Joe: Most of us think we're pretty good with money. We have budgets, savings accounts, maybe some investments. But what if I told you the most sophisticated and active money managers on the planet are the ones living on less than two dollars a day? Lewis: Come on, Joe. Sophisticated? How is that even possible when you have almost nothing to manage? It sounds like saying the person with an empty fridge is a master chef. Joe: That's exactly the assumption this book demolishes. Today we're diving into Portfolios of the Poor: How the World’s Poor Live on Two Dollars a Day, by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. It’s a book that’s been widely acclaimed, even getting a nod from people like Mark Zuckerberg, for completely upending how we think about poverty. Lewis: Okay, so what makes their take so different? Joe: It’s the "how." What's fascinating is that one of the lead authors, Dr. Daryl Collins, started her career as an emerging market economist at a New York investment bank. She went from analyzing Wall Street portfolios to meticulously tracking the portfolios of the world's poorest. Lewis: From Wall Street to a village in Bangladesh? That’s a career pivot. Joe: Exactly. And she and her team did it using a method called "financial diaries." For a full year, they visited the same families every two weeks and tracked every single penny. Every loan, every bit of savings, every single transaction. And what they found wasn't a simple story of earning and spending. It was a whirlwind of complex financial activity.

Joe: To see what I mean, we have to look past income and look at financial activity. Let's meet a couple from the book, Hamid and Khadeja, who live in a slum in Dhaka, Bangladesh. Lewis: Alright, paint the picture for me. What’s their situation? Joe: It’s tough. They live in a tiny room with a tin roof, sharing a toilet with seven other families. Hamid is a reserve rickshaw driver, which means his income is incredibly unpredictable. Some days he works, some days he doesn't. On average, the family lives on about $70 a month. Lewis: Seventy dollars a month. I can barely imagine that. So their financial life must be incredibly simple, right? Earn a few dollars, buy food, hope there's enough for rent. Joe: That's what you'd think. But the financial diaries revealed something astonishing. Over the course of the year, Hamid and Khadeja were managing a complex portfolio. They had money saved in six different places. Lewis: Six? What do you mean? Joe: I'm talking cash hidden at home, a small amount saved with a relative, another bit with a neighbor, a life insurance policy, and a savings account with a microfinance institution. They were constantly moving tiny amounts of money between these different "accounts." Lewis: Wow. Okay, that's more complex than I expected. But it's still just saving, right? Joe: Not even close. They were also borrowing from five different sources. They had a loan from a microfinance institution, but they also borrowed from family, from neighbors, from Hamid's employer, and even got credit from their local grocer. They were juggling all these debts and savings simultaneously. Lewis: My head is spinning just thinking about that. It sounds like a full-time job. Joe: It is! And here’s the number that just breaks your brain. Their total income for the year was about $840. But the total amount of money they moved through their financial system—all the saving, borrowing, and repaying—was $965. Lewis: Wait, hold on. Their financial turnover was more than their entire annual income? How is that mathematically possible? Are they just moving the same dollar around in a circle? Joe: In a way, yes! And that's the central insight. The book calls it "intermediation." For us, a bank does this. We deposit our paycheck, and the bank holds it until we need it for rent or a big purchase. For Hamid and Khadeja, they have to be their own bank. Their income is so small and irregular, they can't just wait for a big chunk of cash to appear. They have to painstakingly assemble it. Lewis: So when they need money for, say, a doctor's visit, they can't just pull it from a steady paycheck. They have to pull a dollar from the savings box, borrow two from a neighbor, and maybe get an advance from Hamid's boss. Joe: Precisely. They're constantly breaking down income into savings and then re-aggregating savings and loans into useful lump sums. The book has this one quote from Khadeja that just cuts right through all the economic theory. She says, "I don’t really like having to deal with other people over money, but if you’re poor, there’s no alternative. We have to do it to survive." Lewis: Wow. That's heartbreaking. It's not financial planning as a luxury, it's a full-time, unpaid, high-stress job just to keep your head above water. It completely flips the script from seeing the poor as passive victims to seeing them as incredibly active, resilient financial managers. Joe: Exactly. They are not financially illiterate. In many ways, they are more financially sophisticated than we are, because they have to be. Their survival depends on it every single day.

Lewis: Okay, the complexity is blowing my mind. But a lot of that was borrowing. We're always told debt is bad, especially high-interest debt. How does that fit into this picture of sophistication? Joe: That's probably the most counter-intuitive and brilliant finding in the whole book. For many of the people they studied, borrowing is actually the fastest way to save. Lewis: Okay, you've lost me again. Borrowing to save? That sounds like an oxymoron. Like drinking to get sober. Joe: I know, it sounds crazy. But think about it from a psychological perspective. The book introduces us to a woman named Seema. She needed a chunk of money, and she actually had that amount in her savings. But instead of using her savings, she took out a loan. Lewis: Why on earth would she do that? She’s just voluntarily paying interest she doesn't have to. Joe: The researchers asked her the same thing. And her answer was incredible. She said, and I'm quoting from the book here, "Because at this interest rate I know I’ll pay back the loan money very quickly. If I withdrew my savings it would take me a long time to rebuild the balance." Lewis: Whoa. So the pain of paying interest was a tool. It was a motivator. Joe: It's a "commitment device." For many of us, saving is hard. There's always something else to spend the money on. But a loan repayment? That's not optional. It's a hard deadline with consequences. The loan forced a discipline on her that she couldn't impose on herself. Lewis: I think I get it. It's like pre-committing to a personal trainer. You pay upfront, so you're forced to show up. The loan repayment is the trainer yelling at you to do one more rep, and the interest is their fee. Joe: That's a perfect analogy. There's another guy in the book, Satish, who had a lot of cash saved up. But he said he loved to borrow. He liked the pressure of the interest charges because it made him pay it back faster. It was a feature, not a bug. For him, a loan wasn't just a way to get money; it was a structured savings plan with teeth. Lewis: That's fascinating. It explains why so many of the financial tools they use, like savings clubs, are all about social pressure and commitment. In a savings club, as one person said, "You feel compelled to contribute... If you don’t do that, it is like you are letting your friends down." Joe: Exactly. Whether it's the interest from a moneylender or the shame of letting down your neighbors, the poor are actively seeking out these external pressures to help them achieve their financial goals. They're hacking their own psychology to build capital. Lewis: But this is where it gets tricky, right? Because this willingness to pay for 'discipline' can be exploited. The book was praised, but it came out around the time microfinance was facing serious heat for charging sky-high interest rates. It got so controversial that even Muhammad Yunus, the founder of the Nobel-winning Grameen Bank, publicly called out some of these for-profit lenders. Joe: You're right, and the book doesn't shy away from that. It makes a really important point. The authors show that serving the very poor is operationally expensive. You're dealing with lots of tiny transactions, which costs a lot in staff time. An institution like the Small Enterprise Foundation in South Africa was charging 75% interest and barely breaking even. Lewis: So if you cap the interest rates too low, these organizations just disappear, and the poor are left with even fewer options—or have to go to the local moneylender who might charge even more. Joe: That's the tightrope. The book argues that instead of just focusing on price, we need to focus on value. Is the service reliable? Is it flexible? Does it actually help people manage their lives? For many, a reliable, if expensive, loan is infinitely better than no loan at all. It's a service, and they're willing to pay for it.

Lewis: So, when you put it all together, what's the big takeaway here? Is it just that the poor are incredibly resourceful? Joe: It's more profound than that. The book argues that poverty isn't just a lack of money; it's a lack of reliable financial tools. The authors describe it as a "triple whammy": incomes that are low, uncertain, and a financial environment where the tools to manage that volatility are extremely limited or flawed. Lewis: So the problem isn't just the size of the portfolio, but the quality of the pieces you have to build it with. Joe: Exactly. The genius of this book is that it shows us the poor are already doing the work. They are the sophisticated money managers. What they need are better tools. And the book's final message is a challenge to policymakers, to NGOs, to banks. It says, stop assuming you know what the poor need. Lewis: And start building services that match the complexity of their actual lives. Joe: Yes. Build savings accounts that are flexible enough for tiny, frequent deposits. Build loans that can be used for a daughter's wedding or a medical emergency, not just for starting a business. Build services that are as reliable, flexible, and sophisticated as the people they're meant to serve. Lewis: That really reframes the whole conversation from charity to finance. It's not about giving handouts; it's about providing high-quality, dependable services. Joe: It is. And it makes you wonder, what informal financial tools do we all use without even realizing it? A loan from a parent to cover a deposit, spotting a friend for lunch until payday, even that 'buy now, pay later' service. We're all managing portfolios, theirs are just on a razor's edge. Lewis: That's a powerful thought. It makes you look at your own finances, and the world, a little differently. We'd love to hear what our listeners think. Do you see these informal financial systems in your own life? Find us on our socials and share your stories. Joe: Until next time. Lewis: This is Aibrary, signing off.