I used to think that the medieval western distrust of usury was backwards and foolish. Then I read about the roman experience with debt, and now I am far less sure of that.
Is there a book/article you'd recommend?
Why Don't People Manage Debt Better?
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Re: Why Don't People Manage Debt Better?
#12[deleted]
Re: Why Don't People Manage Debt Better?
#13When a late payment is $39.99 and a mark on your credit record, even the smallest, lowest-interest debts become high-risk. Reducing the number of risks (and mental energy managing them) easily outweighs the interest differences. When you have to spend a 1/2 day to refinance a credit-card to an unsecured personal loan, it's not always a clear win: you might not get the loan, or the loan offered might have significantl…
Exactly. Every small balance is a potential disaster in the making, an autopay that inexplicably fails, a teaser interest rate that expires, an unexpected annual fee or recurring charge from a merchant, a supremely annoying hour on the phone, etc. I had the exact same reaction to that part as you did. If you're going to evaluate economic actors for rationality you have to make sure your assumptions of what's rational…
I agree. I find my self doing this often with to do lists. Knock off quick and easy stuff so i feel like im making headway even if its not the most important / impactful. I find that more tempting in personal than work where i am only accountable to My self.
So I can definitely to the "irrational" people in here, it's not so irrational when you think about all the consequences.
Re: Why Don't People Manage Debt Better?
#14This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…
I have literally have people tell me that this is still rationality because it's the rational thing "for them". Like, the weirdest one was a cognitive psychology doctoral student.
I mean, okay, if you can redefine rationality to be completely subjective, then sure, rationality is flargikriggendurf.
Re: Why Don't People Manage Debt Better?
#15This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…
Yes, in his course he explicitly explains this strategy is in deference to human psychology. Even if paying towards highest interest debts is mathematically optimal, better to have a strategy you are likely to stick with, than a theoretically better strategy you are more likely to eventually abandon.
Re: Why Don't People Manage Debt Better?
#16This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…
That does sound rational though, by paying off the small debts you reduce the amount of information you have to comprehend. It may not be ideal financial advice, but it will make the remaining debt easier to manage on an emotional level. You also get the peace of mind that those smaller problems will now not spiral into larger problems. You are free to focus on a resolution to the problem.
Re: Why Don't People Manage Debt Better?
#17Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately.
Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and that is the only sensible strategy. As a consumer, a house may be a sensible use of debt. A reliable car needed to get to work may be a sensible use of debt. A student loan might as well. Carrying a balance on a credit card is almost never an appropriate use of debt.
Unfortunately, marketers have instead convinced consumers that debt is an easy way to buy things they can't afford and pay for it later. This is almost always a losing proposition for the consumer, who invariably ends up paying much more than they would have if they had just saved up and bought the thing in full up front. The way to sensibly manage this is to not fall into the trap in the first place.
Re: Why Don't People Manage Debt Better?
#18I used to think that the medieval western distrust of usury was backwards and foolish. Then I read about the roman experience with debt, and now I am far less sure of that.
Is there a book/article you'd recommend?
Without endorsing all the ideas in them, here are two interesting books:
https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
https://en.wikipedia.org/wiki/The_Law_of_Civilization_and_De...
Re: Why Don't People Manage Debt Better?
#19Anyone at a point where they are making monthly payments on multiple credit cards has already lost the debt game. People don't manage debt better because they have been marketed to and taught to use debt completely inappropriately. Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop. That is how businesses use debt and t…
> Debt should be used to purchase an asset that will appreciate or otherwise provide an income in excess of the interest payment on the debt. Full stop.
In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you count the rewards and the tiny amount of bank interest they may receive.
[1]: http://www.creditcards.com/credit-card-news/credit-card-debt...
Re: Why Don't People Manage Debt Better?
#20This is showing that the Dave Ramsey "debt snowball" (pay off smallest debts first to get a psychological win and some breathing room by having fewer minimum payments) is a more effective way to get people to pay off many separate debts than paying off "highest interest rate first" even if it is less optimal for a rational actor. Just another case of people aren't 100% rational that many people have known for a while…
That does sound rational though, by paying off the small debts you reduce the amount of information you have to comprehend. It may not be ideal financial advice, but it will make the remaining debt easier to manage on an emotional level. You also get the peace of mind that those smaller problems will now not spiral into larger problems. You are free to focus on a resolution to the problem.
We had a few small debts (2 student loans, credit card, car payment) and when a friend explained the debt snowball concept it was definitely the key factor in us paying off our debts faster. For me it felt like I was back in control because I actully had a plan that made sense and seemed actually doable.