[nickelcitymario]

Well, thought experiment:

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.

[mwfunk]

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.

[chipotle_coyote]

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.

[amanaplanacanal]

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.

[jeffdavis]

It might be more a matter of accounting.

If you imagine that we are all born in a kind of "debt" where we need a home to live in, then a mortgage is just putting that debt on paper.

[roenxi]

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.

The pleasure of a purchase is not an urgent need.

[perl4ever]

"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?

[roenxi]

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.

[nickelcitymario]

Didn’t notice this conversation take off.

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...

[laughinghan]

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.

[klyrs]

> ...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

[dv_dt]

In that scenario, Marc has far more options and freedom to escape his instantaneous debt state than John does.

[ericd]

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.

[pitaj]

That doesn't seem even remotely true. Taking on large amounts of debt can be risky in many cases. But consider the following case:

- newly purchased $150k home with down-payment of $30k

- $80k savings / investments

- $20k car

- $80k/yr income

This person is not at risk, but they have a net worth of $[30k + 80k +20k - 150k] = $-20k

[bdowling]

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.

[ericd]

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.

[perl4ever]

Debt is just other peoples' money. Being poor isn't just about what you own, it's about what you have access to that you don't own.

[UweSchmidt]

Well said.

[golergka]

Your said nothing about Marc's level of income and if he's able to service his debt easily, so we have no information to pass any judgement here.

[Spooky23]

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.