Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Why Don't People Manage Debt Better?

blogs.scientificamerican.com

Post reply on HN
Print view View original

151–160 of 369 posts

Re: Why Don't People Manage Debt Better?

#151

Post by Outdoorsman »

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…

Well written...

From experience (not mine) too many people consider only one factor when making the majority of purchases with credit:

Can I make the monthly payment...?

If they can they plunge headlong...

Of course just paying the monthly minimum on outstanding credit card balances is disastrous...it's kicking a loaded can down the road...

Re: Why Don't People Manage Debt Better?

#152

Post by imgabe »

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…

Credit cards are great for all the reasons you listed, but there is rarely a good reason to carry a balance and pay the exorbitant interest rates on one.

You can get all those benefits while still paying the balance in full each month and paying 0 interest, even using the time until the next statement as a free 30-45ish day loan.

Re: Why Don't People Manage Debt Better?

#153

Post by nmcfarl »

dragontamer wrote: post #91
bradleyjg wrote: post #58

Earlier quoted context omitted.

I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January…

Now suppose you lose your job in Month 10. The TV-less person will continue not having a TV, and use those funds for emergency day-to-day living expenses as he (or she) gets his life back in order. You can even dip into your credit card credit line for an emergency. But the person who bought the TV on interest is in debt, has less credit to live off of, and only a TV to show for it. ----------- In either case, saving…

There’s a ton of comments on this article that I think are much more nutso. But this is the comment I’m going to reply to, cause people who keep emergency funds are probably open changing their mind via reason.

Touching your 6 months emergency expenses fund is completely against the point. The reason you have this cash is for out of the blue, hit by bus kind of events. You need it when you least expect it

If you take your TV out of it you no longer have it - and this fund becomes nothing more than a general savings account. The kind of thing that drops low right after you buy a TV, or a car, which from my personal experience is exactly when bad things happen. And often bad things require cash on the barrelhead, not just credit cards.

So don’t do this. Either save in a slush fund for your TVº, or put it on a credit card, but don’t take it out of your emergency fund and still call it an emergency fund - 'cause it’s not going to be there for you in an emergency.

º or my personal favorite: a throw away, but named, savings account. (Like CapOne360, née Ing Direct, offers.)

Re: Why Don't People Manage Debt Better?

#154

Post by stvswn »

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…

That's a good way to use debt, but far from the only rational one. The best reason to use debt is for consumption smoothing. For example -- a car breaks down unexpectedly, and now the owner can't make it to work. They won't get paid if they don't go. "Save up for a repair" doesn't work. This is perfectly legitimate reason to spend now, pay later. It's the canonical reason to use credit. The asset they buy -- a new alternator, or whatever -- isn't going to appreciate. The interest they pay is simply to pay for the service of having money now instead of later. That doesn't mean it's foolish.

Re: Why Don't People Manage Debt Better?

#155

Post by GVIrish »

dragontamer wrote: post #91
bradleyjg wrote: post #58

Earlier quoted context omitted.

I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January…

Now suppose you lose your job in Month 10. The TV-less person will continue not having a TV, and use those funds for emergency day-to-day living expenses as he (or she) gets his life back in order. You can even dip into your credit card credit line for an emergency. But the person who bought the TV on interest is in debt, has less credit to live off of, and only a TV to show for it. ----------- In either case, saving…

I wouldn't use that emergency fund money for something like a TV, because it's not really a necessity. Dipping into the emergency fund for indulgences leads to a depleted emergency fund.

Now if your heater breaks and requires replacement, that might be a reason to tap into savings.

Re: Why Don't People Manage Debt Better?

#156

Post by ksdale »

mafribe wrote: post #107
yummyfajitas wrote: post #87

Earlier quoted context omitted.

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)?

You could ask them to buy twice as much food as they normally would every time they go to a restaurant or the grocery store. They can either eat until they feel uncomfortable and gain weight or they can start throwing a ton of food away, either way the utility per dollar spent goes way down past a certain point.

Note that this assumes that you are already able to spend an optimal amount on food.

Re: Why Don't People Manage Debt Better?

#157

Post by imgabe »

cm2012 wrote: post #63
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…

Eh. I used to make a lot less money than I did now. I got into around $10k of debt, mostly buying "useless" things that made life fun, like ordering in, etc. Now I make 4x what I used to and the debt is trivial to pay off. Debt also makes sense when money is worth more to you now than later.

Money is always worth more now than later. That's why when you pay back money later, you have to pay back more than you borrowed (among other reasons).

Re: Why Don't People Manage Debt Better?

#158

Post by epimetheus »

ac29 wrote: post #95
bradleyjg wrote: post #58

Earlier quoted context omitted.

I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January…

> Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January 1st next year you'll have a new TV and $2.75. In scenario 2, you put $1200 on a credit card with a 10% APR. You pay $100 each month towards the credit card bill. As of January 1st next year you have a TV you've been watching for a y…

Actually, a lot of places constantly run "Zero Interest If Paid Off In 12 Months" deals all the time. Lowes, Furniture stores, and even some Credit cards.

We've paid off Couches, A refrigerator, a new Sewer Drain, and several other things (a nice Kitchen Table most recently) this way. It's not as good as saving for it, and getting a few dollars of interest, but that's a marginal gain anyway.

Re: Why Don't People Manage Debt Better?

#159

Post by socalnate1 »

dazc wrote: post #99
bradleyjg wrote: post #58

Earlier quoted context omitted.

I don't think such an absolute position is warranted. It's true that saving up for a big purchase will end up costing you less money than borrowing to pay for it and paying it back. But you will have the item purchased for less time. Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. In scenario 1, you save $100 each month. The bank pays you 0.5% interest. As of January…

> Suppose you have enough disposable income to pay for a new $1200 TV over the course of 12 months. If you don't have $1200 for a TV you shouldn't be buying it. It's not as if you can't buy a perfectly reasonable TV for much less is it?

You're missing the forest for the trees.

Re: Why Don't People Manage Debt Better?

#160

Post by HeyLaughingBoy »

newjersey wrote: post #47
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…

I imagine when you "buy" your supplies and don't pay for them until about ninety days after you took delivery of the supplies, that is considered debt as well? I mean if I want to ship something, Fed Ex will ask for payment up front but when Amazon.com ships something they probably don't actually send the money right away. I am still trying to grasp this concept credit terms. I must add that I have had no training in…

so in my mind, what we want to do is get the "interest-free loan" from our supplier of equal or greater duration to the credit term we give our customers

Yes, you got it :-) Although it doesn't always work in practice. As a small business, I have a UPS account with net-7 terms (they bill me once a week).

This is not normally considered debt, though. It's a liability, but there is no formal loan agreement. I may have a customer push payment out to 90+ days and I end up getting the same amount as if he had paid me within 30 days as agreed. So if UPS charges me $100 to send them an item overnight, but they don't pay me the $5,000 for that item for 3 months, I still have to pay UPS within 7 days.

Post reply on HN