Why are most people broke? US perspective

[Maximus Skepticus]

Nothing exciting but Saw this posted on Quora...and thought the effort was worth posting here...and may be appreciated, evaluated and criticised for content or assumption....I anticipate. Same for the UK?

Why are most people broke?

 

 

North American perspective: The root problem that causes most people to be broke isn’t necessarily “overspending”. That topic has been discussed a billon times over. We eat out too much. We buy too many clothes. We upgrade our phones too often. We go on too many vacations. We get it.

The root problem is WHY we’re able to consume to excess in the first place… and the answer to that is credit. It’s very easy to become broke when the money you spend isn’t yours to begin with… because any money you do come into, you’ll automatically owe to someone.

Credit is toxic because it enables money to magically appear out of nowhere, in a way that is accessible to you for monthly payments that seem more affordable than the actual amount you’re borrowing. Don’t have $20,000 in the bank for a brand new car? It’s okay! Just finance it for $300 per month over 72 months. Much easier to stomach spending $300 right away than $20,000 once you finally save it up, right?

Side note: Of course you can save up, say, $5,000 or so and buy an older car for cash. But in our society, there is more stigma to driving an older car and looking poor, than there is to having a brand new car that you borrowed money to buy. People would rather BE broke than look broke.

Similarly, you may not have $500 in the bank to join your friends on a weekend getaway. But if you put it on your credit card, you can pay it down at $100 or so per month… meaning it doesn’t matter that you don’t actually have the money. Because with credit, you can make decisions as if you do.

This is how North Americans think. Money is a largely abstract concept to them, in that the amount of money in their bank account is generally irrelevant to most decisions that involve money. If you’re buying a car, you’ll just make the monthly payments. If you’re doing a renovation, you’ll take a line of credit out on your house. If you’re buying a new outfit, you’ll put it on a credit card and sort it out later. It’s not so much about what you have… as it is about what you have access to.

Growing up, I was naive to the way credit was used. I always thought that if a $20,000 car costs $20,000… or if a $1,000 computer costs $1,000, or a $5,000 vacation costs $5,000, then you have to have that money ready to go. Like, if it costs $5,000, you have to have $5,000 in your bank account, don’t you? How else could you possibly pay for it?

My brain calculated it as “If I earn $10 per hour, and that computer costs $1,000, then I need to work about 100 hours, or about two and a half weeks full time to buy that computer”. Likewise, I figured that for an adult who earns $30 per hour, they would need to work about 30-something hours to buy it, and that’s just how people bought things. It seemed pretty straightforward…

• You need time to earn money
• You need money to buy things
• Therefore, your ability to buy things is predicated by working the requisite amount of time to save up that money by earning it

Then as I saw the spending patterns of adults who I worked with, I knew this was impossible. There had to be something beyond the surface with the way these people spent money. People owned condos, bought lunch every day, came to work in new clothes on a regular basis, went on vacations to exotic places, bragged about the places they went to for dinner, the lot.

I could only think one thing… Where the HELL could all of this money possibly be coming from?!

Then I began to pay a little more attention, and it all made sense…

• The condos are bought with mortgages (with the down payment borrowed from their parents, of course)
• The cars are bought on financing
• The clothes are bought on credit cards
• The dinners are also bought on credit cards
• So are the lunches that they buy every day at work
• And the vacations are paid for with points that are earned ON the credit cards (so it’s “free”, right?)

Notice how the only “actual” funds that they have to support these things, are the payments they are making towards these debts. As in, you use debt to pay for things, and then cash to pay parts of that debt… as opposed to just using cash to pay for the things in the first place. It’s nearly unheard of to simply pay for something with actual money.

You’re probably thinking… “Okay, but they have a job... So it’s impossible for them to be broke, isn’t it?”

Not really, actually. Let’s go with a $1,500 semi-monthly paycheck. At the end of each month, you’ll have $3,000. Not really “broke”, right?

Well, let’s just say you get a lot closer to “broke” when that money gets distributed to your various debt obligations, which are the glue that hold the average person’s life together. Just illustratively…

• $1,300 to your mortgage/condo fees (which are factored into your mortgage)
• $300 to your car loan
• $1,200 (3 x $400) spread across three credit cards that have been run up to the sky buying clothes, gas, parking, meals, and various incidentals. The $400 payment might cover some of this month’s new expenses… but these cards will usually have four or five figure balances from “unexpected” purchases you “had to” make, but “it’s okay”because you “have plenty of room on this card”, and “you’ll start saving money soon and pay it off” just like you said you’d do last year.

Side note: Since you can use credit cards everywhere, the way people think is that the amount of money that you “have” is whatever is in your bank account, plus whatever your credit limit is. So if you have $200 in your bank account and $5,000 of available credit, you “have” $5,200. That ability, combined with the stigma of saying “I don’t have the money” is exactly why even above-average income earners can appear well-to-do by never declining anything based on money, while actually being broke.

Remaining account balance after mortgage/car loan/credit cards: $200

Then you’ve got your utility bills, internet, phone, cable, and other such things… and before you know it, you’re at $0.00!

Observing this behaviour went a very long way in explaining both how everyone I worked with seemed to be living well, but yet they’re still broke despite working full-time jobs.

My conclusion was this… the North American economy is basically a complex weave of credit instruments in which illusionary dollar figures move from one balance sheet to another, and virtually no one has an actual “cash” balance to their name, beyond short-term holdings for servicing various debts.

This mentality isn’t even completely consumer-driven. It goes far deeper than the consumers themselves…

• Shopping online? It almost always requires a credit card. Debit on the internet is a very new thing.
• Travelling? You almost always need a credit card to get a hotel or rent a car.
• Buying a car? Most car dealerships won’t accept a cash payment for advertised prices… because they advertise those prices based on the commission they get from selling you financing, which they assume everyone will need.

That is how deeply-rooted our credit dependence is… you are often REQUIRED to use credit for many types of purchases, even if you have the cash.

Think about how absolutely sick that is… even if you HAVE real money, there are many cases in which you cannot USE it!

So, if I had to simplify my answer to “Why are most people broke?” by keeping it to one sentence, it would be “Because everybody owes somebody.”

• If you don’t owe it to your mortgage, you owe it to your car loan.
• If you don’t owe it to your car loan, you owe it to your credit card.
• If you don’t owe it to your credit card, you owe it to your line of credit that you took out against the equity on your home that you treat as an “asset”, when it’s really just a conduit to getting even more credit.

It never ends. As long as you owe something to somebody, it’s difficult to save up any money to have actual cash on hand. Especially because any money you can save, is better off being put towards your debts. No point earning less than 1% in a savings account when your credit cards are charging you 19.99%, right?

As long as you owe money to somebody, it’s difficult to “have” any money, because at any time that you possess money, it “belongs” somewhere else.

In the simplest sense, this is how being “broke” works. It has absolutely nothing to do with your income or earning power. It has to do with how much of your earnings are payable to your creditors. Which, for a lot of people, is 100%.

Of course, you can “plan” your monthly debt payments and “put aside” money in a savings account. But even if you have $5,000 in savings and still owe $20,000 between your car loan and credit cards… how is that supposed to help anything? Your net worth is still -$15,000! In fact, because you’re keeping that $5,000 in the bank doing nothing and paying interest on the full $20,000, you are becoming even MORE broke, just so you can “feel less broke”.

These problems don’t exist as much in places like Europe, where credit isn’t common, or at all in Islamic countries where most forms of credit are illegal. If you need something in those places, you pay for it with YOUR money. If you do not have enough money for it, you cannot afford it. It’s simple.

By comparison, more than 60% of North Americans can’t come up with $1,000 on short notice, even for a “necessary” expense like a car repair [1]… Because every single dollar that they earn is spoken for before it even reaches their bank account.

THAT is why most North Americans are broke. It’s not because they’re not making money. It’s because…

• Most people will choose a $300 monthly payment instead of having to save up $20,000 cash for a car. Just a matter of discipline.
• Consumer credit is extremely common, and with such easy access to borrowed funds, there isn’t really an excuse to not buy something if you want or need it. Why would you wait four months to save up $100 per month for a $400 purchase, when you can just charge it and pay $100-something per month to pay it off, and repeat the same thought process every time you need to buy something?
• Since so many people do this, there’s a stigma to not being able to afford something like a birthday gift or a weekend trip… since with credit, anyone can “afford” anything. People think there’s something wrong with you if you can’t spend $100 on something you “should” be buying like tickets to a show all your friends are going to.
• Between regular living expenses and debt payments, it’s easy for a $3,000 monthly income paid on the 31st to become $0 by the 1st. But since banks and lenders will make more money as long as you make tiny payments, they’ll be nice and accommodating with car loans that last 96 months, or 3% minimum credit card payments.

In even simpler terms…

• People earn and get paid money (not broke)
• But they want to live as if they have more money than that (seeming less broke)
• So they’ll commit their money to making debt payments indefinitely to cover what they buy to live this way (probably broke)
• Meaning that if they suddenly need $500 cash for something like a new fridge, they have to use credit to buy it (actually broke)

If you’re North American, this probably sounds like you or someone you know. The economy here is almost completely dependent on credit. Which is an easy way to get into debt… and an even easier way to be broke, no matter how much money you earn.

 

[dougless]

I think much of this could apply to the UK.  I seem to recall that over 80% of private car purchase is via some form of credit or lease arrangement.

[GregBowman]

52 minutes ago, dougless said:

I think much of this could apply to the UK.  I seem to recall that over 80% of private car purchase is via some form of credit or lease arrangement.

Just finished this book - https://nypost.com/2018/06/23/why-the-middle-class-cant-afford-life-in-america-anymore/

But actually the next one I am reading is more incisive  I think and chimes with this thread -  Land of the fee

Edited September 28, 2018 by GregBowman

[jimmy2x3]

and a lot of this debt has been paid by increases in house prices. i used to look around and see it everywhere, people earning far less than me buying homes and living better. being self employed i am a credit risk and thus didint get any credit. 

however you notie something about there lifestyle, and that is that every penny is a prisoner, due to the high amounts of debt they have all got there is no friday night pizza or a couple of quid for the ice cream van for the kids. yet outwardly to others there in a nice house with a nice car at the door. yet they actually live very frugal lifes caught in their credit traps. of course they pretend to others its because they really love camping and picnics instead of mcdonalds and the cinema.  i see it all the time

[Odakyu-sen]

It's nicer being debt free (you sleep better at night). 

[Maximus Skepticus]

16 minutes ago, Odakyu-sen said:

It's nicer being debt free (you sleep better at night). 

+1 although not 'having' my own place makes me feel uncomfortable sometimes

Edited September 29, 2018 by Maximus Skepticus

[winkie]

The word is 'stigma'...... judgement, no stigma no judgement, what anyone looks like or acts like or talks like is not always what they actually are like or what they have or have not...... perceptions are deceiving.

Edit to say: You can't fall from a pedestal if not standing on one.?

Edited September 29, 2018 by winkie

[swordy]

1 hour ago, Maximus Skepticus said:

+1 although not 'having' my own place makes me feel uncomfortable sometimes

...but only because you've missed out on the profit. I feel uncomfortable not buying into Natwest and Bitcoin ten years ago.

[winkie]

7 hours ago, GregBowman said:

Just finished this book - https://nypost.com/2018/06/23/why-the-middle-class-cant-afford-life-in-america-anymore/

But actually the next one I am reading is more incisive  I think and chimes with this thread -  Land of the fee

Found this book secondhand: worth reading but hard to find.....ISBN 9780956725301. ?

[anonguest]

6 hours ago, Odakyu-sen said:

It's nicer being debt free (you sleep better at night). 

True, but.....

“There are two types of people in this world, good and bad. The good sleep better, but the bad seem to enjoy the waking hours much more.”

― Woody Allen

[Lord D'arcy Pew]

The availability for credit is unfortunately seen as a persons true worth.

You may happen upon a man that lives in a big house and drives a big car, and by chance compare him with a tramp that sleeps upon a park bench.

If the tramp has a pound in his pocket then he is worth £1. A positive number.

Yet the chap with the outward appearance of wealth may have debts well excessing his assets.  A very large negative number.

Our shallow vain society judges true worth unfairly,  you need only fake wealth to make wealth a reality, when that reality is in its self false.

We live in a world that values lies and deception above the truth. Its failure is imminent.

Edited September 29, 2018 by Lord D'arcy Pew

[winkie]

 

[monkeyman1974]

5 hours ago, Lord D'arcy Pew said:

The availability for credit is unfortunately seen as a persons true worth.

You may happen upon a man that lives in a big house and drives a big car, and by chance compare him with a tramp that sleeps upon a park bench.

If the tramp has a pound in his pocket then he is worth £1. A positive number.

Yet the chap with the outward appearance of wealth may have debts well excessing his assets.  A very large negative number.

Our shallow vain society judges true worth unfairly,  you need only fake wealth to make wealth a reality, when that reality is in its self false.

We live in a world that values lies and deception above the truth. Its failure is imminent.

On that analysis, I'd prefer to be the bloke in debt.

Similar comparator is drawn between those in sub-Saharan Africa (no debt) and developed world. 

[GregBowman]

6 hours ago, winkie said:

 

A lovely video !!

[Roman Roady]

Way back in 1989 I remember a wise old banker (try not to laugh) telling me and the ex that 2a house is only worth what someone will pay for it"...this was when we went to get a mortgage.

How times changed!

This is still true IMPO however with a certain caveat....

The whole housing bubble of the last 20 years has been due to the fact that a house is worth whatever someone can borrow against it.

Sad but true.

[MattW]

I need to read more books...

 

[Odysseus]

Basically a very long winded version of:-

 

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”

[zugzwang]

The rent's too high.

https://en.wikipedia.org/wiki/Rentier_capitalism

[micawber]

 

8 hours ago, Odysseus said:

Basically a very long winded version of:-

 

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”

That's my line!

[scottbeard]

9 hours ago, Odysseus said:

Basically a very long winded version of:-

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”

I like this article, and I think it's a slightly different point.  It's basically saying how buying everything on credit, and reducing everything to a "monthly payment", a person can suddenly find themselves in a position where - as one poster elegantly put it above - as soon as your monthly salary payment arrives you find that "every penny is already a prisoner" of the past purchase debts.

So unlike Mr Micawber's misery - which is where you can't cover your expenditure - this is a different kind of misery, one in which you aren't actually insolvent, where you're earning lots of money, but still feel "broke" because you are a permanent prisoner of your past spending decisions. 

[Saving For a Space Ship]

10 hours ago, zugzwang said:

The rent's too high.

https://en.wikipedia.org/wiki/Rentier_capitalism

It all boils down to one thing ! 

https://www.youtube.com/watch?v=Gg5SwyTvAHw

[Exiled Canadian]

I think that there are actually two different ways in which using credit to accelerate consumption beyond that which your salary can justify makes life miserable and stressful:

 

1. Once "every pound is a prisoner" it is very difficult to get out of this position (without a windfall cash receipt or large increase in income) without a significant bit of "personal austerity".
 

2. Your ability to meet the demands of all your creditors requires you to at least maintain your current level of income.  I can't imagine how stressful it must be to know that one month without pay could bring your whole financial position down like a house of cards.

to quote the Boomtown Rats - "It's a rat trap - and you've been caught"

Edited October 1, 2018 by Exiled Canadian

[No One]

On 28/09/2018 at 23:44, dougless said:

I think much of this could apply to the UK.  I seem to recall that over 80% of private car purchase is via some form of credit or lease arrangement.

pcp and pch they are called

[Riedquat]

On 28/09/2018 at 22:39, Maximus Skepticus said:

North American perspective: The root problem that causes most people to be broke isn’t necessarily “overspending”. That topic has been discussed a billon times over. We eat out too much. We buy too many clothes. We upgrade our phones too often. We go on too many vacations. We get it.

The root problem is WHY we’re able to consume to excess in the first place… and the answer to that is credit. It’s very easy to become broke when the money you spend isn’t yours to begin with… because any money you do come into, you’ll automatically owe to someone.

Those aren't exclusive. All the latter gives is the means by which people do the former.

[Riedquat]

On 29/09/2018 at 23:45, Odysseus said:

Basically a very long winded version of:-

 

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”

I've a lot of time for that, although an important factor is what the annual expenditure needs to be to be reasonably comfortable. There's the can't afford any food - can only afford beans on toast - can afford basic but OK food - can afford a few luxuries - like to eat out a lot scale. You can't really be happy without reaching the third of those, and it's certainly better to be able to go a bit further than that. But there are also those who'll never be happy because they always have their eye on the next point up. They'll borrow to try to get there too.

It's also an awful lot easier to do without some luxuries when you could have them but choose not to rather than when you've got no choice in the matter.

Edited October 1, 2018 by Riedquat