I am sure that all of us have said, at one time or another, that we can’t do anything because we are “broke.” For most of us this is nothing but a colloquial phrase we use when we don’t have money to do something or we need to curtail our spending. However, there are other times when I hear people talking and it comes with greater meaning. For example, Dave Ramsey advises everyone pay off their debts before doing anything else financially because those people might be broke. They have debt and don’t know where there money is going, thus they are broke.
It appears then there are two different extremes when it comes to talking about being “broke.”
At this point you might be asking yourself, who cares about what it means? Why is it important to spend time a blog post on it?
For one, I am fascinated in the language we use when talking about anything. What does it mean to succeed? WHat does it mean to be rich?What does it mean to have “money”? If you think about the English language we use a plethora of words for money. How we define different terms often helps us construct the monetary lives we lead.
Second, I am a scholar of language. I write about the linguistic choices people make, particularly politicians, and the implications for different people. So focusing on this kind of language is something that is interesting to me.
Finally, I really do think asking ourselves this question can help us to understand where we are in our financial lives, where we have been, and where we are going.
So how do we figure out what it means to be broke? Or I guess a better question would be, since this is my blog, how would I define what it means to be broke?
For this latter question let’s use the ROB household as an example. I have mentioned on more than one occasion that my primary financial purpose is to become financially independent. I have already set forth a number and a specific financial independence day.
I also post quarterly debt payoff reports to track my progress in our journey to FI. However, these quarterly debt payoffs do not include Mrs. ROB’s student loan debt. I promised her when I started this blog that I would not include her debts/assets and I plan on continuing that promise.
Finally, I have stated that you shouldn’t take advice from broke people.
So after all that would I consider us broke?
Answer: NO, I wouldn’t.
Here is my rationale for why I don’t think we are broke.
First, Mrs. ROB and I have a positive net worth. That net worth is actually above six figures, even when you factor in our student loan debt (combined it is more than our mortgage). That net worth continues to get better every single month because the stock markets have been gong up, for the most part, for the past 8 years and our debt continues to go down each month. We aren’t increasing our debt burden.
Second, I am able to save quite a bit for retirement or at least compared to other people. I am able to max out my 403b account at work, have another 401a to which I must add money too, and also contribute a bit to my Roth IRA. If I was broke I shouldn’t be doing that. I should reduce my financial contributions and use it more for monthly cash flow.
Third, although we live paycheck to paycheck Mrs. ROB and I make enough money each month to pay our bills and even a little more. I am actually able to set aside a little money into a savings account for some emergencies and/or other household expenses. What I would like to do more is to clamp down our budget even further. I want to be more disciplined than what we have because I want to accelerate financial independence. Moreover, I know that we will have another economic downturn in the not so distant future. That is natural and normal, but to prepare for it I want to have more money in the bank if we need to access it. Along with that, January and June are two of the most difficult months for us financially I want us to get to the point where I am not perpetually worried if we can pay our bills for those months. This past year wasn’t a problem, primarily because of when we received our paychecks, but has been in the past.
Finally, I guess the litmus test that you might use is could we handle a financial emergency? Unfortunately, most Americans would have trouble covering a $400 emergency. Mrs. ROB and I have enough in savings to definitely cover that $400 emergency. Could we handle a $20,000 emergency? Well that is different. Then we might have to tap a HELOC for that emergency. We have enough saved for the “4 Walls” emergency fund, but I don’t think we could handle things into the tens of thousands of dollars.
So then what is the ultimate verdict? How do we define what it means to be “broke” beyond the colloquial usage.
For me it would be:
- Having a negative net worth would probably constitute being broke.
- Not being able to pay your bills monthly would certainly be someone who is broke.
- Not being able to handle a basic emergency like $400 probably means that you are broke.
Ultimately, however, being broke doesn’t have to be a life sentence it can be a temporary state in your life. I know I have been broke in the past. I have used credit cards to pay other bills. I have, on many occasions, not been able to handle a $400 emergency (see my greatest mistakes for some doozy decisions (also see the stupid tax post). There is a difference between being broke and being poor. To me being poor is also a state that you are in within your financial lives, but it seems to be more of a long-term state, not a short-term state.
That may be semantics, but I do think there is a difference.
So after all of this discussion what do you think it means to be broke? How do you judge that particular state of mind?
And the more important question we have to discuss is how can we escape a permanent sense of being broke? What methods will it take to escape it?
Tell me what you think in the comments below. And if you are interested in reading about how to escape being broke check out the “Other Good Stuff” page for some of my favorite personal finance books.