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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?

#271

Post by heywire »

craigds wrote: post #253
nostrademons wrote: post #249

Earlier quoted context omitted.

Curious what your point is? It's pretty common to pay cash for a used clunker as your first car because you don't have money to buy a new one, and then use it to get to work so you can save up more money to buy a new one. Or at least, it's pretty common among the folks I hang with. The car-loan phenomena is baffling to me; why would you pay interest on a depreciating asset?

I think it's an American thing. In NZ it's pretty rare to buy a new car, far more common to get a 10-15 year old one for $5-10K. Paying cash is normal

Well, someone has to be buying the new cars, or else there wouldn't be any used cars.

Re: Why Don't People Manage Debt Better?

#272

Post by epimetheus »

soperj wrote: post #238
epimetheus wrote: post #158

Earlier 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.

Except you can get discounts if you pay in cash. I'd never pay more than 60% of what they're asking for a couch.

That's a good point. I'm terrible at this kind of negotiation though, do you usually come in with a particular price or do they have a set amount if it's cash? I think I'd like to get better at negotiating, I usually end up paying full price for a car because of my lack of such skill.

Re: Why Don't People Manage Debt Better?

#273

Post by heywire »

zrail wrote: post #19
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 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. In 2014 only 34% of households carried credit card debt month to month[1]. The majority of households pay it off every month, simply using it to smooth out irregular cash flow while potentially racking up rewards. They're not purchasing an asset, per se, unless you c…

I wonder if this counts households which are carrying balances on cards which offer an introductory 0% interest rate? I know quite a few people (myself included) who have utilized the 0% intro rates offered by both branded (Visa/MC/Amex) and store credit cards.

Re: Why Don't People Manage Debt Better?

#274

Post by bcheung »

mark_l_watson wrote: post #25

I have so many friends, and some family members, who act as though the optimum life strategy is to buy as much material stuff as they can without getting into a default situation. Given a lifetime exposure to marketing I don't much blaim their attitude. The thing is: the idea of maximizing material success is so very wrong. A good life is about experiences, not material stuff. Having savings and flexibility that enta…

It's subjective to the individual. It may be wrong to you but to them you're the one that is the fool for not enjoying life to its fullest.

Some people are motivated by taking trips, others by the big house. Personally I don't care for traveling and find it boring and at best a hassle. I would much rather have the bigger house.

People have different risk profiles and needs for material possession. Some people rather have peace of mind, others don't really care and rather have material comfort.

I think the important thing is not to judge people based on what is important to them. Just because it is not what you think is important doesn't make it wrong.

Re: Why Don't People Manage Debt Better?

#275

Post by lossolo »

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…

If there would be no debt on common products, then there would be no market growth, then capitalism would fail? Isn't that true ?

Re: Why Don't People Manage Debt Better?

#276

Post by bcheung »

ibero wrote: post #241
jmckib wrote: post #174

Earlier quoted context omitted.

I've been meaning to read that. Did you end up getting anything practical out of it?

there are a lot of small near-practical applications, but it all really revolves around trying to be cognizant that our initial impressions/estimates vary wildly and are biased. The book spends the entire time giving you countless examples to hammer the point home. My favorite example from the book (via wikipedia) Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she…

:D

I skimmed through a little bit of that book and that is one of the ones I remember seeing that was very interesting. I should finish reading through it.

Re: Why Don't People Manage Debt Better?

#277

Post by blktiger »

epimetheus wrote: post #158
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…

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.

Keep in mind that 0% interest isn't the same as free money. Usually a 0% interest deal comes with "finance charges".

Re: Why Don't People Manage Debt Better?

#279

Post by billmalarky »

kdamken wrote: post #200
Ocerge wrote: post #143

Earlier quoted context omitted.

Absolutely. I fully recognize my $2.50 americano every morning could be a couple of cups of free office coffee, but I look forward to it every single day. I also drive a 10-year-old but reliable car, so I don't have any huge monthly expenditures outside of rent and my $150 student loan payment. I'll take the $100 or so hit every month in exchange for me starting my mornings on a positive note. It's not going to posit…

Playing devils advocate here: you're spending $1200 a year on coffee. With that money you could not only buy a really nice coffee machine and make it yourself every morning, but also have a bunch of money leftover to put towards your loans, invest, put towards a nice vacation, etc. The idea is that those small daily expenses tend to add up, and there may be a lot more of them than you realized.

Reminds me of the old joke:

"If you had stopped smoking 10 years ago you could afford to be driving around in a Ferrari right now."

"Do you smoke?"

"No."

"Then where's your Ferrari?"

Point is don't sweat the small things. Sure they add up, but you should dedicate a portion of your cash flow towards investments at the start of the pay cycle, not "what's left at the end." Then the rest can be spent on anything arbitrarily with a clear conscious.

Re: Why Don't People Manage Debt Better?

#280

Post by bbcbasic »

breischl wrote: post #121

The article ignored the completely rational reason to pay off small debts first - increased liquidity. By paying off small debts first you can reduce the amount of money you have to come up with each month. If you have any uncertainty around income or other expenses, there is real value in that. Doubly so for debts that could be foreclosed on - if you prepay your mortgage a bunch and then fall behind and get foreclos…

Good point. Also, at least in my county a bank may look at limit of the credit card rather than the actual borrowings when deciding whether to give someone a new loan (say a mortgage). So if you have a couple of 10k credit cards, and one has $200 owing you can just pay it off and cancel the card, and potentially could be the difference between getting a home loan or not. Again this is along the lines of increased liquidity.
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