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Why Don't People Manage Debt Better?

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Re: Why Don't People Manage Debt Better?

#241

Post by ibero »

jmckib wrote: post #174
jakub_g wrote: post #56

A big part of Daniel Kahneman's "Thinking. Fast and Slow" is devoted to economic behavior and in general, people are not rational when it comes to money - in some cases risk averse, in other risk seeking. He explains a lot of studies on the topic. If you have some spare time, I recommend the book (though it's not an easy read, as it's very information-dense).

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 was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which is more probable?

a) Linda is a bank teller.

b) Linda is a bank teller and is active in the feminist movement.

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

Re: Why Don't People Manage Debt Better?

#242

Post by ethbro »

bufordsharkley wrote: post #187
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…

> I have met incredibly educated people that are still ignorant about how credit cards/interest charges work and only internalized "Never use credit cards!" advice. I feel that on a rational level, I understand the credit card companies' game, but more than that, I fear them and their power and intelligence. Sure, I'd like to think I'm smart enough not to be tricked by them, but it's safer to avoid the deal with the…

Fair point. We could probably term that the "unnoticed terms" risk and assign a non-zero value to it.

I'd only say two things in defense of credit card use (both valid in the US - not sure about other countries):

- Credit card companies are required to compile all of the information I mentioned into a fairly standardized form per the Truth in Lending Act (see: https://www.federalregister.gov/articles/2010/02/22/2010-624... )

- Credit card companies are competing for your business. At least with decent credit scores, it doesn't make sense for them to have unreasonable terms or try to screw you over

Re: Why Don't People Manage Debt Better?

#243

Post by forgetsusername »

mtgx wrote: post #161
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…

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

>and it's especially bad when credit is not used for investments

It doesn't even have to be "not investments", it can be appropriately risky investments that just don't pan out (perhaps even systemically due to a "black swan").

There's inherent variation, ebbs and flow, in the economy that we won't ever be able to smooth. Booms and busts will occur because those on the credit margins always represent "going too far".

Re: Why Don't People Manage Debt Better?

#244

Post by 3dk »

JustSomeNobody wrote: post #88

He how goes out owing the most wins. He's lived like a king and didn't pay for anything. But seriously, every article I read on personal debt talks about how to get out of it after the fact. I think we need to do a better job of educating people on this subject BEFORE they get into debt.

Agreed. Public schooling in most places completely fails at teaching the general population how to plan for their future and learn basic financial responsibility. A first step would be to show students what sort of options will be available to them and what consequences of each option could entail.

Re: Why Don't People Manage Debt Better?

#245

Post by shoover »

kdamken wrote: post #42

Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position? So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and…

As a long time mint.com user, I hadn't checked out YNAB before. Reading some of their info, I see I do most of the same disciplines, but they are really hardcore about the budget.

One thing that stuck out is in their Simplify [1] article, they recommend not having multiple savings accounts for medium to long term savings goals because that's complicated and the budget takes care of it in a simpler way.

In Mint it would be confusing to do that with a budget alone (the money accumulates as a negative budget amount and just looks like you're under budget by more every month), but they have the Goal feature that links a target date and amount with both a budget and one or more accounts (checking, savings, brokerage, etc.). Mint checks the balances for reporting goal progress.

I don't find this to be complicated or cause an excess focus on the location of money. The clear visibility is helpful and puts a sharp focus on both the budget and the (now smaller) balance of the main checking cash flow account. I know I'm not touching emergency savings, anniversary vacation savings, or whatever because there's no way to access the money without manually transferring it out of the dedicated savings account.

Is YNAB so good that one can really clearly see what is going on with both short term cash flow and slightly longer term savings going through just the budget and a checking account?

[1] https://www.youneedabudget.com/learn/guide/simplify

Re: Why Don't People Manage Debt Better?

#246

Post by kdamken »

debtsnowball wrote: post #85
kdamken wrote: post #42

Better question: why do people buy things they can't afford and most often don't need, putting themselves in this position? So many of my peers don't make a lot of money, but then still go out and buy a new or newish/used car and put themselves on a multiyear payment plan. "Oh but it's only 200 a month, I can swing that". Repeat for like 3-4 other things and suddenly they're always complaining they have no money and…

Consumerism and marketing are powerful things. I know all about the problems debt creates, how it can get out of hand. I've read Dave Ramsey's books and listen to his podcasts. I am very well versed in what it takes to be financially successful. ... But it only takes one moment of weakness to see a new car, fall in love with it, be convinced your life will be better with it and the next thing you know you've committe…

... But it only takes one moment of weakness to see a new car, fall in love with it, be convinced your life will be better with it and the next thing you know you've committed to 48 payments.

I'm trying not be rude here, but that is one of the crazier things I've read. I understand splurging on something like a new pair of shoes or sunglasses, but how poor is your willpower and life planning that you just end up buying a brand new car you can't afford on a whim?

A new smart phone isn't so bad if you can afford it (and by that I mean you have the cash on hand for it upfront, and don't need to do a payment plan or something similar). If you're struggling to pay rent though, just get a refurbished 5s or something.

Re: Why Don't People Manage Debt Better?

#247

Post by fiatmoney »

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…

"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 to be viewed as unable to pay their suppliers, and thus becomes unable to generate revenues. The way out is usually some sort of senior or secured (ie collateralized) debt.

Re: Why Don't People Manage Debt Better?

#248

Post by matwood »

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 agree with you, but then who would pay for my travel points and cash back?

Re: Why Don't People Manage Debt Better?

#249

Post by nostrademons »

rdrey wrote: post #173
dazc wrote: post #99

Earlier quoted context omitted.

> 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?

Replace the word TV with 'first household car'.

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?

Re: Why Don't People Manage Debt Better?

#250

Post by matwood »

pessimizer wrote: post #180
tamana wrote: post #128

Earlier quoted context omitted.

He's saying that you could make $7 by investing your cash for 30days before paying the charge card.

You could lose a lot more than $7 by being a day late, and labor in maintaining a credit card has to be worth more than $7 a month.

Labor? My credit card auto-pays in full each month. For that I get use of someone else's money, points and cash back, and additional warranties. It is no extra work for me, and actually has less stress because if a bad charge does come through the money will never leave my account.

If you use a debit card now and are use to paying in full you are leaving literally hundreds, if not thousands of dollars per year on the table in free money by not using a credit card.

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