Portfolios of the Poor summary

When we hear about people living in extreme poverty – subsisting on a meager $2 a day – it’s easy to assume that they’re leading the toughest lives out there. And this is only the first assumption we tend to make about the world’s poorest people.

We also often assume that people with little money spend any and all cash as soon as they get it. But that’s not true. People living on an average of less than $2 a day usually set aside a small amount of savings – a nest egg for covering unforeseen expenses and tiding over periods without income.

For instance, Hamid, who lives in Bangladesh, always keeps a little cash on him for emergencies, stashes enough money at home for food and also puts aside the necessary amount for making improvements to his home.

But since most of the world’s poorest people are illiterate, they keep track of and manage their finances through oral communication with their friends and families. For example, a husband might tell his wife that he’s trying to save money for their children’s school supplies, and that he’s going to take a job at a local store to earn some income and borrow the remainder from their neighbor. Now that she knows his plan, the man’s wife can remind him to stick to his commitments.

In fact, the ability to manage money in such ways is absolutely key for extremely poor people. Because their income is usually irregular, paying back loans is a real difficulty. For instance, farmers earn practically all their yearly income during two or three peak months of harvest and virtually nothing for the rest of the year. Naturally, it’s difficulty for them to stay on top of monthly payments during periods of low-income, a fact that makes good money management vital to their success.