Financial Access — The Big Picture
A simple way to think about the different financial situations that exist across the world would be to classify everyone into one of three groups.
- People who do not have the financial security to reliably meet their basic human needs on a daily basis.
- People who, if they do not spend money on unnecessary luxuries, can reliably meet their basic human needs on a daily basis.
- People who can spend money on unnecessary luxuries without ever having to worry about their basic human needs not being met.
Each of these three groups of people exists in every country in the world, in different proportions. Those countries that have higher proportions of groups 2 and 3 are considered “rich”, while those countries that have higher proportions of groups 1 and 2 are considered “poor”. Interestingly, no matter what group you are in right now, if you traced your lineage back far enough, at one point your ancestors were in group 1. For some people, that point is 10 generations ago, others it was two generations ago, and others have never had an ancestor that advanced past group 1 in their entire lineage.
It is probably fair to say that the majority of people stay in the same group for their entire lives — there is a lot of friction going both ways preventing movement. To advance from group 1 to group 2 or from group 2 to group 3 is impressive. To advance from group 1 to group 3 in a lifetime is the stuff of legend. To retreat from group 3 to group 1 would be even more difficult. Yes, you hear about these leaps from one group to another because we live in a world with 7.8 billion people and because they make for the best stories, but as a percentage, they are small. The country you are born into makes it easier or harder to move between these three groups, but even in the places where it is the easiest, it is uncommon. Of course, no one reasonable would ever venture to say it is impossible, or that your work ethic doesn’t play a role. But equally, no one reasonable would deny there being some serious factors outside of one’s control that can seriously inhibit movement between these three groups.
One of the most important factors inhibiting movement (or increasing friction) between groups seems to be the fact that you rarely find a neighborhood/immediate family/or friend group which includes both 1s and 2s or 2s and 3s; much less 1s grouped with 3s. The effects of this are pretty obvious. Someone born a 3 could do just about everything wrong, but it is likely all the 3s around him in his family, friend circle, and neighborhood would never allow him to get to 1 status. Just like the government bailing out a failing corporation, rich parents tend to bail out their failing children. Likewise, the knowledge/opportunity on how to move up to a higher group is usually not available to 1s, because they are usually surrounded by other 1s.
If our world was purely meritocratic, there would be 0 friction between these 3 groups. The most talented people in the world would quickly rise to 3s, and with a moderately collectivist mindset these 3s could keep even the most incompetent among them from falling too far.
I think this sounds far better than the current state of affairs, and not because I think money is the root of happiness. Rather, I think having money is important because it gives people freedom to not have to worry so much about money. As is often quoted, “money can’t solve all your problems, but it can solve your money problems.” And with these money problems solved, people can worry about things that are bigger than money, like seeking personal fulfillment or making the world a better place for everyone else.
Obviously this reality does not exist in our world, especially in certain countries. Talent is evenly distributed, but opportunity is not. There are geniuses living in slums with no resources to show the world their brilliance, and there is utter incompetence and ignorance at the highest ranks in some countries, solely because of generational wealth and privilege.
This has led me to believe that the single most important thing we can do to make the world a fairer place is to reduce friction — making it easier for talented people and those in their community to transcend from 1s to 3s.
But where are the biggest points of friction?
There are countless examples, certainly, but the two most glaringly obvious to me are access to financial services and access to the internet.
They really go hand-in-hand. Getting internet access makes it much easier to access digital financial services through your mobile device. It also makes it much easier to get access to information, which is another huge friction reducer. So even if you live in a country of almost all 1s and 2s, you can still watch a YouTube video and learn from 3s that live in another country. This massive spread of knowledge, including financial knowledge, is critical to reducing global inequality. And while internet access is still a problem in many remote areas, it is a problem that is being solved at a rapid pace. Meanwhile, access to financial services is going backwards in some countries. Two-thirds of the 1.7 billion adults globally that do not have a bank account do have a mobile phone, but for a variety of reasons are still excluded from the global financial system.
Moving up is hard enough as it is, but if you do not have access to credit, an investment account, or even a basic savings account, it is nearly impossible. Holding physical cash is very risky, as it could be lost, stolen, or damaged in a natural disaster. It is also a huge time waster — those with cash lose the benefits and convenience of the digital economy. It makes crime a lot easier, it makes it harder for the government to tax and reinvest in their country, it makes it more challenging to start and grow a business…the list goes on. And cruelly, anyone not investing in assets is often unknowingly watching the purchasing power of their cash deteriorate thanks to rising inflation (in basically every country in the world).
Sadly, most people’s current financial status is largely determined by the level of financial access their ancestors had. When my grandma’s Italian family immigrated to the US in 1907, they arrived with no money, no education, almost no knowledge of the English language, and 6 kids to feed. Their situation was not uncommon, and they settled in Omaha, Nebraska’s “Little Italy” with thousands of other Italians who had desperately fled everything they knew in exchange for the promise of America. My grandma’s father and brothers worked as day laborers, searching for any temporary job they could find each morning. At night, they would typically purchase a chicken for the family to eat, and my grandma, who was the youngest, would have to choose between either the neck or the back. During the Great Depression, the struggle was even more difficult. My grandpa’s side of the family, immigrants from the Czech Republic, lost their farm, which was everything they had and everything they knew.
When my grandparents eventually met while working at a meat-packing plant in South Omaha and got married, the mentality they had obtained trying to survive during the Great Depression led them to go to extreme measures to save every penny as they tried to raise their own family. Just over 50 years after their two immigrant families arrived in the US not knowing exactly how they would put food on the table at night, they were safely in the 2 category by the time my mom was born. Of course this was due to hard work, but also luck. They had come to the United States at the right time in history — a time where they could tap into massive industrial growth, and yet avoid the blunt of the discrimination that had plagued the Italian and Czech immigrants just a few decades previously. By the time they had settled in, these racist sentiments had shifted to focus on Asians and African Americans.
Just a few blocks north from where they lived was the “Blackbelt” district of North Omaha where the majority of African Americans lived. In those years, this part of town was a bustling place of commerce and activity, but race riots, lynchings, and racist policies suffocated economic development. Like many segregated cities in those days, Omaha was redlined, meaning that if you lived in the part of the city that had a high concentration of African Americans, you couldn’t get a loan to start a business, a mortgage for your house, or access to insurance.
Without these financial services, along with even more blatantly racist policies and discrimination, asset ownership among blacks in the city declined. Similar patterns happened across the country. We can see how the limitation of financial services plays out in the averages today
That gap is no accident. The ancestors of the group with a median net worth of just over $17,000 built America with their backbreaking daily labor, only to never see a dime for it. Back then, as sick as it sounds, “human beings” was an asset class, and the slave masters profited greatly from this investment. They used this capital to build the same financial industry that would exclude the descendants of their slaves from gaining access to financial services. By redlining cities and preventing access to capital, they built generational wealth for themselves and their families while preventing African Americans from doing the same.
And even these atrocities of inequality can look small when we look beyond the borders of the US. And we don’t even need to look in the war-torn countries of the Middle East and North-Central Africa to find massive injustice when it comes to accessing financial services. Sure, it exists there too, at even more of an extreme, but even in Mexico, a country whose per capita GDP ranks squarely in the top half of countries, only 37% of people above the age of 15 have a bank account.
As I have been living in Oaxaca City, Mexico for about 9 months now, this fact has increasingly been glaring me in the face. I can use a card in most formal businesses, but need to keep Mexican Peso on me for a good majority of transactions. Electronic bank transfers are rare. University students must pay their tuition in physical cash. Without access to credit or investments, business growth is severely inhibited. Almost all commerce exists in the informal sector, limiting the government’s ability to tax and re-invest in services. (In the state of Oaxaca, 80% of people work in the informal sector). Because of this, nearly everyone is an entrepreneur, but the lack of a private sector means that almost none of these businesses expand beyond a couple person operation. When a profit is made in these businesses, it is more likely to be kept under a mattress than in a bank account.
Never has it been more obvious that hard physical work does not equal financial success. As I log onto my computer at 8am to spend the next 8–10 hours in my remote work job, many Oaxacans have already been doing physically demanding labor for hours, and will continue to work hours later than me. This daily cycle must continue relentlessly — because if time must be continuously traded for money, day after day, there is no time to invest in plotting how to get out of this cycle. And if you can’t access financial services, there is no opportunity to invest in assets that can work for you. You have to continue to trade your time for labor, day after day.
I’m hyper-conscious about how this lifestyle differs from mine. One of the factors that brought me to Oaxaca City to begin with was the low cost of living. When everything went remote during the pandemic, I realized I accidentally stumbled upon the opportunity to get paid American wages while living at sub-American prices (or geoarbitrage, as Tim Ferris calls it). I’m therefore comfortably saving 50–75% of my paycheck and immediately investing these savings in assets that will work for me even when I sleep. I am not saying this to smugly imply some sort of superiority. I am keenly aware that the only reason I am in this situation is because my ancestors had access to financial services, and the average Oaxacan still doesn’t.
My grandparents might not have known much about investing, but they were able to take out a low interest rate loan to be able to eventually own a house. That probably wouldn’t have been possible if they were black. They also purchased CDs, which at the very least maintained the purchasing power of the money they had saved to keep up with the high inflation rates in the 70s and 80s. That wouldn’t have been so easy in Mexico, which had a far more extreme inflation crisis during the same time period. The very basic access to financial services her parents had was enough to give my mom a stable childhood where she didn’t have to worry about choosing between the neck or the back of the chicken like her mom did.
Years later, she and my dad applied the financial lessons of their ancestors, cutting costs and saving while working hard to support my sister and I. However, without any connections to the financial industry and without the internet, they were in the dark about what to do with their savings. They knew they should be investing, but didn’t know in what, or with who. They were forced to listen to some financial advisors who didn’t have their best interest and just wanted to siphon off fees. Without the internet, all the quality financial information was still concentrated with the 3s, who acted as the gatekeepers to their privileged world.
But eventually, these gates began to break down. The internet helped, and people like my parents also came to an understanding that there was a better way. During the early days of trying to support a family, my dad said he began to realize that he “wasn’t going to work his way out of this” and that got him to explore deeper the world of investing. He started reading books on personal finance that got him to the point where he could ask the right questions and find advice from people my parents could actually trust. Through these books, my dad was introduced to the investment philosophy of Jack Bogle, the founder of Vanguard, and learned one of the simplest and yet one of the most important lessons in the world: that buying a well diversified list of equities in a low-cost index fund pretty safely yields at least 7–8% annual compounded returns.
Knowledge of this tiny fact (and an understanding of the power of compound interest) — which you will never learn in school — will probably end up saving me years of labor and financial stress in my life. Understanding it is more valuable than a large inheritance. As soon as I could get a job at the age of 13, I started putting every dollar I earned into my Vanguard investment account. The simple fact that I had access to this account and the basic knowledge of how to use it has already put me in a comfortable financial situation for someone who just turned 23 years old. This has allowed me to choose a job I’m actually passionate about (rather than the one that pays the most) and the freedom to travel the world. And even more importantly, the fact that I am not working only to survive has given me the opportunity to search for purpose, meaning, and fulfillment in my life, while trying to make the world a slightly better place than I found it. All of that…because friction was reduced for my ancestors by financial access.
I believe that every human being should be given the chance to flourish, not work soul-sucking monotonous jobs every day of their lives just to put food on the table. But without the ability to save, access credit, or invest, the 1.7 billion adults in the world that still do not have a bank account might not have any other choice. At the very least, how do we ensure that their children spend more time asking the bigger questions in life, rather than if they are going to have food to eat that night?
There is no easy answer, but the pursuit of one is inspiring my adventure this summer to the country of El Salvador, which on June 8th, 2021 became the first country in the world to legalize Bitcoin as legal tender. For those not familiar, Bitcoin is just one of many types of cryptocurrencies which many see as an exciting investment opportunity — but others see it as much more than that. Specifically, there is a subset of this new world of digital money called decentralized finance (or DeFi for short) that many believe will replace the existing financial system with one that is much more just and accessible, giving opportunity and identity to those around the world lacking financial services.
As I research this topic further, I will continue posting blogs and vlogs — first on pre-research on El Salvador’s history, political situation, and move to adopt Bitcoin as legal tender — and eventually on my actual experiences on the ground talking to El Salvadorians and trying out their new national currency. If you’ve read this far, I hope you’ll join me on this journey.
