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Why Don't People Manage Debt Better?

blogs.scientificamerican.com

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Re: Why Don't People Manage Debt Better?

#81

Post by ska »

forgetsusername wrote: post #26
jonknee wrote: post #23

Earlier quoted context omitted.

> 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. Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks which is essentially an easy way to engineer higher earni…

> Businesses use debt in all sorts of ways, they certainly don't limit it to buying assets. A common use recently is to fund share buybacks You don't think buying a stake in a successful company (in this case one that happens to be your own) is buying an asset? The mechanations are slightly different, but you're still buying shares. An effect is rising EPS (due to retired shares), but that isn't the purpose.

   but that isn't the purpose
Sometimes that is precisely the purpose.

Re: Why Don't People Manage Debt Better?

#82

Post by nordsieck »

clarkevans wrote: post #2

When 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…

Also, typically debt accounts have minimum payments. One point in favor of the Snowball Method[1] is that it typically increases your working capital at the expense of greater total payments. For people with few assets, this can help insulate them from emergencies.

[1] https://en.wikipedia.org/wiki/Debt-snowball_method

Re: Why Don't People Manage Debt Better?

#83

Post by nordsieck »

infinite8s wrote: post #76
yummyfajitas wrote: post #57

Earlier quoted context omitted.

Good catch, I wildly oversimplified. That's what I get for doing arithmetic before coffee. Key idea is that since utility is concave, smoothing it out is a win. Now just trade off the gains from smoothing against the losses from financing, and you are golden.

Why is utility modeled concavely?

https://tgmstat.wordpress.com/2014/01/22/declining-marginal-...

Re: Why Don't People Manage Debt Better?

#84

Post by TJSomething »

infinite8s wrote: post #76
yummyfajitas wrote: post #57

Earlier quoted context omitted.

Good catch, I wildly oversimplified. That's what I get for doing arithmetic before coffee. Key idea is that since utility is concave, smoothing it out is a win. Now just trade off the gains from smoothing against the losses from financing, and you are golden.

Why is utility modeled concavely?

Due to the Law of diminishing marginal utility.

Re: Why Don't People Manage Debt Better?

#85

Post by debtsnowball »

kdamken wrote: post #42

Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position? So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and…

Consumerism and marketing are powerful things. I know all about the problems debt creates, how it can get out of hand. I've read Dave Ramsey's books and listen to his podcasts. I am very well versed in what it takes to be financially successful.

... But it only takes one moment of weakness to see a new car, fall in love with it, be convinced your life will be better with it and the next thing you know you've committed to 48 payments.

I know that paying an exorbitant amount for a smartphone is not a wise financial move. But here I am anxiously awaiting the release of the Galaxy S7 to see how great it is. I'm sure I'll want one. I'm sure I'll tell myself my life will be better if I can take beautiful photos with the camera and it will be worth the cost in that regard. (My current phone's camera sucks)

Re: Why Don't People Manage Debt Better?

#86

Post by maxsilver »

zrail wrote: post #48
gtk40 wrote: post #35

Earlier quoted context omitted.

I don't even think of myself as using debt. I see credit cards as a way to get an extra $50-70 a month in rewards[1] and increase my credit score. I have never paid a cent of interest. [1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for u…

Interesting. What card is this?

American Express has a card "Blue Cash Preferred". You get 6% back on Groceries (up to $6k/yr), 3% back on gas, and the card has a $75 annual fee.

If you only use the card to spend $100/week on Groceries, you get $312 in cashback rewards. Subtract the $75/yr fee, and Amex paid you $237 to use their card that year.

(Amex isn't the only card like this -- there's lots from MasterCard and Visa as well. This card in particular just happens to be one of the rewards cards that I know the details of.)

Re: Why Don't People Manage Debt Better?

#87

Post by yummyfajitas »

infinite8s wrote: post #76
yummyfajitas wrote: post #57

Earlier quoted context omitted.

Good catch, I wildly oversimplified. That's what I get for doing arithmetic before coffee. Key idea is that since utility is concave, smoothing it out is a win. Now just trade off the gains from smoothing against the losses from financing, and you are golden.

Why is utility modeled concavely?

My utility from eating (in one time period) $800 worth of food is less than 2 x utility of eating $400 worth of food. Doubling my consumption doesn't double my happiness.

Concavity is a way of formalizing this intuition; it means, roughly speaking, that f(2x) Econ uses log(x) as a simple model, but the same idea would apply to any convex function albeit with different arithmetic.

Re: Why Don't People Manage Debt Better?

#88

Post by JustSomeNobody »

He how goes out owing the most wins. He's lived like a king and didn't pay for anything.

But seriously, every article I read on personal debt talks about how to get out of it after the fact. I think we need to do a better job of educating people on this subject BEFORE they get into debt.

Re: Why Don't People Manage Debt Better?

#89

Post by rsync »

hcmag wrote: post #38

Could someone well-versed with bankruptcy please explain the pros/cons of going that route? I have heard that credit card debt is essentially free money because filing for bankruptcy will wipe out all the debt. If you already own a home/car, and have no intention of getting a loan in the next 10 years, what is wrong with this strategy?

"If you already own a home/car, and have no intention of getting a loan in the next 10 years, what is wrong with this strategy?"

It's dishonest and is the work of a scoundrel.

Re: Why Don't People Manage Debt Better?

#90

Post by kdamken »

RUG3Y wrote: post #65
kdamken wrote: post #42

Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position? So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and…

Mr. Money Mustache is pretty awesome but the guy had a very highly paid job that allowed him to retire early. Some of us are fiscally responsible and don't make all that much cash - I find that a lot of his advice is fairly useless unless you have some money to begin with.

I'd disagree on that last part - I'd say that if you're not making a crazy salary his advice is even more valuable. Most people spend an obscene amount of money on things they don't actually really need. Some classic examples:

A $3 coffee everyday adds up to about $90 a month, when you can usually just drink free coffee from your office or buy some cheap pre-ground stuff.

Spending $5-6 for lunch each day at work can easily add up to another $100+ dollars a month, when you could just make a bunch of peanut butter and jelly sandwiches and spend a fraction of that.

So there's close to $200 a month, right there.

If you're trying to retire early, it's definitely way tougher on a lower salary. But improving your spending habits is an important skill for everyone, especially for those making less.

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