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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?

#301

Post by gordyf »

modfodder wrote: post #231
TeMPOraL wrote: post #190

Earlier quoted context omitted.

> For the record, mine is close to 18 years old and continues to work just fine for watching broadcast television. That's the key point. Your TV is fine because it's old. New ones are built with planned and unplanned obsolescence (unplanned is when your "smart" TV loses half of its functionality because some service goes off-line or even changes their URL or something).

There still isn't a TV on the market (that I know of) that is obsolete after a year, not even five years. As long as the inputs (hdmi, dvi, RCA) work then the TV is not obsolete. It may not have the newest features (4k, "smart" connectivity) but it is every bit as usable (and many of the smart features can be added with a ROKU, Apple TV or the like). Video and Films are my business and my TV is a nearly 5 year old LG…

While I agree that TVs don't go obsolete after one year, obsolete doesn't mean "broken" or "no longer works", it just means that the item is outdated or outmoded and generally no longer used. Ball mice, for example, are obsolete but would still work if plugged into a computer.

Re: Why Don't People Manage Debt Better?

#302

Post by spdionis »

markvdb wrote: post #268
saalweachter wrote: post #257

Earlier quoted context omitted.

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 l…

If in those 5 years you decide to buy a house can't you just pay the rest of the car debt with the liquidity you have saved up meanwhile?

Re: Why Don't People Manage Debt Better?

#303

Post by mark_l_watson »

bcheung wrote: post #274
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…

I agree with you. I meant to be talk about my own preferences, rather than lecture other people what to do.

Re: Why Don't People Manage Debt Better?

#304

Post by icebraining »

forgetsusername wrote: post #243
mtgx wrote: post #161

Earlier quoted context omitted.

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"…

It's obvious that there will always be booms and busts; the important question is why they are synchronized, instead of localized, like the dotcom boom and bust mostly was.

Re: Why Don't People Manage Debt Better?

#305

Post by Sir_Substance »

anexprogrammer wrote: post #282
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…

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 day ask the bank for a serious loan (with a suitable amount of pre-savings) and be informed I cannot be lent to because I have no credit history at all. I know I can get a credit card and always pay it off at the end of the month to get a credit history, but by golly does playing that game sit ill with me.

Re: Why Don't People Manage Debt Better?

#306

Post by jonesb6 »

duderific wrote: post #236
jonesb6 wrote: post #164

We have an entire generation growing up with the idea that large debt is natural and acceptable. I've had countless friends go down $10,000 in debt and say "what's $20,000 in debt really?" and it's a vicious cycle from there.

Yep - and they probably got there eating out a lot, opening a tab at the bar, buying the latest and greatest electronics, traveling etc. There is no concept of living within your means.

Honestly I think most of the things you mentioned are completely do able and can improve quality of life enough to justify the expense.

Overpriced car straight out of undergrad? That's a different story entirely. Those things could anchor an air craft carrier.

Re: Why Don't People Manage Debt Better?

#307

Post by lr4444lr »

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…

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 protection is great peace of mind.

Re: Why Don't People Manage Debt Better?

#308

Post by dibujante »

ethbro wrote: post #111
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…

> 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.

Re: Why Don't People Manage Debt Better?

#309

Post by superuser2 »

anexprogrammer wrote: post #282
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…

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. Obviously you need to factor in interest rates, but with cash and debt you have options. With no cash and no debt you are screwed should anything go wrong. (Although the best is still cash + no debt).

Re: Why Don't People Manage Debt Better?

#310

Post by danielvf »

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…

Paying phone and utility bills counts towards you score as well. We've bought two cars and a house with near zero (or zero for many years) credit card useage. No problems at all.

Our credit score were upper good before and near perfect now. We've not used a credit card in eight years.

You can get a free copy of your credit report once a year from each major company - you could go ahead and order them just to see where you are at.

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