Thursday, August 11, 2016

Negative Net Worth

Bloomberg is reporting that 1 in 7 Americans have a negative net worth. The details are bad, but not as bad as the headline implies. Technically, I didn’t have a negative net worth at the time I bought our first house, since I made a 10% down payment. But it took $17,000 cash money to walk in the front door of that house and that was just about all I had. With less than a thousand dollars left in my checking account, I borrowed $3,000 from my father-in-law to have what I then called “working capital,” i.e. money to pay unexpected bills. Today I would call it money for the emergency fund. I paid my father-in-law $2,000 back within six months. When I gave him a second check for $1,000 the poor man looked totally flabbergasted. He told me to forget about the last $1,000. I don’t think he ever expected to see any of that money again. On two different occasions our net worth dropped below $1,000. That is as close to a negative net worth as I ever want to see.

Back during the slow motion train wreck that occurred between 2006 and the end of 2008, a lot of negative net worth was generated by folks who were upside down on their mortgages. During the subprime mortgage boom people borrowed money to buy homes they couldn’t afford. When the crash occurred, many of these unfortunates who lost their jobs were unable to sell their houses because the price had dropped below the amount they still owed. Since they couldn’t come up with the cash necessary to make up the difference, many of them ended up in foreclosure or personal bankruptcy. Even couples who held on to their jobs couldn’t sell their existing homes, leaving them unable to move to another city with better opportunities. Even the best debt, like the mortgage on your primary residence is dangerous.

Today the story is a lot better. Only 19% of the families with negative net worth own their own home. 75% of people who own their own home have a positive net worth. This is the way it ought to be. The equity in your home is a positive part of your net worth.

On credit cards the glass is half full. We are doing better. Fewer people are using credit cards than back in 2008 when 68% of Americans were carrying a credit card. Now that number is down to 61%. The total amount owed on credit cards is down 14% to $730 billion. Bloomberg also reports that delinquency rates are the best they have been since 1999. Still, the only acceptable balance to carry on your credit card is zero.

The really bad news is $1.2 trillion in student debt, a number that continues to grow at $2,726 a second. This is horrendous. Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, that made it nearly impossible to discharge student debt in bankruptcy many of our young people will be saddled with a negative net worth for a decade or more even if they dropped out of college. Of course, just because you managed to graduate from college doesn’t mean that you will be able to find a job that requires a college degree. However, the lender whether the Government or a private institution, doesn’t care if you ever find a job in your field.

The Bloomberg report notes that Americans with negative net worth can be divided into three equal groups. Those with debts of less than $12,500 are typically in credit card trouble. The third with a negative net worth who owe between $12,500 and $47,500 or the third that owe more than $47,500 have debt that is dominated by student loans.

I find it particularly disturbing that the average age of those with negative net worth is 43. After 20 or more years in the workforce, we should be doing better. Compare this with an average age of 51 for those with positive net worth.

It isn’t the end of the world if you are young and find yourself with a negative net worth. Conventional wisdom believes that you can safely carry an amount of student debt equal to your expected first year’s salary. That would be $33,574 for an English major or $93,500 for a petroleum engineer. Under no circumstances would I counsel a student to carry that kind of debt! If it takes longer than four years to get your degree without accruing any student loans you are better off than if you graduate on time with a boat load of debt. Look for scholarships, work study programs, and even consider taking a part time job. The power of compound interest can wreck your life if you don’t understand it.

If you can manage to avoid the student debt trap, pay cash for your cars (it can be done), and absolutely refuse to carry a balance on your credit cards, you are already well on the way to financial freedom. Just pay down your mortgage, keep on saving and investing for long term goals like retirement and your children’s education. Before you know it, I believe you with find that your net worth is a surprisingly large positive number.


  1. I have a novel solution the the student debt problem. Reduce the amount of money a college student can borrow to 20 or 30K. Back in the Stone Age when I went to college I managed to finance most of my four year degree with $10K in student loans. I got a good job in industry for $23K. In the 30 years since I graduated, starting salaries have roughly doubled and college costs have increased 10 fold. I believe the ready availability of student loan money has been a significant driver in the increase in college tuition. Limit the money a student can borrow and watch tuition go down- along with a lot of weeping and gnashing of teeth. What do you think?

  2. I think that would be an improvement.