The word 'broke' normally means something like 'bankrupt' or 'insolvent'. We need to distinguish between two states, which are quite different:<p>(A) Insolvent: Unable to pay for necessary outgoings (rent, food, loan payments) as they become due.<p>(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).<p>The word 'broke' is usually used to indicate (A), but Bloomberg is redefining it to mean (B).<p>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.<p>Would you consider me 'broke'?<p>Bloomberg would, because they'd calculate my net worth at negative $190k.
There's a third way to be poor: cash poor. Technically positive net worth, but the assets aren't liquid or accessible.<p>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.<p>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.
"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."<p>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).
Hmmm.... not sure I agree with the definition "broke". Let's take this scenario (which isn't that uncommon):<p>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.<p>I wouldn't call such a person broke.
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?
> about 14 percent of U.S. households have a credit card balance of more than $10,000<p>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.<p>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.
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.
What's with the <i>"and not know it"</i> part of the headline? Is that just clickbait, or do people really not know that they are broke?
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.