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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?

#101

Post by charlesdm »

kdamken wrote: post #90
RUG3Y wrote: post #65

Earlier quoted context omitted.

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…

This is the best way to get depressed. It's always significantly easier to negotiate a $1k raise than it is to reduce your spending on basic stuff by $1k.

Focus on earning more, not saving (on useless expenses).

Re: Why Don't People Manage Debt Better?

#102

Post by pessimizer »

douche wrote: post #61
imgabe wrote: post #17

Anyone 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…

It's pretty numb to use debit cards as opposed to credit cards, for various reasons. A.) You can't over-draw a credit card, and get hit with overage fees or bounced-check insurance, or all the other things banks do - particularly with the slightly nefarious way they often choose to order your transactions when they close their books. Particularly troublesome with businesses that put in a hold on your card, then charg…

A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances.

B) Don't live check to check. Keep track of your own finances.

C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received.

D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.

Re: Why Don't People Manage Debt Better?

#103

Post by carlob »

yummyfajitas wrote: post #64
carlob wrote: post #50

Earlier quoted context omitted.

Correct, but a bit misleading. You're taking a person that has income that increases tenfold over a year. For most people the rate of increase of income is smaller than credit card interest rates, and you can really justify high interest rates when you assume that you're going to make a lot of money next year, but then again Steinbeck said that most Americans think of themselves as temporarily embarrassed millionaire…

Probably "year" is the wrong time period, but lots of people have very volatile income. A consultant can easily have 10x variance in income from month to month. A musician or actor might have 0 gigs one month and 5 gigs the next. Shortening the time period just lowers the financing costs.

True, but still how many broke musicians and actors should be considering this month's zero income a fluctuation and get into credit card debt and how many should just be more conservative with their spending?

Re: Why Don't People Manage Debt Better?

#104

Post by kdamken »

njharman wrote: post #96
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…

> why do people buy things they can't afford and most often don't need Advertising. Most people are afraid?/too proud? to admit or even consider they may not be 100% rational or 100% in control of the own actions despite numerous studies showing you are not Advertising, very obviously, manipulates people into making choices. Most of which are not in their interest. The original article even has an example; in the thr…

That's a fair point. It's sad that most people don't "wake up" from it and learn to ignore and disregard them. Those documentaries look interesting, thanks for the link.

Re: Why Don't People Manage Debt Better?

#105

Post by ac29 »

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?

Because, at least in the US, bankruptcy laws have changed such that it is difficult or impossible to get a "clean slate" debt wipe. If the courts think you can afford to pay your debts (you had enough money to buy a house and a car outright in your scenario), they may restructure your debts to make payments more manageable, but not eliminate them.

Also as mentioned below, it ruins your credit and might be construed as fraud.

Re: Why Don't People Manage Debt Better?

#106

Post by maxsilver »

infinite8s wrote: post #98
maxsilver wrote: post #86

Earlier quoted context omitted.

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 parti…

I don't understand these reward schemes. Surely they are being funded by higher merchant fees, which means merchants charge more, which just means that the rewards are a transfer scheme between people who pay by cash/unrewarded cards and those with rewards cards.

There's a lot of truth to that (cash paying customers pay the same, even though the cost to serve them is less).

But unrewarded cards aren't really any different. Most merchants still have to pay the same high fee for them. Since the bank/processor is going to take the maximum amount of money they can regardless, and most merchants will have to pay that full fee regardless, you might as well use a rewards card over an unrewarded one.

Re: Why Don't People Manage Debt Better?

#107

Post by mafribe »

yummyfajitas wrote: post #87
infinite8s wrote: post #76

Earlier quoted context omitted.

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.

Why are you sure that for you, $800 worth of food is less than 2 x utility of eating $400 worth of food? How would you convince somebody who thinks you are wrong (e.g. deluding yourself, or not telling the truth)?

Re: Why Don't People Manage Debt Better?

#108

Post by jerf »

DannoHung wrote: post #14
pilom wrote: post #8

This 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.

In addition to the other fine replies, let me point out that "humans are irrational" is the negation of a very small point. It allows us to think we know something, when in fact what that statement tells us is only that we don't know something about human behavior. It is logically much like saying "Humans are not 7-year-old bulldogs named Fido living in New Jersey on the second floor of a shared house." It's a true statement, but carries virtually no information because it only identifies an incredible small, precise part of the possibility space and negates it; it does not, on it's own, tell you much about what humans are.

Humans are not merely "irrational", they positively behave and think in very specific ways. No human is immune to this. It is, therefore, perfectly rational to discuss rational ways of managing the specific human behaviors that lead to irrational behaviors.

This is also while ritual denunciations of "homo economicus" are really quite sophomoric... the nonexistence of rational economic actors does not mean that you can simply model humans in whatever way you please to make your preconceived notions work. It means that you've got to go learn what humans actually do, which is going to be very challenging, and take that into account, which is almost certainly going to shock anyone who tries it. It means the problem is suddenly immensely harder, not easier.

Re: Why Don't People Manage Debt Better?

#109

Post by dagw »

infinite8s wrote: post #98
maxsilver wrote: post #86

Earlier quoted context omitted.

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 parti…

I don't understand these reward schemes. Surely they are being funded by higher merchant fees, which means merchants charge more, which just means that the rewards are a transfer scheme between people who pay by cash/unrewarded cards and those with rewards cards.

They're mostly being funded by the people who don't pay off their balance in full every month. Accidentally miss one or two payments and all of a sudden all your 'profits' from using the card have been wiped out.

Re: Why Don't People Manage Debt Better?

#110

Post by kdamken »

charlesdm wrote: post #101
kdamken wrote: post #90

Earlier quoted context omitted.

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…

This is the best way to get depressed. It's always significantly easier to negotiate a $1k raise than it is to reduce your spending on basic stuff by $1k. Focus on earning more, not saving (on useless expenses).

I like buying stuff as much as the next guy, but if not buying things you don't need would make you depressed, you probably have deeper issues that need addressing.
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