"Managing debt" is an oxymoron. You have to manage your life better in order to reduce debt. Most things that talk about debt or money management or budgeting talk about it like it is a math problem. It isn't. It runs a lot deeper than that.
Why Don't People Manage Debt Better?
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Re: Why Don't People Manage Debt Better?
#212What is scary is that "how to manage money" is secondary to "how to manage debt". For the most part I have thought about my bank balance first and figured that my credit score would take care of itself and that has generally been the case.
Re: Why Don't People Manage Debt Better?
#213Could 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?
Each state is different, but they'll take your car and some of the equity in your house to make up the difference.
California for example would take all the equity from your house except for 75k so a single person with moderate income.
Re: Why Don't People Manage Debt Better?
#214Earlier quoted context omitted.
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.
The Amazon Prime Store Card is an example. You can choose per transaction either 5% cash back or 6/12 (sometimes 24) months interest-free financing, depending on the size of the purchase. (You can only use the card at Amazon, though, and there's the Prime membership fee.) I've bought several plumbing fixtures and a laptop without paying any interest this way.
This is effectively how the low fed-funds rate trickles down to the consumer - there are 0% financing opportunities everywhere.
Ultimately, these deals are subsidized by people who get charged with massive deferred interest payments because they don't plan properly, and that sucks for them, but as you say, it's a great way to start experiencing the benefits of a purchase instantly.
Even better is to use the financing opportunity on something that makes money. I've furnished apartments using 0% financing, and I'll get anywhere from 50%-100% increase on rental income for a furnished apartment - while paying no interest on the loan! It's like putting extra money in your pocket every month for free.
Re: Why Don't People Manage Debt Better?
#215This 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'm a pretty stupid spender. From personal experience, I find the snowball method is satisfying when, for example, you have 3 maxed-out high-interest CC's and 1 has a low max and probably the lowest of the interest rates (a difference of maybe 3%). But if there's a huge difference in interest rates, with the right numbers in your face, it's pretty easy to see how wasteful it can be. When I'm in payoff mode, I usually roll everything up in a spreadsheet and focus only on watching the total debt drop while paying the min on everything but the highest interest. A few other numbers I like to look at are lower % used credit and higher available credit, all the same numbers really, but it's satisfying to watch them all change, so I put them in the sheet. Obviously I can't completely hide the real numbers from myself, I keep them in a different tab.
Another mental factor I don't see mentioned often is the availability of the credit you payoff. If I put $1000 towards a CC that money is easily available if I need it. If I put $1000 towards one of those cards that can only be used for dental work, which are often the kind that have the highest interest rates, then that money is pretty much gone.
Re: Why Don't People Manage Debt Better?
#216Earlier quoted context omitted.
It's always better to have problems with somebody else's money when your contract scopes your liability narrowly. Even if I follow your advice and do A, B and C, D is still a problem that I need to deal with. Case in point. I had a two-week hotel stay and facility booking at a resort on my AMEX. The hotel fucked up and double-charged me for the event -- to the tune of $20,000. Due to their obtuse bureaucracy and over…
Am I wrong, or wouldn't exceeding your credit limit have exactly the same effect?
Worst case, $50 fee or whatever, which would be waived during the dispute process.
Re: Why Don't People Manage Debt Better?
#217Anyone 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…
My understanding of debt is as the cost of shifting purchases in time, in the same way as barrkel [0].
Working out what the cost is going to be up front only works if you stick to your assumptions throughout repayment, which is a good way of understanding part of the problem with debt - even if you calculate properly against uncertain events for the average case, you as an individual can be caught out by bad luck.
Attempting to subsequently solve the consequences of your bad luck with further debt seems to me an instance of the gambler's fallacy [1], and is another important part of the problem with debt.
[0] https://news.ycombinator.com/item?id=11135283 [1] https://en.wikipedia.org/wiki/Gambler%27s_fallacy
Re: Why Don't People Manage Debt Better?
#218Debt is basically an illusion that you owe money in the future. And people commit things for the future without thinking about the consequences. Its always easier to commit to eat healthy food next week, or planning to go to gym next year- But doing them in the present is what is difficult. For the very same reasons people are bad at saving and investments. They think they have a lot of time in the future, so they might as well splurge a little today.
From that perspective, you always feel you have time to buy a home, or start saving for a personal retirement fund. Or time to pay off your credit card bills, or the illusion that you borrow money for luxury today and defer it for the future.
As time passes and you become more cognizant of the fact that your energy levels and motivation to commit to large financial slogs like a house or a retirement fund are wearing thin, you just think you should've started being a little disciplined long back.
Re: Why Don't People Manage Debt Better?
#219Earlier quoted context omitted.
Am I wrong, or wouldn't exceeding your credit limit have exactly the same effect?
Having x credit limit costs vastly less than x cash in a checking account.
What I meant is that if you have a lot of things scheduled to be withdrawn from your bank account, and some sort of fraud or double charging happens, chaos ensues (as above.)
If you had a bunch of things timed to be taken from a charge account, and you exceeded your credit limit because some sort of fraud or double charging happens, identical chaos would ensue.
edit: and there's certainly not a vast difference in carrying $20K of credit and $20K in cash. We live in a world of negative interest rates.
Re: Why Don't People Manage Debt Better?
#220Earlier quoted context omitted.
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?
If you look at my example, the person with peak income of $10 spent a bit under $5.5/month. Both time periods were "fluctuations" from his average income of $5.5.