Why Don't People Manage Debt Better? • Hacker News Board

Re: Why Don't People Manage Debt Better?

#321

Post by enraged_camel » Sat, Feb 20, 2016, 1:00 AM UTC

superuser2 wrote: post #309

anexprogrammer wrote: post #282

Earlier quoted context omitted.

The old, and conveniently oft forgotten, advice applies: Never borrow against a depreciating asset. If you need to clear down you may have a problem. A job loss, recession, illness could all mean you want to clear the debt. Selling the now second hand TV is not going to clear the debt. Add in a few more debts justified thus and you have a bankruptcy or house loss on your hands. Perhaps you can guarantee you will not…

>A job loss, recession, illness These are all great reasons to have an emergency fund which covers the payments on all your debts (and your other expenses) for a few months. Then if you're in a situation where you need to use it, you can make a decision about whether to try to offload the debt or just pay it out of savings. I'd take $20,000 in savings + $20,000 in debts any day over $0 in savings + debt free. Obvious…

>>These are all great reasons to have an emergency fund which covers the payments on all your debts (and your other expenses) for a few months.

That's not what an emergency fund is for. An emergency fund is for essential expenses, such as rent (or mortgage), food, prescription medicines not covered by insurance, and so on. If you are in the "I'll just use my emergency fund to pay off my debts in case disaster strikes" you've already lost the game.

Re: Why Don't People Manage Debt Better?

#322

Post by mikeash » Sat, Feb 20, 2016, 1:02 AM UTC

dibujante wrote: post #308

ethbro wrote: post #111

Earlier quoted context omitted.

> Run the math again at 18% APR ($133 in interest over the 14-month payoff period) or even 24% ($185 in interest over the 14-month payoff period), and you quickly see just how much premium it costs to get that TV a year earlier. I feel like the issue isn't just the TV. It's that it's the TV, plus the next thing, plus the next thing. Or in other words, tiers of debt usage from best to worse: (1) completely avoid payin…

To be fair, if you really aren't capable of understanding how credit cards work, "never use credit cards" is probably the best internalized advice to have. I still don't get it. My credit card is a device by which my bank gives me some incentive (aeroplan miles, cash back) to put my transactions on a card and then immediately pay them off, instead of performing those directly against my bank account.

When you buy something with your card, the bank collects a fee from the seller which is more than the value of those incentives.

Re: Why Don't People Manage Debt Better?

#323

Post by anexprogrammer » Sat, Feb 20, 2016, 1:02 AM UTC

Sir_Substance wrote: post #305

anexprogrammer wrote: post #282

Earlier quoted context omitted.

The old, and conveniently oft forgotten, advice applies: Never borrow against a depreciating asset. If you need to clear down you may have a problem. A job loss, recession, illness could all mean you want to clear the debt. Selling the now second hand TV is not going to clear the debt. Add in a few more debts justified thus and you have a bankruptcy or house loss on your hands. Perhaps you can guarantee you will not…

>I'm a "reformed" credit card user. I haven't borrowed for anything apart from the house in around 15 years. It's not a problem, and the kids don't miss out on having too much stuff either! I've never used a credit card, because people like you got to me before I was old enough to apply for one and warded me off, so thanks :) However, what's your experience with taking out that home loan? I'm worried that I might one…

Hmm. I'll also add that owning a house is not as it once was.

Time was you got tax relief on mortgage interest, and crucially there was enough inflation in the system that a mortgage was an insanely easy choice. A little inflation would deflate your mortgage payment down to truly trivial levels over the life of the mortgage. Because of the removal of inflation your mortgage payment is no longer an ever decreasing proportion of your income, ignoring pay rises, so the only remaining factor is what you believe will happen to rents.

Re: Why Don't People Manage Debt Better?

#324

Post by kulkarnic » Sat, Feb 20, 2016, 1:08 AM UTC

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…

This is factually incorrect, in addition to being bad advice. You take on debt when the net present utility of the purchase is greater than the price of the debt.

Here's a simple example to illustrate: you have an interview tomorrow, and you want to buy a suit to be sure you are appropriately dressed for it. The net-present-utility of the suit is quite high -- not having one may cost you the job opportunity. On the other hand, a suit is a depreciating asset. It is also not an income-generating asset (i.e. you may sell the suit the day after the interview at no loss of income.)

Using the reasoning of "debt for appreciating/income generating purchase" will preclude you from buying this suit, sensible though the purchase is.

PS: in an ideal world, you'd rent the suit, or any asset that has only temporary utility and pay depreciation+premium. http://john-joseph-horton.com/papers/sharing.pdf

Re: Why Don't People Manage Debt Better?

#325

Post by Consultant32452 » Sat, Feb 20, 2016, 1:10 AM UTC

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…

You're forgetting a very important topic in finance: positive cash flow. While saving that $100/mo I have an additional $100 in my cash flow that can be diverted in the event of an emergency. Instead I have a $107.20 credit card bill. So how will I pay for that flat tire? You guessed it, I'll put it on the card. If you're the type of person who has a sufficiently large emergency fund and savings, you're probably also the type of person who doesn't need to spread the cost of a TV out over a year.

Re: Why Don't People Manage Debt Better?

#326

Post by kalid » Sat, Feb 20, 2016, 1:17 AM UTC

Sir_Substance wrote: post #305

anexprogrammer wrote: post #282

Earlier quoted context omitted.

The old, and conveniently oft forgotten, advice applies: Never borrow against a depreciating asset. If you need to clear down you may have a problem. A job loss, recession, illness could all mean you want to clear the debt. Selling the now second hand TV is not going to clear the debt. Add in a few more debts justified thus and you have a bankruptcy or house loss on your hands. Perhaps you can guarantee you will not…

>I'm a "reformed" credit card user. I haven't borrowed for anything apart from the house in around 15 years. It's not a problem, and the kids don't miss out on having too much stuff either! I've never used a credit card, because people like you got to me before I was old enough to apply for one and warded me off, so thanks :) However, what's your experience with taking out that home loan? I'm worried that I might one…

For what it's worth, I recently bought a house. Having a rotating line of credit on a credit card that was paid off did not help with some loan history requirements.

The lender wanted to see loan with fixed payments in the past 3 years (which my wife had, a car loan). Sure, maybe we could have argued, etc. but a credit card paid off each month wasn't a magic bullet for building credit history. I'd say get a nominal loan (not simply a credit card) to build up credit.

Re: Why Don't People Manage Debt Better?

#327

Post by superuser2 » Sat, Feb 20, 2016, 1:22 AM UTC

enraged_camel wrote: post #321

superuser2 wrote: post #309

Earlier quoted context omitted.

>A job loss, recession, illness These are all great reasons to have an emergency fund which covers the payments on all your debts (and your other expenses) for a few months. Then if you're in a situation where you need to use it, you can make a decision about whether to try to offload the debt or just pay it out of savings. I'd take $20,000 in savings + $20,000 in debts any day over $0 in savings + debt free. Obvious…

>>These are all great reasons to have an emergency fund which covers the payments on all your debts (and your other expenses) for a few months. That's not what an emergency fund is for. An emergency fund is for essential expenses, such as rent (or mortgage), food, prescription medicines not covered by insurance, and so on. If you are in the "I'll just use my emergency fund to pay off my debts in case disaster strikes…

The internet personal finance community usually considers debt payments to be a fixed expense that you need to plan for in your emergency fund in addition to the other things you mentioned. I'm not sure where you're getting your "emergency funds can't cover debt payments" assertion from.

20k amount financed on a car @ 2% for 48 months: $434/mo. Save that (in addition to your other savings) for 6 months, then finance the car. Then you can absorb a 6 month unemployment stint out of savings, during which you can downgrade at any point if necessary. Or you can wait an extra 42 months to save $827 in interest if that's worth it to you, but either way the risk is managed.

Re: Why Don't People Manage Debt Better?

#328

Post by newjersey » Sat, Feb 20, 2016, 1:38 AM UTC

fiatmoney wrote: post #247

newjersey wrote: post #47

Earlier quoted context omitted.

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…

"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?" Yes, it is. In both an accounting sense, and a legal sense. "I mean if they have to go through a rough patch again, won't any credit terms they get (banks, investors, or suppliers) automatically be worse?" Yes. It's a standard death-spiral path for a company…

> senior debt

I don't know much about finance so for anyone else like me I'd like to point out that this is not a typo.

> In finance, senior debt, frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer.

https://en.wikipedia.org/wiki/Senior_debt

> What is 'Senior Debt'

> Senior debt is borrowed money that a company must repay first if it goes out of business. Companies have a number of options for obtaining financing, including bank loans and the issuance of bonds and stocks. Each type of financing has a different priority level in being repaid if the company decides to liquidate. If the company goes under, the holders of each type of financing have different levels of rights to the company's assets.

> If a company goes bankrupt, senior debtholders, who are often bondholders or banks that have issued revolving credit lines, are most likely to be repaid, followed by junior debt holders, preferred stock holders and common stock holders. Senior debt is secured by collateral, and that collateral can be sold to repay the senior debt holders. As such, senior debt is considered lower risk and carries a relatively low interest rate. Even though senior debtholders are the first in line to be repaid, they will not necessarily receive the full amount they are owed in a worst-case scenario.

http://www.investopedia.com/terms/s/seniordebt.asp

I'm sure there is more to this topic than what I've pasted above. Off the top of my head, I can imagine it is unlikely that the courts would just accept that a company going bankrupt got a super senior loan from the chairman's wife if there is no book keeping that the money actually went into the company and was not a ploy to defraud the actual lenders. I think any lender can take the debtor to court if they suspect malice (This is just my hunch.)

Re: Why Don't People Manage Debt Better?

#329

Post by lithander » Sat, Feb 20, 2016, 1:44 AM UTC

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…

I assume that you had a TV before you upgraded, too? And the one you bought and used for a year is now one year closer to getting replaced. You lost more money then the 72$ depending on how often you replace your TV. In the end you can afford to replace more things more often when you don't have to pay interest on loans.

Re: Why Don't People Manage Debt Better?

#330

Post by merpnderp » Sat, Feb 20, 2016, 1:44 AM UTC

lr4444lr wrote: post #307

Sir_Substance wrote: post #305

Earlier quoted context omitted.

>I'm a "reformed" credit card user. I haven't borrowed for anything apart from the house in around 15 years. It's not a problem, and the kids don't miss out on having too much stuff either! I've never used a credit card, because people like you got to me before I was old enough to apply for one and warded me off, so thanks :) However, what's your experience with taking out that home loan? I'm worried that I might one…

Capital One has a 1.5% cash back on all purchases card. I put everything I can on it, and pay off in full very month on time. Does the prospect of paying only 98.5% of almost every price before your eyes not interest you? If not, then I don't know much what will. Your financial prudence will be rewarded with these residuals if you help the banks get their merchant fees. Over a lifetime, it can add up, and the fraud p…

That's got to be some sort of opportunity for arbitrage.