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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?

#161

Post by mtgx »

bradleyjg wrote: post #58
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…

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…

This video on economic theory basically says that it's credit that causes booms and busts, and it's especially bad when credit is not used for investments because it inevitably creates a situation in the future where millions of people at once will have less money to spend, thus creating a bust:

https://www.youtube.com/watch?v=PHe0bXAIuk0

Re: Why Don't People Manage Debt Better?

#162

Post by Jtsummers »

barrkel wrote: post #147
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…

Debt is useful to change the time between income and expenses; it solves a cash-flow problem. That's the real key: treat it as a time adjustment in flow, and not as a stock. It's not something you can dip into, as it were; it's something you use to move consumption closer in time, in return for reducing potential consumption in the future. If you're using it to buy an asset that appreciates more than the interest on…

> If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman?

Because it's not their (core) competency or they don't want the risk.

I could start my own company printing indie games. But I have no connections in the industry (well, not entirely true, but none that are exploitable for this), I have no experience running a business, but I do have capital. And someone else who does have those connections and experience wants to start up such a business. Collateral on the loan protects my money (partially) in case of failure to repay, while the risk is mitigated by having someone more experienced doing the work.

Re: Why Don't People Manage Debt Better?

#163

Post by grahamburger »

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…

Or, of course, if the furnace goes out right before Christmas and you don't have any money (except a credit card) because you were laid off 3 months prior and haven't been able to land a new gig yet. That's how I started the year with $700 more in credit card debt.

Re: Why Don't People Manage Debt Better?

#164

Post by jonesb6 »

We have an entire generation growing up with the idea that large debt is natural and acceptable. I've had countless friends go down $10,000 in debt and say "what's $20,000 in debt really?" and it's a vicious cycle from there.

Re: Why Don't People Manage Debt Better?

#165

Post by phamilton »

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).

Or both.

The MMM philosophy isn't to deprive yourself. It's to learn to find satisfaction without the high cost.

Personally, I hate eating out every day. Packing a tupperware with leftovers is much more my style. I save about a thousand a year because of this, but I don't feel deprived at all.

Re: Why Don't People Manage Debt Better?

#166

Post by lotsofpulp »

newjersey wrote: post #144
cperciva wrote: post #119

Earlier quoted context omitted.

I mean if I want to ship something, Fed Ex will ask for payment up front They might ask for payment up front, but they'll quite happily take a credit card instead. Yes, credit cards are a form of transactional debt if you pay them off each month; they allow you to enjoy your purchases for ~ 1 month before paying for them.

I imagine the credit card payment processor pays at the end of the month? So when one accepts payment using credit card, is that an automatic 30 day credit the seller has extended to me? I didn't think about that. So essentially, the credit card issuer didn't really spend "their money" at all. Wow. The more I learn the more I realize how little I know.

No, the bank that issues you credit will pay the merchant in a few days after the merchant charges your credit card account. The bank issuing your credit card is the one that extends credit to you, however, there is usually a few days between the merchant charging your account and the bank sending the merchant the money.

Afterwards, if you do a chargeback, the bank will yank back the funds from any other amounts the bank owes the merchants, but if the merchant has enough proof the cardholder participated in the transaction (aka, swipe and sign, or chip and sign, or use of CVC code online), then the bank will give the money back to the merchant. The bank still takes $30 or so from the merchant as a fee for getting a chargeback though, but I'm sure that amount and terms vary from merchant to merchant, depending on their purchasing power.

Re: Why Don't People Manage Debt Better?

#167

Post by HeyLaughingBoy »

taneq wrote: post #94
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…

> Carrying a balance on a credit card is almost never an appropriate use of debt. One exception: Credit cards with those introductory "6 months interest free" clauses. Sign up for as many as you can get, with as large a limit as you can get. Max them all out on payments into a mortgage offset account. Just before the end of the interest free period, pay them all off again. (I've heard of this being done but I'd bet i…

I did that about 20 years ago to pay off about 12k of debt I accrued. Basically kept shuffling the debt from one "interest free for 6 months" balance transfer to another until it was all paid off. They are still around today, just not as popular.

Re: Why Don't People Manage Debt Better?

#168

Post by lotsofpulp »

imgabe wrote: post #157
cm2012 wrote: post #63

Earlier quoted context omitted.

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).

Not in the case of negative interest rates.

Re: Why Don't People Manage Debt Better?

#169

Post by Retric »

zippergz wrote: post #146
ac29 wrote: post #95

Earlier quoted context omitted.

> 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…

> I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely. My credit score according to Credit Karma is 811, which I think everyone could agree is very good. I just spot checked two of my credit cards, and they're both at about 16% interest. Now, maybe I could get a lower rate if…

There are multiple types of credit cards. Generally you can trade higher rates for higher credit limits, a longer float before interest starts, a low intro rate 18mo at 0% is common, cash back, or other rewards.

If you really pay off every months you want a 45 day carry before interest and cash back. But, they often have much higher rates.

PS: I have two one at 9% another at 12%, but the 12 has a much higher limit.

Re: Why Don't People Manage Debt Better?

#170

Post by nisse72 »

grecy wrote: post #112
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…

In scenario 1, when you realize that paying so much money for a TV is nonsense, you can spend that money on something else, and/or stop going to work, or reduce work hours. In scenario 2, you're stuck going to work for the entire 12 months to pay off a TV that will be obsolete by the time you finish paying for it. Scenario 2 robs you of your choices, because you're making a promise of future labor. Scenario 1 leaves…

Since when does a television become "obsolete" after a year? Or even after 5 years? Just because it doesn't have built-in support for Netflix or whatever the latest thing is? This is the sort of idea that lures people into overspending in the first place.

For the record, mine is close to 18 years old and continues to work just fine for watching broadcast television. Yes it's fatter than those newfangled flat things, but it doesn't watch me watching it, it doesn't record my conversations, and it doesn't report my viewing habits back to the mother ship. One day it will fail and I'll be forced to get a new one.

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