You May Be Broke and Not Know It

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.

"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."

(Regardless, the article is quite shallow and it seems to come from the Department of the Bleeding Obvious).

This.

Also, "reducing" your net worth may be a great decision. Talking about your example, if I had $100k in a bank, it would make perfect financial sense to borrow $100k and get that degree, while getting in the red.

People already understand this when they talk about business — and a lot of companies routinely have a lot of debt without any problem, because they make this money work. Why not apply the same logic to people?

Not to mention that, by Bloomberg's standards, most companies are "broke".

Debt isn't intrinsically good or bad, it can be very good in the right situation. I, as OP, recently left grad school with over $100k in debt, which will be paid easily in less than 5 years.

Debt allows you to leverage your future earnings to do something now. I wouldn't be able to pay for grad school without debt, and would be in a worse situation without it.

As long as you graduate - but if you drop out of med school then what?

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...)

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.

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.

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.

By "broke" they mean liabilities are more than assets. So if someone uses credit cards to pay for a $3,000 vacation, they have $3,000 in debt and no measurable asset. If someone takes a $300,000 mortgage to buy a $300,000 house, the asset equals the liability. (Minus transaction costs and all that good stuff) If the house increases in value to $500,000, they are $200,000 in net assets minus whatever they've paid down. If the house value drops $100,000 below the mortgage, then they're still negative. (In much of the US, houses are still worth less than what people paid for them 10 years ago)

No that isn't a negative becuase you can sell the house and pay back the mortgage, as long as it's value hasn't nosedived.

No, it's relatively easy to estimate the "net value" of a mortgaged house, which should (except in a housing market crash) be positive, otherwise the bank wouldn't lend you the money in the first place.

On the other hand, it's very very hard to calculate e.g. net "student loan value" (i.e. future earnings - future loan payments) - in fact, many people took out huge student loans but found themselves making way less income than they expected (hoped for)! Unfortunately, lenders don't care about that, becaue the government guarantees the loan...

I agree that it's not a very useful definition of "Broke", but you can sell the house, pay off the mortgage and (probably) have money left. With student loan debt etc. there is nothing on the other side of the balance sheet (except from hopefully higher earning potential over the long term).

Net worth = assets - liabilities

An asset is a house, a liability is a morgage. Taking out a morgage doesn't effect your net worth because while you add a liability you also add an asset that counteracts that liability.

From the article: "It turns out credit cards and student loan debt are the main reasons Americans are ending up with a negative net worth. Mortgages are a minor factor, the New York Fed found. Only 19 percent of people with negative net worth are homeowners"

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.

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.

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.

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.

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.

No. Except in the case of jointly-held debt (e.g. spouses, someone who co-signed on a loan).

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.

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.

in the US: Not usually. Its fairly complex, but so long as you did not co-sign on any loans with your parents, or put forth any personal guarantee's on their debts - you're not responsible for them if they pass away. The "estate" is responsible, so they would liquidate any assets they had to cover the debts.

In the Netherlands, you're advised not to accept the inheritance before having investigated the legator's credit situation. If you do accept the inheritance, you WILL be hold accountable for all debts.

Here in Czechia, you as a descendant can opt out and decide not to inherit anything. In that case, you will not inherit the debt, but you'll also lose the right to any other inheritance you might otherwise get.

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.

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.

Deserve what?