A simple example is the concept of living paycheck to paycheck... If you work on contract or hourly and payment is delayed (either because there weren't enough hours to work or your client is slow to pay), one of two things happens:
1) You are wealthy enough to have credit and perhaps a bit of cash savings, and you can pay your bills with that savings/credit card. When your paycheck comes, you pay down the short-term credit and you are as good as if it never happens.
2) You have no credit and no savings. You must directly choose between which bills you can and cannot pay. Some bills go into default or incur late fees. Other bills may cancel service because you cannot be relied upon to pay. In this scenario, when the paycheck comes, you pay your late bills, but you are left with the extra fees, lost services, and are at a net-loss going into the next period.
Compound scenario 2 for a few periods, and you start to incur heavily negative consequences that are very difficult to overcome.
- Repairing things that break (e.g. "My car needs $300 in maintenance" is a big deal when you were just barely going to break even on the month and have no savings)
- Random expenses for kids' school
None of these things are necessarily all that pricy, but when your minimal cost of living is equal to or only slightly less than you make, you have a problem. The worst part is that it accumulates. As these non-negotiable costs arise, you end up making compromises (e.g. taking out credit you're not sure you can repay soon), and those compromises make it harder to handle unexpected costs in the future (e.g. because you're still paying off interest on the last one).
The thing about being rich or poor isn't about how much money you have, per se. It's about how much money you have that you don't really need right now. Quality of life is pretty crap up to a certain point, then it rises quickly once you get past the point of treading water, then it tapers off somewhat later because at that point it's all basically "I do not have to worry about basic needs."
I watched a guy who had just gotten out of prison trying to make it back into society. A lot of things cost more for him. One example: Car insurance. He didn't have the money to pay 6 months of insurance in one chunk, so he had to buy it one month at a time. Well, the insurance companies charge extra for that.
He couldn't afford a decent car, so he got a car that was cheap, and which (no surprise) broke down a lot. When it broke down, he had to pay to have it fixed, plus to take the bus to get to work.
1) You are wealthy enough to have credit and perhaps a bit of cash savings, and you can pay your bills with that savings/credit card. When your paycheck comes, you pay down the short-term credit and you are as good as if it never happens.
2) You have no credit and no savings. You must directly choose between which bills you can and cannot pay. Some bills go into default or incur late fees. Other bills may cancel service because you cannot be relied upon to pay. In this scenario, when the paycheck comes, you pay your late bills, but you are left with the extra fees, lost services, and are at a net-loss going into the next period.
Compound scenario 2 for a few periods, and you start to incur heavily negative consequences that are very difficult to overcome.