserable grad student). The numbers were worse when I started college (with unemployment hovering between 8-10% for the entirety of my college tenure), but have leveled out to their pre-recession "norms."
The reason that these numbers fascinate me so much is that numbers tell the story of the aggregations of people. Individual Horatio Alger stories are inspiring, and I never want to belittle their importance, but these stories are remarkable precisely because they are so rare.
But why are they so rare? You're about to get the three point version of the thesis that never was, so get excited.
Poverty forces too many decisions
One of the least studied phenomenon in economics is decision fatigue, but I'm convinced that its the primary inhibitor of upward mobility. If you've used up all your mental energy deciding which bill to pay, or how to get your kids to school and yourself to work on time, then you're going to start making bad decisions.
Consistently making good decisions requires systems more than it requires will power or self control (although more of either never hurt). Creating effective systems requires access to resources which is something that most people in poverty don't have. So the systems born out of poverty break easily and force more decisions.
The problem isn't just the decision fatigue, its that the decision making starts at too young of an age. Children in poverty learn to ration their requests at a young age, which means that many kids in poverty spend a lot of time wishing, dreaming and deciding whether or not to ask for what they want. My armchair economist/sociologist theory is that by the time kids start making meaningful life decisions (regarding work, lifestyle, sex, and education) they are already deeply entrenched in the threatening pattern of decision fatigue.
Systematic risk introduced to the budget
Budgets help people to create meaningful and personalized systems that will reduce decision fatigue and enable them to achieve their goals. While I'm not going to completely dismiss the power of budgeting, I think budgeting has more failure risk in poverty situations than otherwise.
In software engineering, a system is a group of components that work together to achieve some objective (in my world, the objective is usually to quantify something). The system "risk" is the probability that any one component fails, and the objective cannot be achieved. Usually software engineers will mitigate risk by either reducing components, reducing complex dependencies, or building routines that will systematically fix known failure points.
On the poverty level, the components, the dependencies and the solutions are often outside of your control. Imagine briefly what can go wrong in between the time you wake up and the time you go to work, if you're on the poverty level. Your mom fails to show up at your place to watch the kids in the morning, so you've got to get them to the bus yourself. Your phone is out of minutes, so you can't call in until you spot a neighbor in their yard. You're out of money and out of gas. You were going to take the bus, but with staying with the kids you're already 45 minutes late. You run out of gas a mile from work, pull over to the side of the road and begin to walk the rest of the way to work. You debate whether or not you should call a tow truck, and you're manager tells you that this if you're two hours late to work again you might as well not come in.
Simply put, most people living in poverty experience a lot of disruption which leads to budget failure. If money is extremely tight, it could take a year or more of good luck and good financial decisions to have just a $1000 baby emergency fund saved up. Two months in, a car repair, the need to kick in extra for a utility bill or an errant late fee could easily eat up the $200 which is more than a little bit discouraging. Even so, I recommend developing solid personal finance habits including budgeting.
The point of the budget at low income levels isn't that it will turn your life around. However, the regular practice of budgeting could set you up to take advantage of opportunities that arise in the future. Perhaps that stroke of good luck will hold out for a year or more. Perhaps your tax refund will be unusually large, or you'll finally find a job where you earn a living wage. The last thing you want to do when opportunity finally presents itself is to rely on your limited willpower to take care of your finances. Having a budgeting system in place will allow you to use your limited decision making power to take advantage of your opportunity rather than wasting the decision making power on basic financial decisions.
Higher income and reliable access to necessary resources (childcare and transit top my list) are one set of prerequisites to enabling class mobility, and the ability to make reliable personal systems is the second requirement. Although a budget alone won't solve the problems of poverty, it is still necessary for class mobility.
This leads me to one last question: If you've got the habits in place, what is the likelihood that you will advance economically? My opinion is that if you are earning above the lowest income quarter (approximately $25K annually), then personal finance can help you advance. At $25K per year, your money (in combination with government subsidized childcare) can buy you stable access to resources that will allow you to advance if you're willing to try (probably a few times). You are in a position where the budget and the hustle will pay off. Below that level, I think you'll need great luck or systematic intervention. What do you think?
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.