My Nerdy Life

“I’m so broke” : Why Most People are More Broke than People in a 3rd World Country

It seems the term “broke” is thrown around a little too easily sometimes. In our materialistic world it can be easy to become ignorant of what it genuinely means to be “broke.” This amusing video is a good reminder that everything is relative, and many of us still are much better off than others. Yet, most people are more broke than people in a 3rd world country due to immense debt that is carried by many.

I found this video clip both amusing and humbling. Many of us forget that some people must endure genuine hardship to survive, and it makes our complaints seem entirely irrelevant. If you’re reading this post, you probably live a relatively privileged life. You probably have a roof over your head, you probably can afford at least one hot meal a day, you probably have access to clean drinking water, you probably have access to medical care, you can probably afford an internet subscription, and you might even have a car or a house to name a few of the privileges we have. If you have all of these things, it suddenly makes complaining about not having the latest car or gadget seem like downright whining. It’s estimated that ~25% of the world population lives below the poverty line. That’s over 1.75 billion people!

The vast majority of those people are not poor by choice, and work incredibly long and hard days, saving every scrap of food, money, and drop of water. Meanwhile, in developed countries so many people willingly throw themselves into incredible debt and then complain about being in debt! Current figures estimate Canadians have hit a new record of 163% household debt compared to disposable income. And for what? So we can have the latest iPhone, go to fancy restaurants, buy a huge house?

What’s more mind boggling is that the average Canadian income is around $75,000. For a household with a double income, that’s $150,000, which means the average household debt is over $240,000! Now, understandably a good chunk of that is in mortgages, but it’s still a lot of money. In many booming Canadian markets, it can be tricky to find cheaper housing, so there are limits to how much debt you can avoid. However, even with astronomical housing prices, people still think it’s a good idea to go further into debt and buy themselves an expensive car, go on lavish vacations, or just blow money left, right, and center, all the while paying THOUSANDS of dollars a year in mortgage interest. It’s no wonder more and more people are retiring later and later, and don’t even have their mortgages paid off.

Just the other day, I came across an article in the Globe & Mail about a couple that knowingly has fixed expenses of 80% of their income AND has a baby on the way! They bought a ridiculously huge house (3500 sqft) for $750,000! They couldn’t even get approved for the mortgage until they borrowed $80,000 from family. The male spouse’s entire pay-cheque goes towards the mortgage, while the wife’s income covers the other expenses. What’s most alarming is that soon she will be taking maternity leave, which will drastically cut their income. They have already crunched some basic numbers and realized they will be $1000/month short in income to meet their current expenses. Their solution: the wife will work more for a few months to earn some extra commission money and borrow $500/month from a relative’s pension (mind = blown!). Even if they do bring in some extra cash, it will only marginally help them cover expenses and do nothing for paying down their massive debt.

It’s sad/amusing how their “logic” works. They realize they have insane debt, and they don’t have enough income to pay for everything, but they’re “happy” with their decisions to buy the giant house (seriously, who needs 5.5 bathrooms?!?!) and finance 2 cars! Between the mortgage ($660,000), lines of credit ($27,000) and credit cards ($13,500), they have over $700,000 in debt.

The male spouse says he moved here from India with no savings (and likely no other assets), but even after 11 years he STILL has no real savings. In fact, financially, he is probably more poor than when he arrived! The bank effectively owns his house and cars, and the savings he has ($85,000 RRSP, $1250 TFSA) are virtually meaningless when considering the debt he is in. If the housing market crashes and they foreclose on their house, the savings they have may not be enough to cover those costs. Even if they break-even, they would end up in a financial mess and have a very hard time obtaining credit in the future. So really, if he came to Canada with only the shirt on his back, he was still far more wealthy than he currently is. They are in very risky financial situation that leaves a large number of complications if they can’t make ends meet.

At a minimum they should either downsize into something at least half the size of the current house. Or perhaps even better, sell the house (for a decent profit) and rent instead. At this point nearly all of their monthly payments are going towards interest anyway, so there is no real financial benefit to paying a mortgage.

The couple acknowledges they can barely afford to “just survive”, which means they’re living frugally because they have to, not because they want to. This is the critical difference between those seeking financial independence and those just spending money as fast (or faster) as they earn it. What good is a giant house that consumes all of your income, if you can’t afford to buy furniture for it or leave your house and travel or just generally do anything? You end up living frugally, but not on your own terms. Not to mention the stress, complications, and huge risk if something goes wrong.

So next time you have the urge to say “I’m so broke,” consider why you’re broke and if you’re really broke or just missing out on the last gadget. Being broke is highly relative, and for many people, entirely a result of their own choices. If you’re living pay cheque to pay cheque, there’s no time like the present to try and turn things around. You don’t have to save/invest a lot, you just have to start and keep doing it. You have to take a good hard look at your financial situation and adjust things to make sure you can live comfortably within your means, while preparing for the future. Just like you have to rebalance your portfolio periodically, you have to rebalance your life periodically to keep everything in check. It is fully understandable that life throws curveballs at you and your earnings/expenses may have been different the past, and you can’t predict the future. The only thing you can do is control the present, and do your best to make educated predictions about the future based on what you currently know. It also means building in buffers and safeguards to hedge against sudden drops in income or high unforeseen expenses, since it’s not always easy to make large financial changes quickly (e.g., selling/buying a house). So get out there and enjoy life, just be sensible about your finances at the same time!

What strategies do you have for getting out of a financial rut? Did you experience a sudden change in income/expenses? How did you respond?