JACOB GOLDSTEIN, HOST:
Hey, it's Jacob Goldstein. Just a quick note - today's show is a rerun. It's a good one. It includes a one-man neighborhood bank. The story was reported by Marianne McCune and Alex Blumberg , back in two thousand thirteen. Here is.
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ALEX BLUMBERG, BYLINE: Mike Smith lives by himself in a small town in Kentucky, near the Ohio River. He makes just a bit over $1,000 a month, so not much, but he owns his house outright and doesn't carry any debt. He suspects that his brother and at least one, but maybe all three, of his grown children have stolen money from him in the past. And over a period of about a year, he had exactly six transactions that were above $100 in value. There was a property tax bill, an insurance payment, a couple big-ticket repairs and then there was the $109 he spent on a pet lizard, which he planned to use as an investment by breeding it and selling its offspring. Hello, and welcome to PLANET MONEY. I'm Alex Blumberg.
MARIANNE MCCUNE, BYLINE: And I'm Marianne McCune. And we learn about Mike, which is not his real name, by the way, from this new project called the U.S. Financial Diaries. This project is tracking every dollar that comes in and out of more than 200 low- and middle-income American households.
BLUMBERG: And when you track all those dollars, you find these fascinating intimate details about one of the more hidden aspects of our lives, money.
MCCUNE: It's not often that you get to find out this much about how people deal with their money. I mean, some couples even hide this stuff from each other. But the U.S. Financial Diaries project put together six detailed profiles of the people in their study. Mike Smith is one of them. And among the details that we learned about his behavior is that he has around $4,000 in cash hidden in his house. And that cash is actually divided into two different accounts - one for general savings, the other for his yearly property tax bill.
BLUMBERG: He says he doesn't trust the banking system that much. He also has eight vending machines in his garage that he bought through an ad in the paper as an investment but now he thinks might have been a scam.
MCCUNE: And he has this very strict system for managing his cash. Once the money in his wallet goes above a $1,000, he pulls out 500 and stashes it around the house, a system he says he learned from his grandmother.
BLUMBERG: When we were reading these profiles, it occurred to us, there are so many different ways of dealing with your money. And a lot of people out there are doing what Mike Smith is doing, sort of creating their own alternate financial systems outside the existing formal financial system. And these alternate systems have a lot of the same stuff - dedicated savings accounts, lending systems.
MCCUNE: On today's show, we take a look at a couple examples of these do-it-yourself financial systems. We'll meet a guy with a bank in his pocket and a woman who uses peer pressure to pay down her debt.
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BLUMBERG: Let's start our exploration of these DIY financial systems with a guy you met last week.
MCCUNE: Yeah. I went up to talk to this guy in west Harlem. His name is Miguelo Rada - big guy, very friendly, in his 50s. If you're in the neighborhood and you need a little cash, maybe you want to pay him a visit.
MIGUELO RADA: One time, a guy came to me and he said look, I have to do something over the weekend, and he said, I need $20.
MCCUNE: Now, Miguelo isn't the kind of guy you'd necessarily expect to have extra cash to lend. He just spent 32 years in prison. He got out last year. He's living in a halfway house in west Harlem, and he's on public assistance. But he's gotten really good at penny pinching these last six months. He even took a five-week course on financial management from a local credit union, the Neighborhood Trust.
BLUMBERG: And this guy who wanted the 20 was in the halfway house with Miguelo. He's a musician, and he needed the money to get to a gig. He said he'd pay Miguelo the money back after he got paid over the weekend.
RADA: Monday morning, he came to me and he says - here, thank you very much. I appreciate it. I needed it. I said no problem, man.
MCCUNE: Miguelo does this all the time. He's lending out money in tiny amounts for short periods - maybe 20 or 30 bucks, not worth the trouble for a bank. But in a key way, he's solving the same problem that the entire financial system is designed to solve.
BLUMBERG: Economists call it consumption smoothing. The times we get money don't always line up with the times that we need money. So, sometimes we save money ourselves and dip into that savings when we need it. And sometimes, we borrow from other people who've saved money.
MCCUNE: If you have a bank or a credit card, this kind of thing is sort of invisible. If you don't, you actually have to find someone who can fill that role.
MCCUNE: The people you're lending to, could they borrow from a credit card or a bank?
RADA: Some of their credit is so bad, you know, it would be virtually impossible.
MCCUNE: So Miguelo basically runs this tiny bank out of his pocket. He and I were joking about it, and we went down a checklist of what banks do. Does he charge interest? No, he does not. Credit check?
RADA: (Laughter) I might ask somebody - what happened, man? Is there a way out? How did you get into this problem? And they go through all their stories, right? And then I look at that, and yes, I make an evaluation. But what I say is, all right, here.
MCCUNE: Record keeping.
RADA: It's not that much, so I keep it up here in my head.
MCCUNE: You don't have a ledger or, like, a note to yourself?
RADA: No, I don't. No notes. Matter of fact, I rely on their honesty.
MCCUNE: OK. Last one, credit feedback.
RADA: If you don't pay, it won't happen again. That's all.
MCCUNE: So he's not being a bank as a business. But he took this class, and he got really into trying to help people manage their money and learn how to use credit. And then there's a more surprising bank-ish (ph) thing that Miguelo does. He actually accepts deposits, like, from his much less frugal brother.
RADA: I say - yo, you want me to hold something for you? And he was like, yeah, man. Hold this hundred for me. So I held his hundred.
BLUMBERG: Like a bank, Miguelo takes deposits, but unlike a bank, when the depositor comes back to get his money out, Miguelo doesn't just give it to him. He asks them a bunch of tough questions first, like - what are you going to use the money for? You're not going to use it for something stupid, right? You're not going to get yourself into trouble here.
MCCUNE: Right, like the last time his brother asked for his deposit back.
RADA: There was a look in his eye (laughter). Maybe I just projected that, but I asked him - what's going on?
MCCUNE: Miguelo's brother said he had to pay a bill, and even then, Miguelo wanted to see proof. He said I'm coming with you.
RADA: He didn't want me to go with him at first, but I convinced him. And I said well, you're not getting it. He said - you serious? I said yeah, and I turned and I started walking. Yo, yo - come here, man. And then I went with him and got his receipts for everything. I said OK. Everything is cool.
BLUMBERG: I love to imagine, like, going to the ATM and your ATM hassling you about what you're going to do with the money you're withdrawing. You know, like, you've been going out a lot lately. Perhaps you should pack a lunch.
MCCUNE: Right. Do you need this money, or do you just want it? So this is another thing that distinguishes the formal financial system from the informal systems like Miguelo's. Miguelo is part banker, part social worker.
BLUMBERG: And there's actually a social aspect to a lot of these informal financial systems. And the social aspect is actually a big reason that people use them.
MCCUNE: Right. So not too far from Miguelo's halfway house in west Harlem is this funeral home. And I went there to talk to this young funeral director Tamara Bullock because she's part of this thing called a sou-sou. It's an informal savings club.
TAMARA BULLOCK: The bank thing is, like, totally new to me, but the sou-sou has been around forever. Like, I remember being a child and hearing my mom was in a sou-sou.
BLUMBERG: Sou-sous actually go by a lot of names, but the way it works is always pretty much the same. A group of people get together and they say OK, every week, we're all going to contribute a set amount of money each week. And each week, one member of the group is going to get the whole pot.
MCCUNE: Right. So the last sou-sou Tamara was in, she had 13 people in her group, mostly colleagues from her funeral home. And every two weeks - every payday in their case - each of them put in $100. Tamara drew number seven from a hat, and that means that seven paydays in, she got her $1,300.
BLUMBERG: And people spend this money however they want. Some people use it to go on a shopping spree. Some people use it to travel. One woman in Tamara's group is planning on using the money she gets to cover her moving expenses. Tamara used her last $1,300 for sort of a boring, but necessary, reason. She had to pay off a bill she'd gotten from a collection agency, and she used part of it for her rent.
MCCUNE: So the thing that's odd about this is the financial system has already set up a bunch of different ways for people to save money that give you, actually, a better deal than the sou-sou. They pay you interest like a savings account.
BLUMBERG: And Tamara actually has a savings account. But she also has a sou-sou because the sou-sou offers advantages that a savings account doesn't. One advantage? Peer pressure. Now, your savings account, it won't get mad at you if you don't pay into it one week. But with a sou-sou?
BULLOCK: You have to. Like, there's no ifs, ands or buts because other people are depending on you to be accountable so you definitely have that in your mind that you have to do that.
MCCUNE: If someone does stop depositing, which is totally not allowed at all, the person who organized the sou-sou has to pay their share. And if people are late...
BULLOCK: Twice, there was one person who was in the sou-sou who's lost his job. He's been late by, like, a day. So the next go-round, it's already decided that he's not going to be able to be in the sou-sou.
BLUMBERG: Can I just say harsh informal system?
BLUMBERG: That is, like, way colder than the formal system. If you're late by one day after you've lost your job, you're out? Your credit card company is way more forgiving than that.
MCCUNE: And another advantage of the sou-sou for someone like Tamara, who says she loves shopping a little too much...
MCCUNE: I like that I can't access it.
BLUMBERG: Just like with Miguelo hassling his brother about where his money is going, the sou-sou also uses this social pressure to keep your behavior in check. You say you want to save? We're going to make sure you save.
MCCUNE: And the funeral director in the office next door to Tamara, Patricia Hamilton, who's 62 years old, she says there's another advantage to saving this way. It's sort of the flip side to the social pressure. It's the fun - the fun of doing this all in a group. Your ATM card? It does not get excited with what you're going to do with the money you're saving. But in a sou-sou, you dream and debate.
PATRICIA HAMILTON: But I think this time we're going to go skydiving in the Rockies or Yellowstone National Park, something like that, or maybe in Puerto Rico.
BULLOCK: No. She thinks I'm skydiving again.
HAMILTON: She's going to skydive again. We're going to go swimming with the sharks also.
BULLOCK: I'm not skydiving again.
HAMILTON: She's going to skydive again.
BULLOCK: I'm not skydiving again.
BLUMBERG: So man, we, too, have been debating what we should think about all this stuff, all these DIY financial systems that people have set up. There can be problems with these sort of systems of informal credit. So no matter how good Miguelo's friends are about paying him back, no matter how promptly Tamara pays into her sou-sou, no matter how much cash Mike Smith has stuffed in coffee cans in his house, none of that counts on their formal credit histories. None of that will help them get a loan to buy a house or a car or start a business or get a credit card.
MCCUNE: There is a credit union out in California that's trying to record these kinds of social loans for people so that they do count toward their credit rating. But it's going to be hard to capture a loan like the $20 that Miguelo gives to his friends.
BLUMBERG: And another problem - yeah, these informal lending networks - sure, sometimes it's friends and relatives giving you a no-interest loan like what Miguel does. But Marianne, you talked to one expert who said that sometimes, these friends that people borrow from, they're not actually friends.
MCCUNE: Yeah. Jonathan Rollins, a financial adviser at the same place that Miguelo took that financial planning class, he said he'll ask his clients - who's the friend who gave you the loan? And they'll say well, it's a friend of a friend. And actually, I owe quite a bit of interest.
JONATHAN ROLLINS: If someone says yeah, I owe $1,000, but I'm paying $30 in interest a week, I know that it's a 3 percent weekly loan shark loan. They'll pay interest only until they can pay off the principal. It's a tough debt cycle.
BLUMBERG: Say what you will about our formal banking system, it generally will not break your knuckles if you don't pay it back. But the formal financial system can be dangerous as well. So, remember back at the beginning, we mentioned that project, the U.S. Financial Diaries. And another family that they profiled as part of their research is this family they called the Johnsons, two working adults with three kids. And the Johnsons actually made a pretty good living. They averaged about a 70,000 year, six or seven times what Mike Smith, the guy with the lizard, was making. But in contrast to Mike, for the Johnsons, the monthly math just never worked out. They consistently, on average, spent more than they brought in each month.
MCCUNE: But because they had access to the credit system - to credit cards, home equity loans and lines of credit - they didn't actually realize that. They had full-time and part-time jobs, and their income varied quite a bit month-to-month, as did their expenses. And so they just never became aware that they were steadily adding to their mountain of debt each month.
BLUMBERG: And this is one of the dark sides of the formal system. It's too good at consumption smoothing, so good that it lets people believe they can consume more than they can actually afford to.
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BLUMBERG: I'm Alex Bloomberg.
MCCUNE: I'm Marianne McCune. Thanks for listening.
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GOLDSTEIN: This show originally aired back in 2013. Since then, U.S. Financial Diaries finished their fieldwork. They're publishing all kinds of data and charts and more profiles like the ones that inspired this show. We've posted a link to all of that on our website. That's npr.org/money. You can follow us on Facebook or Twitter, or email us at email@example.com. Thanks for listening.
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