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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?

#261

Post by dazc »

nostrademons wrote: post #249
rdrey wrote: post #173

Earlier quoted context omitted.

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?

> Curious what your point is?

I took his point as: Some people buy an expensive car they can ill afford when they could buy a cheaper one that will do the same job.

Like my TV example, but with a car.

Re: Why Don't People Manage Debt Better?

#262

Post by 2muchcoffeeman »

dragontamer wrote: post #175
nmcfarl wrote: post #153

Earlier quoted context omitted.

There’s a ton of comments on this article that I think are much more nutso. But this is the comment I’m going to reply to, cause people who keep emergency funds are probably open changing their mind via reason. Touching your 6 months emergency expenses fund is completely against the point. The reason you have this cash is for out of the blue, hit by bus kind of events. You need it when you least expect it If you take…

Well, its the reality of the situation. A typial 6-month Emergency fund is somewhere on the order of $15k, depending on where you live. This is more money than the typical American 40 year old has saved up their entire life (including retirement accounts) http://www.fool.com/investing/general/2015/05/17/americans-a... If you manage to have $15k, and you are making a big purchase, do use it before you start using a cr…

> This is more money than the typical American 40 year old has saved up their entire life (including retirement accounts)

Seriously? I feel like an old man. I had that much money saved in less than a year from starting my first part time coding job.

In fact the whole not saving money thing seems a bit strange to me. My monthly cost have remained relatively stable for almost a decade while my salary keeps going up.

Re: Why Don't People Manage Debt Better?

#263

Post by [deleted] »

saalweachter wrote: post #257
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?

Why would you waste your liquidity on an asset so easy to secure a loan for as a car? A five year new car loan from a credit union -- no shopping around -- has a cost of something like $58 / $1000 borrowed. So even if you have $20k cash on hand to buy a new car, for a thousand bucks you can maintain an extra $20k of liquidity for expenses that are more annoying or more expensive to finance, like auto repairs.

[deleted]

Re: Why Don't People Manage Debt Better?

#264

Post by bcheung »

There's an important factor that is ignored by the article and it is a fundamental principle in finance. That principle is risk.

Any time anyone asks a question in finance the correct answer is always, "It depends".

Absolute answers like always pay highest interest card make sense mathematically in certain cases but they are not the whole story and don't take into account other factors that are equally if not more important than paying the least amount of interest.

Another factor to consider is cash flow.

If you are someone that lives paycheck to paycheck and can pay off a card or loan sooner to create some additional cash flow that has major benefits for increasing cash flow, peace of mind, and providing a buffer for unexpected expenses.

It lowers the risk of default and late payment fees / increased rates if you have more cash flow. Ultimately leading to paying less in interest and fees.

If there are unexpected expenses you will be glad to have the available cash. That's worth paying a little more interest in the long run.

There's also the fact that it may not make sense to pay down low interest rates like a 4% fixed mortgage when you can invest at rates higher that. In that case you want to pay it off as little as possible and maybe even take out equity to put into investments.

Re: Why Don't People Manage Debt Better?

#265

Post by tunesmith »

tamana wrote: post #135
remyp wrote: post #69

Earlier quoted context omitted.

A pesky thing called morality and the fact that incurring debt with the intention of later going bankrupt is fraud?

Don't be moral with corporations that have no intention of being moral with you. The National Mortgage Foundation defaulted on its own mortgage!

> Don't be moral with corporations that have no intention of being moral with you.

Why not? Seriously.

Re: Why Don't People Manage Debt Better?

#266

Post by bcheung »

douche wrote: post #61
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…

It's pretty numb to use debit cards as opposed to credit cards, for various reasons. A.) You can't over-draw a credit card, and get hit with overage fees or bounced-check insurance, or all the other things banks do - particularly with the slightly nefarious way they often choose to order your transactions when they close their books. Particularly troublesome with businesses that put in a hold on your card, then charg…

There's another advantage for paying with credit cards that you didn't mention.

It builds credit and increases your credit score.

When your credit score is higher you pay less in interest on loans. That means credit cards actually save you money if you are not carrying interest each month.

Re: Why Don't People Manage Debt Better?

#268

Post by markvdb »

saalweachter wrote: post #257
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?

Why would you waste your liquidity on an asset so easy to secure a loan for as a car? A five year new car loan from a credit union -- no shopping around -- has a cost of something like $58 / $1000 borrowed. So even if you have $20k cash on hand to buy a new car, for a thousand bucks you can maintain an extra $20k of liquidity for expenses that are more annoying or more expensive to finance, like auto repairs.

Because you want to buy a house? If you are borrowing 8k for a simple car @2%, 5 years, you are repaying ~140/month. On a 20 year loan @2%, that same monthly payment would net you 30k.

My native country has a central database of every single loan outstanding. Lenders have to consult that before granting a loan and stay within certain limits. So at least here, an outstanding car loan might disqualify you from a home loan because of a lack of solvability...

Re: Why Don't People Manage Debt Better?

#269

Post by squeaky-clean »

dagw wrote: post #252
ksdale wrote: post #156

Earlier quoted context omitted.

You could ask them to buy twice as much food as they normally would every time they go to a restaurant or the grocery store. They can either eat until they feel uncomfortable and gain weight or they can start throwing a ton of food away, either way the utility per dollar spent goes way down past a certain point. Note that this assumes that you are already able to spend an optimal amount on food.

You're assuming that 'food' is a single fungible commodity. Spending twice as much on food doesn't mean buying twice as much food, it could also mean buying better quality food and going to higher quality restaurants. I could easily both double and triple my current food spending without eating more or wasting food.

But taste/enjoyment isn't the only purpose of food. You're doubling enjoyment, but not doubling the utility.

If I gave you the choice of only eating $1 of Cup-Noodles every day for 30 days ($30 total), or one single $300 meal at a high class restaurant, and nothing for 29 days, which is the smarter choice?

Re: Why Don't People Manage Debt Better?

#270

Post by bcheung »

pilom wrote: post #8

This 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…

It also reduces risk in the form of default, higher fees from late payments, increased interest rates from missed payments, and provides a buffer for unexpected expenses down the road.

Finance is very situational and when people talk about things in absolutes like the articles does, it can mislead people who have different circumstances, goals, proclivities, and risk profiles.

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