12 ms·

You May Be Broke and Not Know It

30 points by FuNe 10y ago

CamelCaseName 10y ago
Oh trust me, I know I'm broke.
jbb555 10y ago
"And not know it" If you don't have some idea of your net worth, you probably deserve it...
- nommm-nommm 10y ago
  Deserve what?
epx 10y ago
That's how governments around the world tried to conceal the deceleration of economy, encouraging people to get into debt. Was funny to see the Brazilian government commit the same error in late 2000s.
- forinti 10y ago
  The dose makes the poison. In Brazil, people started getting their _first_ mortgages. In the US, people had 5 or more at the height of the subprime boom. Only recently has credit for second mortgages been available in Brazil.
  - marcosdumay 10y ago
    In Brazil the best mortgages available have about 13% interest. It's basically impossible to reach the same debit level of the US, but consequences are much more severe.
Jtsummers 10y ago
There's a third way to be poor: cash poor. Technically positive net worth, but the assets aren't liquid or accessible. For instance, retirement savings may be accessed early with penalties (IRA) or early as a loan (401(k)) that you have to payback before leaving your current job. Or stocks and other investments which you don't want to sell because their value and earnings are greater than your CC or other debt interest (a good problem to have, but still a problem). Or you may have paid off that home or car, removing debt, but at the cost of losing your liquid cash. Selling the home or car are not options because you don't have a backup and require (at least the vehicle) for earning your income. The home is sellable, but not promptly, could be rented but that also introduces liabilities and other risks. EDIT: I imagine for many of you in SV, this is things like stock options as well. You can't sell it for several years, and there's no guarantee of its value at that point anyways. You may leverage it for obtaining debt (still staying networth positive, on paper), for things like home purchases, but ultimately you still lack liquid assets.
- repsilat 10y ago
  In banking they talk about "liquidity" and "solvency" being two primary axes of financial difficulty. It's the common wisdom in some places to say that solvency is over-emphasized in lay discussions -- that an insolvent bank can shuffle on for a long time, "dead man walking," so long as it can get its hands on cash for today and tomorrow by borrowing somewhere. On the other hand, a solvent bank with liquidity problems can die very quickly. Bank runs are an obvious example here. (In a sense you might say that all terminal solvency problems eventually manifest as liquidity problems. I guess you could argue that the reverse is true too, though.) The solution to the "solvent but illiquid" problem tends to usually be "loans from someone who is liquid." A bank may lend you money against your house or your shares, central banks loan money to deposit-keeping banks against the banks' assets (mortgages, bonds, whatever banks tend to have these days...)
wyldfire 10y ago
Stupid question: if your estate can't satisfy your debt obligations, do your descendants inherit the debt or do the creditors just forgive the debt? (US, but I'm curious if it's different elsewhere). I would think that it must be the former otherwise there'd be a legitimate reason to discriminate against extending credit to old people, right?
- kstenerud 10y ago
  In the USA, should your descendants decide that they want to keep something where money is still owed, they may opt to take on the debt. In Japan during the heyday, you could take out multi-generational mortgages.
  - wbl 10y ago
    That's secured debt, which is different from unsecured. Basically everything settles against the estate, and then you inherit if there is any left.
- dboreham 10y ago
  No. Except in the case of jointly-held debt (e.g. spouses, someone who co-signed on a loan).
- johnward 10y ago
  In the US they are forgiven. Family is not responsible for paying this. If you wanted to keep a house or something you could choose to have that debt transferred to you but if not it's the bank's problem.
- arcanus 10y ago
  I've not heard of a modern country where debt is inherited by the children. However, you said, 'estate', which can be sent into receivership due to defaulting on loans. So your assets may be seized before they are transferred to the next generation. But the debt itself is certainly not transferable, unless your descendants have co-signed on a loan.
kstenerud 10y ago
"Even people with good jobs can owe so much on credit cards, student loans, or mortgages that, on paper, they’re worth less than zero." So, by that rationale, almost everyone with a mortgage is "broke"? Because, generally (except in recent times where money is cheap to borrow), you get a mortgage when you don't have the cash to buy a house outright (and probably won't for decades).
- euroclydon 10y ago
  It doesn't work that way for secured loans. So you can take out a $250K loan on a $300K house, and it results in +$50K in net worth. For credit card loans, there is no underlying collateral. For student loans it's the same.
- analyst74 10y ago
  This article is talking about negative wealth, not just people in debt. Meaning that the small number of homeowners who have negative wealth have debt (primarily student loans) larger than their home equity and other investment.
  - kstenerud 10y ago
    And what about the early years of a mortgage, where your home equity is very low?
    - graedus 10y ago
      "It doesn’t feel good when your net worth is a negative number. But many of these debtors aren’t necessarily doing something wrong. It can make sense to borrow when you’re young—to get an education, buy a home, or even sometimes to meet emergency expenses—as long as you’re pretty sure you can pay it off later when you’re earning more money."
- ocdtrekkie 10y ago
  Yeah, I mean, it's tough to evaluate this with that thrown in, because it's technically a debt, but you have an incredibly long time to pay it off. If you're managing your money well, it is not a huge risk. I could not pay off my mortgage now outright, but I could make payments on it for YEARS even if I lost my job. So I don't consider myself "broke", even though this definition would suggest that I am. Your first goal to financial security, if not a positive net worth, should be ensuring you have enough padding in your savings to handle unpredictable events like loss of job.
rahimnathwani 10y ago
The word 'broke' normally means something like 'bankrupt' or 'insolvent'. We need to distinguish between two states, which are quite different: (A) Insolvent: Unable to pay for necessary outgoings (rent, food, loan payments) as they become due. (B) Negative equity: The value of total liabilities (e.g. loan principal) exceeds the value of total assets (e.g. cash, bank balances, stocks, and real estate). The word 'broke' is usually used to indicate (A), but Bloomberg is redefining it to mean (B). Imagine I've just graduated from medical school, top of my class, and have debts of $200k that I incurred during my studies. I have $10,000 in my bank account. I have a job lined up that will pay me enough to live on, but I expect rapid rises over the next few years. Would you consider me 'broke'? Bloomberg would, because they'd calculate my net worth at negative $190k.
- Jtsummers 10y ago
  Re B and your med school scenario: If you're living paycheck to paycheck, or just barely above, then yes, you'd be broke. In particular, a lot of people in this situation find themselves treading water, financially. Their income may grow, but so does their debt (accruing interest and more debt due to lack of cash). They're not insolvent, until they lose their job. But they're also not able to (reasonably, many still do) spend money on much beyond necessities.
  - adevine 10y ago
    But this scenario doesn't apply to the vast, vast majority of folks in the med school situation. These newly minted doctors will make low wages in residency, but they are still great credit risks because they can be expected to make much higher salary in the future withOUT the need to acquire additional debt. The problem with these "insolvency" calculations is that by going into debt for education you are trading cash for future earning potential. If you valued that future earning potential like an annuity, it many cases it would be worth millions of dollars, but straight net worth calculations value it at 0. Of course, the problem with student debt is that a lot of folks are making really bad investments on that "annuity" - trading large sums of cash for a minimal if any increase in future earning potential. Despite all the upheaval in medicine, however, almost all doctors can expect to make much, much more income after they finish residency.
chadlavi 10y ago
I am very much aware of my student loan debt, thanks Bloomberg. Quite aware.
refurb 10y ago
Hmmm.... not sure I agree with the definition "broke". Let's take this scenario (which isn't that uncommon): You're a student who just graduated college and you have $40K in student loans, but a bright career ahead of you (STEM degree or similar). Overall you're net worth is minus $40,000, but you're first job is paying your $75K and it's likely to only go up from there. I wouldn't call such a person broke.
- ajdlinux 10y ago
  Literally me right now. Of course, as someone who lives in Australia, where our government-run student loan scheme is both income-contingent and deducted straight from payroll as part of income taxation, the only time I notice how much I owe in student debt is once a year when I'm doing my tax return... other than that, I don't worry about my student debt at all, knowing that even if I lose my job it's not going to drive me broke.
- squeaky-clean 10y ago
  Yeah, I wouldn't call this broke. You owe more money than you have, but you don't need to hand it all over right now. Broke is you need a hundred more dollars to pay rent, and even if you have a million in an account somewhere, you have no way to get that hundred before the date rent is due. You wouldn't say the United States is the poorest country in the world, even though it's in the most debt.
- burnstek 10y ago
  I'd call that a broke person with potential, but that person is still currently broke. I would hope that person looks in the mirror and also agrees they are broke, and will make financial decisions with that in mind. In many ways, this is how so many folks end up drowning in debt. They "bet on the come" by assuming they are investing in the right education, will be successful in their field, etc. They delude themselves into thinking that just because they make $75k/yr that they aren't broke.
- mathattack 10y ago
  Yes, they take two terms with precise meanings (insolvent and negative equity) and muddle them up with being "broke". They also struggle with the unmeasurable. It's hard to measure the value of an education, or good health, so they don't.
chiph 10y ago
> about 14 percent of U.S. households have a credit card balance of more than $10,000 That's amazing, but not surprising. I used to have some neighbors who started shopping for a house. Everything was going well - they had found a home they liked and had gone to apply for a mortgage. Which is when it was revealed that one of them had a couple of credit cards the other didn't know about - with a $14k balance on them. People debate over the best method to pay them off and get out of credit card debt, and it just doesn't matter as long as you get started. Once you get into the habit of watching the balances decline, then you can optimize by doing things like paying the higher-rate ones first, or paying off the smallest balance one first, whichever works for you.
nommm-nommm 10y ago
They didn't explain the "not knowing it" part. Who doesn't know they are broke and why?
- wccrawford 10y ago
  It's because they're twisting the normal use of the word "broke" in an attempt to make a catchy headline. What they're really saying is that there's another way to be considered "broke" and that many people won't realize they fit that definition. Mainly because it's non-standard and basically never used. It's just a trick for clicks.
dudul 10y ago
How does a mortgage drive your net worth down? Sure you owe a lot of money to the bank for a while, but you have the value of the property to cover for it. Or is it only for cases where the property value dives just after one bought it with a new - now over-estimated - mortgage? Usually banks perform their own evaluation of properties before issuing the mortgage.
whack 10y ago
What's with the "and not know it" part of the headline? Is that just clickbait, or do people really not know that they are broke?

30 points by FuNe 10y ago

CamelCaseName 10y ago

Oh trust me, I know I'm broke.

jbb555 10y ago

"And not know it" If you don't have some idea of your net worth, you probably deserve it...

nommm-nommm 10y ago
Deserve what?

epx 10y ago

That's how governments around the world tried to conceal the deceleration of economy, encouraging people to get into debt. Was funny to see the Brazilian government commit the same error in late 2000s.

forinti 10y ago
The dose makes the poison. In Brazil, people started getting their _first_ mortgages. In the US, people had 5 or more at the height of the subprime boom. Only recently has credit for second mortgages been available in Brazil.
- marcosdumay 10y ago
  In Brazil the best mortgages available have about 13% interest. It's basically impossible to reach the same debit level of the US, but consequences are much more severe.

Jtsummers 10y ago

There's a third way to be poor: cash poor. Technically positive net worth, but the assets aren't liquid or accessible. For instance, retirement savings may be accessed early with penalties (IRA) or early as a loan (401(k)) that you have to payback before leaving your current job. Or stocks and other investments which you don't want to sell because their value and earnings are greater than your CC or other debt interest (a good problem to have, but still a problem). Or you may have paid off that home or car, removing debt, but at the cost of losing your liquid cash. Selling the home or car are not options because you don't have a backup and require (at least the vehicle) for earning your income. The home is sellable, but not promptly, could be rented but that also introduces liabilities and other risks. EDIT: I imagine for many of you in SV, this is things like stock options as well. You can't sell it for several years, and there's no guarantee of its value at that point anyways. You may leverage it for obtaining debt (still staying networth positive, on paper), for things like home purchases, but ultimately you still lack liquid assets.

repsilat 10y ago
In banking they talk about "liquidity" and "solvency" being two primary axes of financial difficulty. It's the common wisdom in some places to say that solvency is over-emphasized in lay discussions -- that an insolvent bank can shuffle on for a long time, "dead man walking," so long as it can get its hands on cash for today and tomorrow by borrowing somewhere. On the other hand, a solvent bank with liquidity problems can die very quickly. Bank runs are an obvious example here. (In a sense you might say that all terminal solvency problems eventually manifest as liquidity problems. I guess you could argue that the reverse is true too, though.) The solution to the "solvent but illiquid" problem tends to usually be "loans from someone who is liquid." A bank may lend you money against your house or your shares, central banks loan money to deposit-keeping banks against the banks' assets (mortgages, bonds, whatever banks tend to have these days...)

wyldfire 10y ago

Stupid question: if your estate can't satisfy your debt obligations, do your descendants inherit the debt or do the creditors just forgive the debt? (US, but I'm curious if it's different elsewhere). I would think that it must be the former otherwise there'd be a legitimate reason to discriminate against extending credit to old people, right?

kstenerud 10y ago
In the USA, should your descendants decide that they want to keep something where money is still owed, they may opt to take on the debt. In Japan during the heyday, you could take out multi-generational mortgages.
- wbl 10y ago
  That's secured debt, which is different from unsecured. Basically everything settles against the estate, and then you inherit if there is any left.
dboreham 10y ago
No. Except in the case of jointly-held debt (e.g. spouses, someone who co-signed on a loan).
johnward 10y ago
In the US they are forgiven. Family is not responsible for paying this. If you wanted to keep a house or something you could choose to have that debt transferred to you but if not it's the bank's problem.
arcanus 10y ago
I've not heard of a modern country where debt is inherited by the children. However, you said, 'estate', which can be sent into receivership due to defaulting on loans. So your assets may be seized before they are transferred to the next generation. But the debt itself is certainly not transferable, unless your descendants have co-signed on a loan.

kstenerud 10y ago

"Even people with good jobs can owe so much on credit cards, student loans, or mortgages that, on paper, they’re worth less than zero." So, by that rationale, almost everyone with a mortgage is "broke"? Because, generally (except in recent times where money is cheap to borrow), you get a mortgage when you don't have the cash to buy a house outright (and probably won't for decades).

euroclydon 10y ago
It doesn't work that way for secured loans. So you can take out a $250K loan on a $300K house, and it results in +$50K in net worth. For credit card loans, there is no underlying collateral. For student loans it's the same.
analyst74 10y ago
This article is talking about negative wealth, not just people in debt. Meaning that the small number of homeowners who have negative wealth have debt (primarily student loans) larger than their home equity and other investment.
- kstenerud 10y ago
  And what about the early years of a mortgage, where your home equity is very low?
  - graedus 10y ago
    "It doesn’t feel good when your net worth is a negative number. But many of these debtors aren’t necessarily doing something wrong. It can make sense to borrow when you’re young—to get an education, buy a home, or even sometimes to meet emergency expenses—as long as you’re pretty sure you can pay it off later when you’re earning more money."
ocdtrekkie 10y ago
Yeah, I mean, it's tough to evaluate this with that thrown in, because it's technically a debt, but you have an incredibly long time to pay it off. If you're managing your money well, it is not a huge risk. I could not pay off my mortgage now outright, but I could make payments on it for YEARS even if I lost my job. So I don't consider myself "broke", even though this definition would suggest that I am. Your first goal to financial security, if not a positive net worth, should be ensuring you have enough padding in your savings to handle unpredictable events like loss of job.

rahimnathwani 10y ago

The word 'broke' normally means something like 'bankrupt' or 'insolvent'. We need to distinguish between two states, which are quite different: (A) Insolvent: Unable to pay for necessary outgoings (rent, food, loan payments) as they become due. (B) Negative equity: The value of total liabilities (e.g. loan principal) exceeds the value of total assets (e.g. cash, bank balances, stocks, and real estate). The word 'broke' is usually used to indicate (A), but Bloomberg is redefining it to mean (B). Imagine I've just graduated from medical school, top of my class, and have debts of $200k that I incurred during my studies. I have $10,000 in my bank account. I have a job lined up that will pay me enough to live on, but I expect rapid rises over the next few years. Would you consider me 'broke'? Bloomberg would, because they'd calculate my net worth at negative $190k.

Jtsummers 10y ago
Re B and your med school scenario: If you're living paycheck to paycheck, or just barely above, then yes, you'd be broke. In particular, a lot of people in this situation find themselves treading water, financially. Their income may grow, but so does their debt (accruing interest and more debt due to lack of cash). They're not insolvent, until they lose their job. But they're also not able to (reasonably, many still do) spend money on much beyond necessities.
- adevine 10y ago
  But this scenario doesn't apply to the vast, vast majority of folks in the med school situation. These newly minted doctors will make low wages in residency, but they are still great credit risks because they can be expected to make much higher salary in the future withOUT the need to acquire additional debt. The problem with these "insolvency" calculations is that by going into debt for education you are trading cash for future earning potential. If you valued that future earning potential like an annuity, it many cases it would be worth millions of dollars, but straight net worth calculations value it at 0. Of course, the problem with student debt is that a lot of folks are making really bad investments on that "annuity" - trading large sums of cash for a minimal if any increase in future earning potential. Despite all the upheaval in medicine, however, almost all doctors can expect to make much, much more income after they finish residency.

chadlavi 10y ago

I am very much aware of my student loan debt, thanks Bloomberg. Quite aware.

refurb 10y ago

Hmmm.... not sure I agree with the definition "broke". Let's take this scenario (which isn't that uncommon): You're a student who just graduated college and you have $40K in student loans, but a bright career ahead of you (STEM degree or similar). Overall you're net worth is minus $40,000, but you're first job is paying your $75K and it's likely to only go up from there. I wouldn't call such a person broke.

ajdlinux 10y ago
Literally me right now. Of course, as someone who lives in Australia, where our government-run student loan scheme is both income-contingent and deducted straight from payroll as part of income taxation, the only time I notice how much I owe in student debt is once a year when I'm doing my tax return... other than that, I don't worry about my student debt at all, knowing that even if I lose my job it's not going to drive me broke.
squeaky-clean 10y ago
Yeah, I wouldn't call this broke. You owe more money than you have, but you don't need to hand it all over right now. Broke is you need a hundred more dollars to pay rent, and even if you have a million in an account somewhere, you have no way to get that hundred before the date rent is due. You wouldn't say the United States is the poorest country in the world, even though it's in the most debt.
burnstek 10y ago
I'd call that a broke person with potential, but that person is still currently broke. I would hope that person looks in the mirror and also agrees they are broke, and will make financial decisions with that in mind. In many ways, this is how so many folks end up drowning in debt. They "bet on the come" by assuming they are investing in the right education, will be successful in their field, etc. They delude themselves into thinking that just because they make $75k/yr that they aren't broke.
mathattack 10y ago
Yes, they take two terms with precise meanings (insolvent and negative equity) and muddle them up with being "broke". They also struggle with the unmeasurable. It's hard to measure the value of an education, or good health, so they don't.

chiph 10y ago

> about 14 percent of U.S. households have a credit card balance of more than $10,000 That's amazing, but not surprising. I used to have some neighbors who started shopping for a house. Everything was going well - they had found a home they liked and had gone to apply for a mortgage. Which is when it was revealed that one of them had a couple of credit cards the other didn't know about - with a $14k balance on them. People debate over the best method to pay them off and get out of credit card debt, and it just doesn't matter as long as you get started. Once you get into the habit of watching the balances decline, then you can optimize by doing things like paying the higher-rate ones first, or paying off the smallest balance one first, whichever works for you.

nommm-nommm 10y ago

They didn't explain the "not knowing it" part. Who doesn't know they are broke and why?

wccrawford 10y ago
It's because they're twisting the normal use of the word "broke" in an attempt to make a catchy headline. What they're really saying is that there's another way to be considered "broke" and that many people won't realize they fit that definition. Mainly because it's non-standard and basically never used. It's just a trick for clicks.

dudul 10y ago

How does a mortgage drive your net worth down? Sure you owe a lot of money to the bank for a while, but you have the value of the property to cover for it. Or is it only for cases where the property value dives just after one bought it with a new - now over-estimated - mortgage? Usually banks perform their own evaluation of properties before issuing the mortgage.

whack 10y ago

What's with the "and not know it" part of the headline? Is that just clickbait, or do people really not know that they are broke?