If your finances throughout your life are not in order, if you have high debt, regardless if it's because of medical bills, student loans or too big a car and house, you are in a weak position. What good does a nice car do if you worry about bills and if you try to avoid to look at the balance in your banking app?
You don't always know how rich some folks are, but for the most part it's easy to see if someone is living above their means, if you get a little anxienty on those people's behalf, then good!
John lives in extreme poverty. He's debt free, but is unable to adequately feed himself or his family. Several of his children have died from malnutrition.
Marc lives in a nice suburban home, has 3 square meals a day, so does everyone in his family. However, his debts (including his mortgage, car payments, student loans) exceed his savings.
If our intuition is wrong, then John is winning. He's ahead of Marc financially.
But I can tell you which one of them I'd rather be. It's not John.
They’re both screwed. I’d rather have crippling debt than children dying from malnutrition, but obviously both Marc and John are completely screwed in different ways. They’re both losers in this scenario, there are no winners.
Both you and the poster you're replying to are comparing debt to savings rather than debt to income. Taking the numbers from a downstream reply, the guy with the $120K mortgage on the $150K house is ahead if he can comfortably afford the monthly payment on his mortgage with the $80K annual salary.
The entire point of taking out a loan is that you don't have the assets available to outright buy the thing you're taking out the loan for. Obviously, people can take on too much debt, be trapped by usurious interest rates, and so on; you need to be realistic about how much debt you can afford, and a lot of people aren't (often through no fault of their own). But "my total debt at this moment in time exceeds my savings" is not in and of itself a harbinger of financial doom.
Yes, net worth and cash flow are two very importantly different things.
Negative net worth just means you can declare bankruptcy when necessary. Positive cash flow is what keeps you out. The risk is that an interruption to that cash flow can mean that you have to take the bankruptcy option.
If you want to imagine we are all born with a 'debt' then you should also assume we are born with an 'asset'. They should be workign to put that on paper faster than the debt.
As a personal choice, I don't accept any excuse for taking on debt to fund a lifestyle. It is just not a good idea.
I've talked to people who come up with these crazy justifications in their 20s why spending money now is more important than spending money later; I don't know why it is so hard to accept that these decisions have a 20 year time horizons and that they are going to live to be 75. The averages are pretty clear, if you prioritise financial security above incidental expenses you can have both.
Expensive experiences are not worth more than financial security, they don't meaningfully contribute to people's lives or happiness. You can be just as happy playing sports with locals to meet new people as traveling to exotic locations to gawp at nice architecture and meet new people. In 10 years you won't notice if you cooked your own food or had someone else do it for you. An expensive car will not bring a normal person good luck. You can live in a couple of different houses over a lifetime and save much money with little downside.
"If you want to imagine we are all born with a 'debt' then you should also assume we are born with an 'asset'. They should be workign to put that on paper faster than the debt."
If you take your salary and divide it by a reasonable interest rate, then you get the value of yourself as an asset, or the equivalent amount of capital you would need not to work. It is a large amount if you choose a realistic interest rate.
So, sure, a few hundred thousand in debt for school or a house is not such a big deal when you consider that an ordinary salary is equivalent to a million or two in capital.
The issue is cash flow, which seems to be what you are acknowledging, so how do you get to a fanatical anti-debt stance?
Maybe I didn't emphasis it enough; the key part is on the second line where I said "taking on debt to fund a lifestyle".
I spun a off topic; nickelcitymario's original scenario riled me up. It compared someone with a steady income to someone without an income and concluded that the person with an income had a financial edge because they had debts - that isn't right, the person with the income is ahead because they have an income.
A mortgage, car payments and student loans are luxuries that are not required to make an income; and the people I know with those things tend not to be using them to make money but rather to fund a lifestyle (for reference, I think the wealthiest set of friends I have are not university educated, buy second hand cars and rent - very relaxed lifestyle).
It is a common trope that people misjudge debt, take on too much, turn themselves into debt slaves and then suffer. They misjudge the situation and charge in when they are young and haven't really had time to learn about what makes a person happy. It is annoying that people keep downplaying the costs and risks of debt - it is an expensive, usually long term commitment and it results in ordinary people having less wealth. Wealth is hugely beneficial in strategic and tactical terms.
Just to be clear, I wasn’t saying Marc was better off because of debt. I was saying he was better off despite having debt. I was responding to the specific idea that Americans are poorer than people in other countries because they have more debt. My point was it’s entirely possible (and common) to be better off despite having a negative net worth.
Others spoke to this better than me, though, when discussing cash flow and the like...
In what way is Marc screwed? In the scenario given, even though Marc's debts exceed his current savings, there's every reason to believe his future income will outpace his debts and that he'll be able to maintain his standard of living until he dies.
> ...he'll be able to maintain his standard of living until he dies.
Under the assumption that his wages track with inflation, you might be right. He'll be able to scrape and hustle and pivot right until the day he dies. That's not a "win." When his health inevitably falters, he'll have increasing difficulty finding work, accumulating ever more medical debt. Chances are, his children will be dependent on him well into middle age, but "his" house and assets will vanish to cover debts.
A good outcome is one where we're making enough to save up for a comfortable retirement. That's not the reality for, perhaps, most people born after 1980
You have to keep in mind the the expected value of lifetime earnings of both. College students from top schools going into consulting/finance aren’t poor coming out of college, even though they may be deep in debt, because the expected value of their labor potential is in the multi-millions.
Not quite the same as having it in-hand, but it’s real unless conditions change drastically.
Your math is off. The home is an asset worth $150k plus a liability of $120k for the mortgage, for a net positive $30k. That puts your hypothetical person with a net worth of positive $130k, not negative $20k as you calculated.
When valuing a business, you typically look at the discounted future cash flows in addition to assets/debt. Basically, you factor in their profitability and calculate the current value of owning that stream of cash flow. People have cash flows as well. So even though people typically only count assets/debt, Marc effectively has a net worth substantially higher than -$20k if he’s saving more than he’s spending, which jives better with people’s intuition about Marc’s situation.
John isn’t someone of sound mind living in the US.
Both cases are poor examples. Financial health has two components; assets and cash flow. John can be in a better situation if his cash flow is good and he is solvent, but will always be facing more risks if he lacks key assets like a home.
> What good does a nice car do if you worry about bills and if you try to avoid to look at the balance in your banking app?
You have a nice car you can drive around?
I mean, the purpose of money is to do things with it. The balance in your banking app is only relevant because you desire to put it to some purpose. If you stop desiring to put it to some purpose, you're equally equipped whether or not you have a positive balance, and if you already have put it to some purpose like a nice car, you've accomplished the actual goal you wanted and should stop getting distracted by the means. (You should, of course, continue to pay attention to the means if you have other, unfulfilled goals. And perhaps you should think about whether having a nice car is more of a priority than those goals. But the goals are not money in and of itself.)
If you've got debts from student loans or mortgages that are set up such that you can pay those debts slowly and in a way you can afford to pay, and in the meantime you've got money to spend, you are actually fine. A balance sheet that only looks at how much is in the bank and how much you're in debt and not at how much you can afford to hold that debt is not telling the full story.
(This is, incidentally, the same reason the national debt isn't a big concern: nobody is going to demand that we pay that debt right now. So going further into debt gives the ability to do more things with that money, i.e., it gives us the effect of having more money, even though on paper we now have less money.)
Yonatan Zunger's notion of "financial shock wealth" is the most novel and satisfying framing of this question I've seen in years.
...If $5,000 is something you could afford, ask yourself the same question again with $100,000 (fire burn down your house?), with $250,000 (cancer treatment and your health insurance kicked you off?). For everyone, there’s some number which is the largest size of a financial shock they could weather.
This number is probably the truest measure of a person’s real wealth: What is the largest unexpected financial shock you could sustain without the cost of that to you suddenly becoming ten times the original cost or more? That number isn’t something easy to calculate; it depends on whether you have a family that can help you out, on your income, on whether that shock involves losing your job (and thus your health insurance, if you live in the US), on whether you have access to any other sources of security (including public assistance)....
And there is the failure of so much modern thinking, laid out in black and white: your financial picture is your measure of success.
God I hate greed and the profit motive more than anything else in this whole wacky place.
I would love to die in average suburban comfort if it meant the billions I'd made had all gone to deserving causes and not to any flagrant lifestyle of my own.
I don't see how your desire is incompatible with the comment above it. You can give all your money to deserving causes. By the definition of the previous post, you have then succeeded in life, because you have no money left. If you don't give money to deserving causes and happen to have some left, you have been cheated by life. It's pretty similar to what you say (except it gives you more options on what you want to spend on).
Greed and the profit motive are proxies for resources not being infinite and so we have to make hard choices about who gets what.
What doesn't get managed (observe->think->act if needed) gets squandered; and if we squander resources at the societal level that would just be stupid. We don't have the abundance of the modern era because luck is on our side, we have it because our management practices have grown unbelievably efficient over the centuries. Economic forces are the most effective way of triggering the management cycle; and because of that are necessary.
The need to focus on the material (which manifests as greed and profit seeking) is an ugly fact of life in the same way that needing to eat regularly is an ugly fact of life. It'd be better if we could get rid of both, but there are practical considerations to bow to.
You forgot how we (as a society) have been consuming fossil fuel resources (in particular) way above a sustainable rate. Millions of years of accumulated resources gone in tens of years. Possibly 'efficient' in the short term, but most likely problematic in the longer term - even without accounting for climate change.
If you died rich and have a family to leave the wealth to and the state isn't set up to steal your wealth by taxing you a second time, you've won at life. A big part of life is spreading your genes and making sure that your offspring are well set up to continue spreading your genes. This either requires heirs and wealth at death or at least making sure you transfer wealth to your heirs before you die.
> A big part of life is spreading your genes and making sure that your offspring are well set up to continue spreading your genes.
According to some. Or, you can opt out of this and enjoy your life anyway.
It's troubling to see so many people in this thread concerned with "winning" at life. In the end we all die, then it's game over. Any high score is quickly forgotten.
Life is brief, treasure it while you still draw breath.
The main drive/purpose of life is to continue and spread itself, that’s just fundamental biology. You’re free to opt out of that and define your own goals (it sounds like enjoying yourself is your goal), but without another generation to pass it on to, everything that every human has ever done will have been pointless, because the purpose of most of what we do is to help humans. And what we collectively leave them with is the “score” that will be remembered for as long as there are people to remember it. But sure, your individual score is unlikely to be remembered for very long, except by your direct descendants.
It is one goal of many; there's no reason to limit yourself to a singular goal. I don't claim that my goals have any special meaning though, they are simply how I am driven to act in the world. Each of us is driven in different ways, and although we tend to wrap our drives in elaborate disguises and claim "free will", at the end of the day we are simply elegant (though somewhat squishy) machines.
> without another generation to pass it on to, everything that every human has ever done will have been pointless
Yes, that's exactly it. The very notion that anything has to have a "point" or "meaning" is something that humans dreamed up. It's an unfortunate side effect of our sense-making systems that help us understand the world.
I didn't mean that derisively, btw. I think it's perfectly fine to want to focus on other things besides raising children. We don't need more people being raised by parents who don't want to raise them.
I do think we can modify our drives, though, and that free will isn't quite as much of an illusion as you say. Visualization is pretty powerful.
But you're right that there's not necessarily a real point. If it's a complete fiction, though, I think it's a useful one.
> I do think we can modify our drives, though, and that free will isn't quite as much of an illusion as you say. Visualization is pretty powerful.
I agree that our drives can be modified, but who is modifying them, and based on what drives? And where does the drive to modify ourselves come from? It's turtles all the way down.
To quote Hofstadter: "In the end, we self-perceiving, self-inventing, locked-in mirages are little miracles of self-reference."
As long as enough people reproduce around the world, there is another generation to pass it on to. Someday in the future, there may be a time where not enough children are born. Right now though, the global population is still growing and we're in more danger of overpopulation than underpopulation.
If I base my thinking on actual numbers rather than the theoretical principle, and in addition I stop worrying about my "score", then I can just focus on the actual stated goal, helping humans. When I'm dead, I'm gone. Them remembering me doesn't do shit for my soulless remains.
I might as well do something good for people because I care about people doing well, not because I want people to care about me even after I'm gone.
I'd say the primary purpose of the species is to continue the species. It's not everyone's individual drive, some people not having offspring so that they can focus on other things probably helps the group.
> Or, you can opt out of this and enjoy your life anyway.
The only reason the "enjoy your life" option is even on the table is because someone selflessly did the work of wealth building and society building that makes it possible for us to have the option of a life of leisure today.
When you die, it's not game over. If that were the case, you wouldn't even exist because it was once game over for all your ancestors, yet here you are enjoying your life.
Culturally, it's a tragedy that we've done an awful job communicating the importance of leaving a legacy for your offspring that enables them to enjoy life like we have. This long chain of people enjoying life only works if we propagate this message.
I’d be interested in hearing you expand on that. Why do you personally identify with your genes, which will be diluted to nothingness in just a few generations? To my mind it seem a bizarre and borderline pathological worldview- something rooted less in actual biology than in an invented teleology.
If your finances throughout your life are not in order, if you have high debt, regardless if it's because of medical bills, student loans or too big a car and house, you are in a weak position. What good does a nice car do if you worry about bills and if you try to avoid to look at the balance in your banking app?
You don't always know how rich some folks are, but for the most part it's easy to see if someone is living above their means, if you get a little anxienty on those people's behalf, then good!