There's a huge difference between being first world poor, and third world poor.
Just my experience, but my first world poor friends, without exception are all bad with money. They have little understanding of how money actually works, have terrible spending habits, are incredibly risk averse, and carry a "money is evil" mindset.
If it's possible for you to live within your means (edit: putting aside illness, addictions, felonies etc), you can build wealth at a good rate in the first world. You may never be a multi-millionaire, but you can be financially secure and stable.
>my first world poor friends...are all bad with money
This is a well documented phenomenon.[0][1] The state of being in poverty has a significant effect on your cognitive processes evaluating risk and reward and future planning. For people who grew up in poverty, those programmed biases can be extremely challenging to overcome and limit their upward mobility. There's also the aphorism that it's "expensive to be poor." The boots metaphor and all that.
As to building wealth at a good rate, doing that from a state of relative stability vs a state of relative poverty are two entirely different scopes. "Escaping poverty requires almost 20 years with nothing going wrong." When 5 years of savings can be wiped out by a car repair that means you can't get to your job, you can lose 5 years of progress in one bad event.[2] The problem with that statement is whether it "is possible to live within your means." It can be exceptionally challenging and complicated to live within your means while impoverished but still move upwards and respond to emergencies and disasters. And it's doubly much to ask that kind of complex planning from someone affected by the deleterious cognitive effects of poverty documented above.
That's interesting because its also well documented that "Poverty decreases IQ" studies are contentious and not well replicated.
> Mani et al. (Research Articles, 30 August, p. 976) presented laboratory experiments that aimed to show that poverty-related worries impede cognitive functioning. A reanalysis without dichotomization of income fails to corroborate their findings and highlights spurious interactions between income and experimental manipulation due to ceiling effects caused by short and easy tests. This suggests that effects of financial worries are not limited to the poor.
One big problem is that we in general do not teach good money management in schools. Impoverished kids could at least be exposed to the principles of sound financial practices from K-12. What they actually get is maybe a few weeks of "personal finance" as a unit in a High School social studies or economics class. Too little, and too late.
All kinds of ways to do this. Younger kids could be shown how regular investment compounds over time using games that pay out the reward at the end of the school year. Older kids can do mock investments in mutual funds, etc.
> If it's possible for you to live within your means, you can build wealth at a good rate in the first world.
There are a significant number of exceptions to this idea. If you dig a deep enough hole (drug problems, felonies, etc) it's hard to just keep a roof over your head.
And sure, "it's their fault", but for a lot of people the die was cast when they were very young.
(Update: I should clarify that this may be a U.S. problem vs a first world problem. The safety net here is abysmal, speaking as someone who has spent way too much time and money helping a friend manage.)
Apologies, I wasn't clear. The "If it's possible for you to live within your means" qualifier was for these sorts of things.
Depending on their severity, addictions, felonies, learning difficulties and health problems (and many other things) could all be legitimate limiters on wealth building.
>> If it's possible for you to live within your means, you can build wealth at a good rate in the first world.
That's true if you're well insured, never become disabled, can find & maintain regular employment that pays a living wage, have access to a reasonable cost of living, and are savvy enough to figure all that out.
Aren't about half of US personal bankruptcies (or were, before Obamacare) because of medical debt? It might be just me, but I was under the impression that having negative net worth in the US has a lot to do with which cards you're dealt in life.
The correct stat is "50% of all bankruptcies include medical debt". That doesn't mean the medical debt caused the bankruptcy. It could be a $10 co-pay they didn't pay, but the $50,000 in credit card debt that sank them.
Keep in mind, health problems are actually a major cause of bankruptcy in countries with universal coverage like Canada as well. It's nice when your healthcare is paid for, but if you can't work, bankruptcy is a major problem as well.
I agree... assuming no health/personal catastrophes for you or your family, stable employment, and good training in financial planning. Those are some big assumptions.
Not really, the vast majority of those living in first world nations don't have catastrophic events that ruin them financially.
Also, you don't need 'good training in financial planning', you just need the same amount of common sense my grandparents had - spend less than you earn, and set something aside for a rainy day.
I think people are using different definitions of poor here. The article references NET WORTH not INCOME e.g. a doctor earning $200k a year but with $200k of medical debt is "poor."
over 50% of households make >$50k a year in the U.S. but many of them have very little net worth...some of them are unlucky, but many of them make decisions that keep them with very little money in their pocket...
Honestly we should be looking at consumption rather than income. Of the ten poorest communities in the US by income half are college towns. Most college students have low incomes but I don't think it's right to consider them poor either given that this is generally a temporary state and they're frequently living better than their age-mates who aren't are working full time instead of attending college and thus have higher incomes.
“Of all the preposterous assumptions of humanity over humanity, nothing exceeds most of the criticisms made on the habits of the poor by the well-housed, well-warmed, and well-fed.”
I'm confused what you mean here - isn't a degree of risk aversion good? I feel like "most people" are incredibly not risk averse, in that they recognize that they have little savings to no savings, emergency funds and etc but still behave like they are not at risk.
I however, keep a 4-6mo fully liquid because I'm terrified at the thought of only having 1mo in liquid. Tbh, I'd love to have 12mo, but anything beyond 4-6 and it starts feeling obscene not investing the extra.
You are assuming they are poor because of choice and not because of systemic abject poverty. Yeah its easy to save 60000 dollars a year if you make 200000 p/a but the likelihood of someone in a lower-class robo job saving significant amounts of money is very low.
A book that changed my life, Your Money or Your Life, by Vicky Robin and Joe Dominguez, was recently re-published with some updated info. If you're the reading type, you should pick up a copy at your library. It guides you through making peace with your past, figuring out your real income and spending, tracking your savings/spending every month, thinking about expenses in terms of hours of your life, etc.
If you get an older copy, just don't take the investment advise too seriously—it's pretty out-of-date. Everything else is gold.
A lot of it is self control and that doesn't necessarily mean living with the least amount of money possible. It just means understanding how much you make and how much you can afford to spend.
The first step is to track your incoming / outgoing financials.
Just like programming, in order to fix the problem you need to understand what the problem is and tracking your $ for a few months will show you exactly what's going wrong.
There are plenty of resources available. The personal finance subreddit is a good place to start. If you are looking more for the wealth building side of personal finance I recommend Rich Dad, Poor Dad or Dave Ramsey to start changing your ideas about money.
research purchases extensively, comparisok shop, buy used, learn to sew and solder, cook plant-based food, exercise outdoors, value down time and low cost entertainment like board games, reading, drawing and making music.
But does this also include negative wealth? Especially in the US, it seems to me that many people have a lot of debt – staring from credit card debt to a too expensive car lease (and a new one ever 3 years) to the house they have payments on for ~50 years? This way, it seems to me that a lot of people (especially younger ones) have a wealth of ~-10,000€.
Debt is “bad” when used for depreciating assets (cars, credit cards). Debt is “good” when used as leverage on appreciating assets (real estate) or working assets (tools, business vehicles, servers, or anything else being used to generate cash flow).
If I have an interest only loan on something like a taxi medallions (thanks Planet Money for the example!), I generate cash flow with that asset, and can walk away from the debt at any time through bankruptcy of the owning entity, that’s still positive wealth (cash flow).
The less capital you need to obtain access to greater amounts of cash flow, the better the cash on cash return/investment quality.
The probably count mortgages and student loans as negative wealth, and they probably count houses as positive wealth, but they probably don't count degrees as positive wealth even though they should.
You have to define "wealth" if you want a worthwhile answer. After all, debt is a component of a person's assets.
If you remember your accounting courses: assets are equal to the sum of all liabilities and equity. Meaning mortgage debt and home equity combine to form your total home assets. A person may have $1m in assets and $900k in liabilities. Or a person could have $200k in assets but $50k in liabilities. Which person is more "wealthy".
I suppose its a matter of opinion because, after all, we haven't defined a goal. Is a low debt to equity ratio desirable? Depends on what you're trying to accomplish. Is high cash flow desirable? As an end state, yes that's desirable but what if that end state requires a large amount of debt to achieve?
Unfortunately the link from the article to the original report seems to be broken.
The standard simple calculation for net worth is assets minus debts, so credit card debt, mortgages, etc. would be negative.
But even though the mortgage is negative, the value of the home would be positive, and the net difference between the value of the home and the debt owed on the mortgage could very well be a positive component of net worth.
Yeah but, who's happier? That's not easy to answer btw. I've read studies that show evidence for both:
-Money brings you happiness (up to some asymptote most never reach)
-Poor (by western standards) rural tribes or hunter-gatherers are very happy.
I think it's illustrative to compare assets across the world but perhaps a more normalized metric would be overall "happiness", whatever that means (no its not easy to define).
My own western-biased experience tells me it's a bit of both. Money does in fact bring freedom of time which can bring happiness, but I've met some extremely happy people living on peanuts, eating very healthy and living on islands off the coast of Japan.
It would be completely consistent for more money => more happiness for each individual person, but for differences in happiness between people to be dominated by non-monetary factors (personality, relationships, local culture, etc.). The problem is that you probably can't make that hunter-gatherer much richer without completely changing the culture they live in.
Happiness isn't a useful metric by itself. Happiness needs to be stable, stability requires power, and power requires relative wealth. In the long run inequality undermines happiness, even if you've met some happy poor people.
Look at the native American population. They were happy until the weren't: when a culture with greater financial power wanted what they had and they didn't have the power to stop it.
Or look at Somali pirates: happy fisherman. Until foreign powers dump waste in their fishing waters for decades, then they lose their economy and have to arm themselves to defend their waters. No more happy. Because they couldn't fund a proper navy.
The point being -- know the difference between weather and climate.
> If not, I don't see what use that number could be.
There is still value in the comparison. Products like mobile phones are going to have similar prices around the globe. Also, it affects the capability to travel.
With my European salary, I can travel anywhere in the world. Norway is more expensive than Turkey, but I can travel to both.
We had a team member for a secondment that came from a country with lower salaries. Our company had a policy where you pay first and then you get refunded. He needed to get all expenses pre-paid because of his full salary not being enough to pay for the expenses.
If you can buy a house in your country for 2,000 dollars. I can also buy a house in your country at that price. Probably I can buy a few of them once I have my basic needs covered in my own country.
So, there are more interesting data points than purchasing power in dollars. But it is relevant when we talk about wealth distribution.
I think your privilege may be showing. Estimates are that there's around 3.6 billion airline passengers a year. That's not unique or international passengers, that's all passengers. When you factor in that most passengers fly several times a year, and most flights are domestic, that means international travelers are a privileged minority. Employees of international companies usually work for the local branch of said company as well, and are paid relative to local salaries not relative to all the companies salaries.
>Products like mobile phones are going to have similar prices around the globe.
This is a false assumption, and why controlling for purchasing power is important. Even expensive electronics don't have the same base price everywhere and local costs can add a significant amount. The overwhelming majority of consumer purchases cannot take advantage of international travel to countries with lower costs and better exchange rates. Even when they can, duties may apply when trying to bring things back. If it was so easy everyone would do it and the laws would have to be rewritten to prevent it.
>If you can buy a house in your country for 2,000 dollars. I can also buy a house in your country at that price.
This is also a false assumption, many countries have laws limiting foreign ownership and unused real estate, and getting credit for a home purchase can be even harder. The vast majority of homes are the primary residence of the people who own them, having a cheap second home in elsewhere does nothing for them
> Products like mobile phones are going to have similar prices around the globe
On the other hand, consider how much people pay in America for things which are not globally-transportable, such as housing, or services which are ultimately based on the labor rates of the people around them, like child care.
Between locations there can be definite asymmetries in the balance between goods, labor, and rents.
Yes, I agree that the number sounds great to me. People forget that 70% of the world's population lives on less than $10/day. When you're making $100k+ at your fancy first world tech job maybe $2300 sounds terrible. But when $2300 is 230 days pay, it's amazing. And that number has got to be really high from a historical standpoint, since historically there was really only royalty and abject poverty.
It really isn't all that awesome, because that isn't very much net worth at all. At a minimum, you'd want everyone's net worth to be at least the average value of a car, I'd think.
70% of the world's population lives on less than $10/day. And that is a significant improvement over most of history. If it's really half of the world that has $2300 that sounds very promising to me. I guess "awesome vs not awesome" really amounts to "compared to what?" Compared to the fantasy in my head of how life could be, it's terrible. Compared to real world history, it sounds pretty good.
Young people tend to have less assets than old people. Graduate from college with the median debt (~30K) and now you have net negative worth for a while. But this does not mean you're poor, and it certainly correlates with much higher net worth when older.
Buy a car, which now has immediately lost value (in general), and you may have negative net worth for some time. But this is not bad, nor is it long term poor.
As such, I don't think wanting everyone's net worth to be the average value of a car is realistic. Maybe averaged over a lifetime, or some such non-time-static metric would be better.
Not really. Obviously money spends differently in different places, but the sum of EVERYTHING that someone owns being less valuable than my computer, cell phone and the cash in my wallet is very bad.
Never mind the idea that there's still an extreme minority of the population in possession of an obscene ratio of the world's wealth is "awesome" in the sense that it "inspires awe that our society has continued to allow this to happen" but that doesn't mean it's good.
But isn't total wealth relative to the economy one lives in? I'm thinking of Steven Pinker and his latest book "Enlightenment Now", where he discusses some staggering stats about world poverty that are really worth considering. Of course things can definitely be much better. But it seems we actually have been making tremendous progress along this line, so the article's negative connotations may be a bit misplaced.
I did a lot of manual excel work in sorting and filtering the Credit Suisse Global Wealth Report after I received it.
An important thing to know here is that this is net wealth, not gross wealth. IF you have a $500,000 house and a $400,000 mortgage and nothing in the bank and no student loans and so on, you have $100,000 in net assets.
This is why 33% of Americans and 90% of Russians have less than $10,000 in assets. Massively, massively in debt, or massively, massively income deficient relative to someone from New Zealand or Switzerland.
This article is confusing to me because it conflates two things I tend to keep separate in my head - the changing income inequality within one country, and the income inequality of the entire world, mixed together.
Within a nation you can measure and track inequality with something like the GINI coefficient, and for nations like the US, inequality has worsened over time.
Within the world, we've seen massive improvements over time (at least that was my impression reading Hans Rosling) and it seems rather inexorable that globalization will make it improve even more over time.
I'm guessing the problem there is like how "privilege can make greater equality feel like oppression" - if the levels continue to normalize over time, then the richer countries will get (relatively) poorer. But if the richer countries have higher inequality, then that burden will be mostly felt by the richer countries' poor.
Yeah the pace of change lately has me mentally filtering out and avoiding any articles / posts / news / documentaries older than about 6 months at this point.
What I’ve learned from many people is that land is a valuable asset to have. Land is naturally scarce with a fixed supply, so it is a decent vehicle for storing wealth.
Would be cool if you could transfer land titles via blockchain, then you don’t need a middleman. If you can provide tiny lots to purchase for people who don’t traditionally invest in land, it could potentially be a great way to help those who are in poverty build a bit of wealth.
Readit News
Just my experience, but my first world poor friends, without exception are all bad with money. They have little understanding of how money actually works, have terrible spending habits, are incredibly risk averse, and carry a "money is evil" mindset.
If it's possible for you to live within your means (edit: putting aside illness, addictions, felonies etc), you can build wealth at a good rate in the first world. You may never be a multi-millionaire, but you can be financially secure and stable.
This is a well documented phenomenon.[0][1] The state of being in poverty has a significant effect on your cognitive processes evaluating risk and reward and future planning. For people who grew up in poverty, those programmed biases can be extremely challenging to overcome and limit their upward mobility. There's also the aphorism that it's "expensive to be poor." The boots metaphor and all that.
As to building wealth at a good rate, doing that from a state of relative stability vs a state of relative poverty are two entirely different scopes. "Escaping poverty requires almost 20 years with nothing going wrong." When 5 years of savings can be wiped out by a car repair that means you can't get to your job, you can lose 5 years of progress in one bad event.[2] The problem with that statement is whether it "is possible to live within your means." It can be exceptionally challenging and complicated to live within your means while impoverished but still move upwards and respond to emergencies and disasters. And it's doubly much to ask that kind of complex planning from someone affected by the deleterious cognitive effects of poverty documented above.
[0]http://behavioralscientist.org/can-neuroscientists-help-us-u... [1]https://blogs.scientificamerican.com/sa-visual/this-is-your-... [1]https://www.theatlantic.com/business/archive/2017/04/economi...
> Mani et al. (Research Articles, 30 August, p. 976) presented laboratory experiments that aimed to show that poverty-related worries impede cognitive functioning. A reanalysis without dichotomization of income fails to corroborate their findings and highlights spurious interactions between income and experimental manipulation due to ceiling effects caused by short and easy tests. This suggests that effects of financial worries are not limited to the poor.
Comment on "Poverty Impedes Cognitive Function" (PDF Download Available). Available from: https://www.researchgate.net/publication/259207757_Comment_o...
All kinds of ways to do this. Younger kids could be shown how regular investment compounds over time using games that pay out the reward at the end of the school year. Older kids can do mock investments in mutual funds, etc.
Deleted Comment
There are a significant number of exceptions to this idea. If you dig a deep enough hole (drug problems, felonies, etc) it's hard to just keep a roof over your head.
And sure, "it's their fault", but for a lot of people the die was cast when they were very young.
(Update: I should clarify that this may be a U.S. problem vs a first world problem. The safety net here is abysmal, speaking as someone who has spent way too much time and money helping a friend manage.)
Depending on their severity, addictions, felonies, learning difficulties and health problems (and many other things) could all be legitimate limiters on wealth building.
That's true if you're well insured, never become disabled, can find & maintain regular employment that pays a living wage, have access to a reasonable cost of living, and are savvy enough to figure all that out.
Keep in mind, health problems are actually a major cause of bankruptcy in countries with universal coverage like Canada as well. It's nice when your healthcare is paid for, but if you can't work, bankruptcy is a major problem as well.
OP is referring to those.
Not really, the vast majority of those living in first world nations don't have catastrophic events that ruin them financially.
Also, you don't need 'good training in financial planning', you just need the same amount of common sense my grandparents had - spend less than you earn, and set something aside for a rainy day.
over 50% of households make >$50k a year in the U.S. but many of them have very little net worth...some of them are unlucky, but many of them make decisions that keep them with very little money in their pocket...
― Herman Melville
I'm confused what you mean here - isn't a degree of risk aversion good? I feel like "most people" are incredibly not risk averse, in that they recognize that they have little savings to no savings, emergency funds and etc but still behave like they are not at risk.
I however, keep a 4-6mo fully liquid because I'm terrified at the thought of only having 1mo in liquid. Tbh, I'd love to have 12mo, but anything beyond 4-6 and it starts feeling obscene not investing the extra.
If you get an older copy, just don't take the investment advise too seriously—it's pretty out-of-date. Everything else is gold.
The first step is to track your incoming / outgoing financials.
Just like programming, in order to fix the problem you need to understand what the problem is and tracking your $ for a few months will show you exactly what's going wrong.
https://reddit.com/r/personalfinance
True.
"but my first world poor friends, without exception are all bad with money." ROTFL. What about your third world friend? This may give you an idea.
Read this: https://news.ycombinator.com/item?id=17218250
Let that sink in a while.
That would include vehicles, houses, clothes, everything.
I am musing on this problem from my air conditioned office at work. We truly have first world problems.
If I have an interest only loan on something like a taxi medallions (thanks Planet Money for the example!), I generate cash flow with that asset, and can walk away from the debt at any time through bankruptcy of the owning entity, that’s still positive wealth (cash flow).
The less capital you need to obtain access to greater amounts of cash flow, the better the cash on cash return/investment quality.
If you remember your accounting courses: assets are equal to the sum of all liabilities and equity. Meaning mortgage debt and home equity combine to form your total home assets. A person may have $1m in assets and $900k in liabilities. Or a person could have $200k in assets but $50k in liabilities. Which person is more "wealthy".
I suppose its a matter of opinion because, after all, we haven't defined a goal. Is a low debt to equity ratio desirable? Depends on what you're trying to accomplish. Is high cash flow desirable? As an end state, yes that's desirable but what if that end state requires a large amount of debt to achieve?
Yeah, but the house itself is most likely worth at least the same as the loan.
The standard simple calculation for net worth is assets minus debts, so credit card debt, mortgages, etc. would be negative.
But even though the mortgage is negative, the value of the home would be positive, and the net difference between the value of the home and the debt owed on the mortgage could very well be a positive component of net worth.
Is that really a thing? Do many people really go beyond the standard 30 year term of their mortgages?
I think it's illustrative to compare assets across the world but perhaps a more normalized metric would be overall "happiness", whatever that means (no its not easy to define).
My own western-biased experience tells me it's a bit of both. Money does in fact bring freedom of time which can bring happiness, but I've met some extremely happy people living on peanuts, eating very healthy and living on islands off the coast of Japan.
Look at the native American population. They were happy until the weren't: when a culture with greater financial power wanted what they had and they didn't have the power to stop it.
Or look at Somali pirates: happy fisherman. Until foreign powers dump waste in their fishing waters for decades, then they lose their economy and have to arm themselves to defend their waters. No more happy. Because they couldn't fund a proper navy.
The point being -- know the difference between weather and climate.
There is still value in the comparison. Products like mobile phones are going to have similar prices around the globe. Also, it affects the capability to travel.
With my European salary, I can travel anywhere in the world. Norway is more expensive than Turkey, but I can travel to both.
We had a team member for a secondment that came from a country with lower salaries. Our company had a policy where you pay first and then you get refunded. He needed to get all expenses pre-paid because of his full salary not being enough to pay for the expenses.
If you can buy a house in your country for 2,000 dollars. I can also buy a house in your country at that price. Probably I can buy a few of them once I have my basic needs covered in my own country.
So, there are more interesting data points than purchasing power in dollars. But it is relevant when we talk about wealth distribution.
>Products like mobile phones are going to have similar prices around the globe.
This is a false assumption, and why controlling for purchasing power is important. Even expensive electronics don't have the same base price everywhere and local costs can add a significant amount. The overwhelming majority of consumer purchases cannot take advantage of international travel to countries with lower costs and better exchange rates. Even when they can, duties may apply when trying to bring things back. If it was so easy everyone would do it and the laws would have to be rewritten to prevent it.
>If you can buy a house in your country for 2,000 dollars. I can also buy a house in your country at that price.
This is also a false assumption, many countries have laws limiting foreign ownership and unused real estate, and getting credit for a home purchase can be even harder. The vast majority of homes are the primary residence of the people who own them, having a cheap second home in elsewhere does nothing for them
On the other hand, consider how much people pay in America for things which are not globally-transportable, such as housing, or services which are ultimately based on the labor rates of the people around them, like child care.
Between locations there can be definite asymmetries in the balance between goods, labor, and rents.
Deleted Comment
70% of the world's population lives on less than $10/day. And that is a significant improvement over most of history. If it's really half of the world that has $2300 that sounds very promising to me. I guess "awesome vs not awesome" really amounts to "compared to what?" Compared to the fantasy in my head of how life could be, it's terrible. Compared to real world history, it sounds pretty good.
Buy a car, which now has immediately lost value (in general), and you may have negative net worth for some time. But this is not bad, nor is it long term poor.
As such, I don't think wanting everyone's net worth to be the average value of a car is realistic. Maybe averaged over a lifetime, or some such non-time-static metric would be better.
That should be a wake up call.
Never mind the idea that there's still an extreme minority of the population in possession of an obscene ratio of the world's wealth is "awesome" in the sense that it "inspires awe that our society has continued to allow this to happen" but that doesn't mean it's good.
An important thing to know here is that this is net wealth, not gross wealth. IF you have a $500,000 house and a $400,000 mortgage and nothing in the bank and no student loans and so on, you have $100,000 in net assets.
This is why 33% of Americans and 90% of Russians have less than $10,000 in assets. Massively, massively in debt, or massively, massively income deficient relative to someone from New Zealand or Switzerland.
Within a nation you can measure and track inequality with something like the GINI coefficient, and for nations like the US, inequality has worsened over time.
Within the world, we've seen massive improvements over time (at least that was my impression reading Hans Rosling) and it seems rather inexorable that globalization will make it improve even more over time.
I'm guessing the problem there is like how "privilege can make greater equality feel like oppression" - if the levels continue to normalize over time, then the richer countries will get (relatively) poorer. But if the richer countries have higher inequality, then that burden will be mostly felt by the richer countries' poor.
Would be cool if you could transfer land titles via blockchain, then you don’t need a middleman. If you can provide tiny lots to purchase for people who don’t traditionally invest in land, it could potentially be a great way to help those who are in poverty build a bit of wealth.