Why Don't People Manage Debt Better? | Hacker News Reader

Why Don't People Manage Debt Better?

blogs.scientificamerican.com

213 pointssergeant3356 comments

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 that is the only sensible strategy. As a consumer, a house may be a sensible use of debt. A reliable car needed to get to work may be a sensible use of debt. A student loan might as well. Carrying a balance on a credit card is almost never an appropriate use of debt.

Unfortunately, marketers have instead convinced consumers that debt is an easy way to buy things they can't afford and pay for it later. This is almost always a losing proposition for the consumer, who invariably ends up paying much more than they would have if they had just saved up and bought the thing in full up front. The way to sensibly manage this is to not fall into the trap in the first place.

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 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 year already and owe $69. You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier.

Is that worth it? Well that depends on a lot of things, some of them intangible, but I wouldn't say it can't possibly make any sense. The sort of Puritan attitude towards consumption and debt may not be the worst attitude to have, at least for oneself. But when combined with evangelism it is pretty annoying.

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 get ill or lose your job during the loan?

So many of the people bitten hard by the 2008 recession applied logic such as yours, and often drew down on their mortgages (cheaper than credit card) to buy TVs, cars and holidays.

Borrowing against a growing asset is different.

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'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.

You've basically swung too far to the other side of the spectrum, and you will be penalized for not having a credit history if you ever seek a large loan.

If you consider your credit card to be a no-fee (or low-fee) payment mechanism that aggregates your monthly expenditures into a single bill, you can have savings theoretically (though in reality, probably not usefully) appreciating over the course of the month in a bank account, and then pay the bill for your expenditures at the end.

This simple money management technique reduces fees paid for ATM access, allows your assets to maximally appreciate, and builds up a very solid credit history. Credit Cards and Lines of Credit aren't evil; they're useful, but they're not hard to use in a manner that will bite you.

If you can play the game to your rules, not theirs, having a single credit card can be ok:

* Pay the entire balance every month, ideally by direct debit (they don't like doing this) * Ignore offers to increase credit limit * Actively reverse automatic credit increases. My card company tried ridiculously hard to talk me out of reducing my credit limit.

This type of credit card customer is by far the minority (10% iirc), and least welcome to the card companies. Their ideal customer has multiple cards and pays minimum balance every month.

Student loans also count towards credit worthiness.

For a home loan, having little or no credit, isn't necessarily a deal breaker, but does limit lender choice. At least in the UK.

I dislike the game partially because the more indirection between spending and the actual money, the easier it is to overspend or lose track. This is the whole point, of course! So I just stick to the debit card for net, and actual cash from ATM when out shopping.

>but by golly does playing that game sit ill with me.

Why? They are giving you free money for your trouble (1.5-2% back, a proportion of the transaction fee they've effectively baked into the price of all consumer products) and offloading the risk of having your bank account drained through a debit card or getting mugged for your cash.

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.

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.

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.

I've never used a credit card

There are many reasons to use one. Others here have already given you some. But I want to add one more good reason: protection. So here you go:

- I try to pay for all restaurant meals with a credit card. Then, e.g. if I get sick eating at e.g. Chipotle, there's at least a record that I purchased something from them. If I lose the receipt I might not remember whether it was a taco or a burrito, but I'm still way ahead of someone who paid cash and doesn't have his receipt!

- If I have a dispute of any sort with the supplier, it really helps to at least have the threat of a credit card chargeback available. Too many disputes or chargebacks are bad news for vendors, and most will want to avoid those.

- Some cards will extend the warranty on a purchase, but I've never availed myself of that feature so I don't know how easy it is to use.

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.

Get and use a credit card (or two), but pay it off every month. Every year or so, ask them to raise the credit limit. You'll be in fine shape when it comes to getting a mortgage.

"Not paying interest on any card" is desirable. "Not having any card" works against you in your situation.

I have a credit card that needs to be paid off in full every month. Zero-interest 1-month loans are very handy to iron out any behavior or income fluctuations.

You're a terrible person - why call me out for being wrong, then when I show you that you are wrong, just vanish? That's un-australian.

>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).

>>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.

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.

> 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 year already and owe $69. You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier.

I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely. 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'm ignoring the negligible savings rate interest in your example and, probably foolishly, assuming this hypothetical person only has this single CC debt.

> 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 paying interest charges, (2) pay interest charges on large purchases with full knowledge and planning and in a responsible manner, (3) pay interest charges without knowledge of what you're paying or what to do about it.

Personally, I think it's a failure of financial literacy of the US educational system on one of the most important aspects of kid's lives. 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've also met less educated people who never think past "This is what it says the minimum payment is, so I pay that."

Neither position is good. And they. aren't. that. complicated.

The disclosure sheet gives you annual fee (if any), APR when interest is charged, and any penalties that may result in an APR adjustment. After that it's simply "If you have a >$0 statement balance from the previous month after your due date and payment, then you begin accruing interest on the daily total of your balance." Not rocket science.

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.

> 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 devil altogether.

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

You can play the "game" in a fairly safe manner -

Get a no-annual fee credit card. Put it in your sock drawer. Take it out every 6-12 months and buy lunch with it. When you get home put card back in sock drawer and RIGHT AWAY pay off the amount you had for lunch on your bill. (You almost always can make payments on a zero balance. Citi was kinda weird about it but I make payments over my balance all the time and only Citi gave me a "can't pay over 20% of your balance").

Just having the card and not using it "counts" in your score. The lunch is just to keep the bank from marking your card as inactive and cancelling it.

If you feel you will be tempted to use it to increase your overall spending - then by all means avoid it.

Unless you are at a very small bank/credit union (and sometimes not even then) your bank probably is a credit card company.

> I think this is a good point, but the sort of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card, APR's closer to 20% or higher are more likely.

My credit score according to Credit Karma is 811, which I think everyone could agree is very good. I just spot checked two of my credit cards, and they're both at about 16% interest. Now, maybe I could get a lower rate if I asked, but that's what they gave me by default. It doesn't matter to me since I never carry a balance (in fact, I didn't even know what the interest rate was; I had to go look). But 10% does seem pretty optimistic.

That said, I agree with the overall point. It should be acceptable to use credit in the situation described, as long as you're completely aware of the actual cost and are making a rational decision. Unfortunately, too few people do the math, and even for very educated and intelligent people, purchasing decisions can be irrational.

There are multiple types of credit cards. Generally you can trade higher rates for higher credit limits, a longer float before interest starts, a low intro rate 18mo at 0% is common, cash back, or other rewards.

If you really pay off every months you want a 45 day carry before interest and cash back. But, they often have much higher rates.

PS: I have two one at 9% another at 12%, but the 12 has a much higher limit.

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.

The Amazon Prime Store Card is an example. You can choose per transaction either 5% cash back or 6/12 (sometimes 24) months interest-free financing, depending on the size of the purchase. (You can only use the card at Amazon, though, and there's the Prime membership fee.) I've bought several plumbing fixtures and a laptop without paying any interest this way.

This is effectively how the low fed-funds rate trickles down to the consumer - there are 0% financing opportunities everywhere.

Ultimately, these deals are subsidized by people who get charged with massive deferred interest payments because they don't plan properly, and that sucks for them, but as you say, it's a great way to start experiencing the benefits of a purchase instantly.

Even better is to use the financing opportunity on something that makes money. I've furnished apartments using 0% financing, and I'll get anywhere from 50%-100% increase on rental income for a furnished apartment - while paying no interest on the loan! It's like putting extra money in your pocket every month for free.

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

I've never seen that. What I have seen is that if you don't pay the card off completely in 12 months, they'll assess interest going back to the inception of the account, so if you make a 0% deal you've got to be sure you can pay it off in the time allotted.

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.

I think the whole analogy is moot since anyone buying a TV would, at least, try for store financing.

A quick look up says that Best Buy offers 11.9% APR for select purchases, or 25% for others.

I am not sure I agree that the kind of people who would need a year to save $1200 do not have the sort of credit to get a 10% APR credit card.

There are plenty of high income earners who are just as irresponsible with spending as some low income earners. I always had a good credit score during the years it would have taken me a year to save $1200.

In scenario 1, when you realize that paying so much money for a TV is nonsense, you can spend that money on something else, and/or stop going to work, or reduce work hours.

In scenario 2, you're stuck going to work for the entire 12 months to pay off a TV that will be obsolete by the time you finish paying for it.

Scenario 2 robs you of your choices, because you're making a promise of future labor. Scenario 1 leaves all your choices on the table.

Since when does a television become "obsolete" after a year? Or even after 5 years? Just because it doesn't have built-in support for Netflix or whatever the latest thing is? This is the sort of idea that lures people into overspending in the first place.

For the record, mine is close to 18 years old and continues to work just fine for watching broadcast television. Yes it's fatter than those newfangled flat things, but it doesn't watch me watching it, it doesn't record my conversations, and it doesn't report my viewing habits back to the mother ship. One day it will fail and I'll be forced to get a new one.

> Yes it's fatter than those newfangled flat things, but it doesn't watch me watching it, it doesn't record my conversations, and it doesn't report my viewing habits back to the mother ship. One day it will fail and I'll be forced to get a new one.

It's actually getting pretty difficult to buy a new "dumb" TV these days. The last TV I bought was in November 2014, it's a normal 50" Plasma screen TV with zero connected features. Some of my relatives liked the TV and asked me to find them one like it and I can't. Apparently TV makers have decided that making good TVs isn't important and packing them with smart features I don't want or need is the way to go.

Recently purchased an older model LG oled, and it has all sorts of "smart" features. Simply not connecting it to the internet and not agreeing to the terms of service has turned it back into a dumb tv.

> 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 plasma that still performs great. And I only bought it because my ex kept the Panasonic plasma after the break-up or I'd probably be using an 8 year old TV.

Are there any reports of smart TVs not working completely (inputs stop working) because the "smart" connected features stop working?

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.

In scenario 2, I've had the choice of actually using the TV.

Now suppose you lose your job in Month 10. The TV-less person will continue not having a TV, and use those funds for emergency day-to-day living expenses as he (or she) gets his life back in order. You can even dip into your credit card credit line for an emergency.

But the person who bought the TV on interest is in debt, has less credit to live off of, and only a TV to show for it.

-----------

In either case, saving up a pile of 6-months of expenses cash-on-hand is a good strategy. If you have 6-months of expenses saved up, you simply buy the TV with that money, and then in a year you put money back into your cash account.

Look, now you have the benefits of all strategies! Saving up money for emergencies, or even large expenses (LONG before you even think about those expenses) is the way to go.

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 your TV out of it you no longer have it - and this fund becomes nothing more than a general savings account. The kind of thing that drops low right after you buy a TV, or a car, which from my personal experience is exactly when bad things happen. And often bad things require cash on the barrelhead, not just credit cards.

So don’t do this. Either save in a slush fund for your TVº, or put it on a credit card, but don’t take it out of your emergency fund and still call it an emergency fund - 'cause it’s not going to be there for you in an emergency.

º or my personal favorite: a throw away, but named, savings account. (Like CapOne360, née Ing Direct, offers.)

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 credit card. Now of course, if you have $15k "Emergency use only" PLUS $5k "discretionary", then yeah, spend the money from your discretionary account first.

People able to save 15k of cash usually have decent credit ratings and can get 0% financing for most things.

> 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.

I wouldn't use that emergency fund money for something like a TV, because it's not really a necessity. Dipping into the emergency fund for indulgences leads to a depleted emergency fund.

Now if your heater breaks and requires replacement, that might be a reason to tap into savings.

I think that's a valid point. TV is quite a luxury item, I spent more than half of last year building up my emergency fund without a TV or couch (still missing couch: I'll get that soon).

But I recognize that I personally like to live on low expenses, lower than other people. For the spenders out there, even just saving up enough for an emergency fund is a big deal.

The important thing is that piles of money are a tool, as is credit (including credit cards). Use the tools as you see fit, but there are definitely "best practices". If you have a large pile of money (ex: Emergency Fund), it makes more sense to buy using that money rather than to dip into credit.

After all, you could always use your credit card in an emergency. Spending available cash first will be cheaper in the long run (as long as your spending habits remain in check)

> You've essentially paid $72 for the privilege of getting the TV you wanted a year earlier.

And that's almost an entire month of savings.

Now, correct your rates with what's on the other replies, and we are suddenly talking about 2 or 3 months of savings. Just for getting that TV an year earlier.

Yes, that may be worth it. But almost always isn't.

> Yes, that may be worth it. But almost always isn't.

I don't disagree with you, but until you provide some evidence this is just the opinion of some random stranger on the internet, and should be taken with a pound of salt.

> 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?

You're missing the forest for the trees.

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?

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...

> 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.

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.

No.

Tv don't enable you to get a better job/keep your current. If you want the argument to mean anything then you have to trade like for like. A nice couch will last years and it is still a frivolous consumer spending object. Is it worth it to pay ~80 usd to have the couch a year earlier?

Here's what I just read:

> > > > Here's my argument.

> > > That argument's too weak.

> > Okay, here's a stronger version.

> No, you have to stick with the weak version.

Personally, I want to hear the strongest version of the arguments when I'm making a decision.

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.

In practical reality though, if you can't afford to pay cash for it, you can't afford it. People ignore a lot of the hidden/maintenance costs in their lives.

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.

Oh, well, if an Youtube video says so, it must be true.

Does it show any evidence for that theory?

The video is by Ray Dalio, founder of Bridgewater, and it states that it's just his personal mental framework to understanding the economy; not claiming gospel or anything. Either way, he's kind of a big deal.

Outside of the big purchases, home and transportation, it is safe to say if you cannot save for it in a reasonable time you really cannot afford it.

The only time I buy anything on credit is when it is zero percent on the terms and even then if I could buy it outright or save for it quickly.

It just is too easy to get in the trap of credit and reasoning it out is the first indication you have a problem. If its important save for it, if you cannot save for it get credit counseling

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.

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 charge you the actual price, and then refund the hold (like many fuel stations)

B.) If you don't get paid weekly, and instead biweekly, monthly, or more sporadically than that, putting all spending that doesn't absolutely have to be drawn directly from your checking accounts on credit makes a huge amount of sense. You can float that tank of gasoline, or your groceries on credit, but when the heating oil needs to get filled, or the rent is due, you need cash in hand, and you don't want to get caught short. More of an issue if you're not paid very well to begin with and haven't got much cushion built up.

C.) Buy stuff on credit, collect the reward points, pay it off before the next statement, and you've gotten free money for things you'd have to buy anyway.

D.) If a credit card gets stolen and somebody goes on a spree with it, you just dispute the charges with your bank, they issue chargebacks, no real money is gone from your account. With a debit card, good luck, they just vacuumed money out of your real checking account.

Credit cards are great for all the reasons you listed, but there is rarely a good reason to carry a balance and pay the exorbitant interest rates on one.

You can get all those benefits while still paying the balance in full each month and paying 0 interest, even using the time until the next statement as a free 30-45ish day loan.

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.

A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances.

B) Don't live check to check. Keep track of your own finances.

C) And if you fail to do that once (because you're probably living check to check), you've nullified any free benefit you ever received.

D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.

> D) Horseshit. I had my card stolen by the Target breach, there were charges on it all over Europe, and within a week I had every penny back.

Let's say that week happens to be the one when your rent/mortgage is due, your car payment is due, your student loan payment is due, etc. It doesn't matter that the money goes back into your checking account eventually, if it's not there when it needs to be, you get hit with overdrafts, bounces, late fees, marks against your credit history. Those aren't things you can just "opt out" of.

Using a credit card is a useful layer of indirection and buffer.

I don't live check to check, and I don't keep all of my cash in a single checking account.

edit: I guess keeping cash surplus to my immediate needs in a savings account is opting out?

It's always better to have problems with somebody else's money when your contract scopes your liability narrowly. Even if I follow your advice and do A, B and C, D is still a problem that I need to deal with.

Case in point. I had a two-week hotel stay and facility booking at a resort on my AMEX. The hotel fucked up and double-charged me for the event -- to the tune of $20,000. Due to their obtuse bureaucracy and overall stupidity, it took two weeks to get the issue resolved.

In the debit card scenario, I'm stuck with a $20,000 liability immediately upon the hotel screwing up. I don't keep a five-figure balance in my checking account, so that's a problem until I notice that this event has happened. (Which I may not, because I'm on the beach enjoying my honeymoon and not checking my mail).

With the credit card scenario, I get back from the event, open my mail and discover a $40,000 bill instead of a $20,000 bill. Nothing is bounced, everyone is paid, nobody is angry at me. I make one phone call to AMEX, dispute it as a double charge, and my risk (and work) is done.

Am I wrong, or wouldn't exceeding your credit limit have exactly the same effect?

The facts are simple: Consumers have more protection on a credit card than a debit card. The Visa/MC logo on your debit card gives a false sense of consumer security.

Here's an example. Buy a laptop from ebay. Pay with debit card. Seller ships a brick in a laptop box sends via Fedex. You sign for the package, open the box, realize it's a brick. You dispute the charge with your bank. They are nice so they provisionally give you a credit. They call the sender. Sender says "I have a tracking number, he signed for it, he's lying, I sent him a working computer." You lose this dispute. The bank tells you to sue him in small claims court.

With a credit card, as long as you dispute before you pay the bill, the dude doesn't get paid, and you don't get charged. Once you pay, your rights are diminished.

> B) Don't live check to check. Keep track of your own finances.

I'm not saying this to be aggressive, but you're missing something in the calculation. http://www.investopedia.com/articles/03/082703.asp

You should be more aggressive, because I don't understand the point that you're trying to make.

> A) Opt out of "overage fees and bounced-check insurance" which would be the problem here, not debit cards. Keep track of your own finances.

How would that work? With banks in the UK, you can either say (1) let the charge through, in which case they will charge you "unapproved overdraft fee" or something, or (2) reject the charges, in which case they will charge you "unpaid transaction fee" and not pay the bill (which I think is a crime, because they're literally charging you for nothing - as they didn't deliver the service (pay the charge)), in addition the company that issued the request will charge you a fee as well.

I can only hope that elsewhere, regulations are a bit more sensible so that there is no potential for this kind of abuse.

You make sure that you have enough money in the bank to cover what you spend.

One problem: Debit cards are automatically paid down at zero all the time. None of the credit cards I've ever had have made it easy to automatically pay down to zero. You have to do it manually - you remember most of the time, then you're a bit late one month, and it's enraging. Credit card companies have every reason to make this difficult.

I've had credit cards since 2005, and at least 15 different ones, and they've all had an option to autopay online so that you don't even need to remember to pay your bill. I highly doubt any major bank issued card does not have an auto pay full balance option.

Card issues make crazy amounts just in the transaction fees merchants pay, they have no reason to dis incentivize people from using them for as many purchases as possible.

> None of the credit cards I've ever had have made it easy to automatically pay down to zero. You have to do it manually

My bank's electronic bill pay automatically pays my full credit card bill, every month, without fail. It's been doing that for at least a decade IIRC. Is this that unusual?

Consumption smoothing is a perfectly valid use of debt.

Suppose I have utility = log(consumption), but my income is volatile. If I have 1 income in year 1 but 10 income in year 2, and use no credit, my utility is log(1)+log(10) = 2.3.

If I use credit, I can have utility log(5.5 / (1+r)), with r the interest rate. At 10% interest, that's 3.2. At 20% interest that's 3.0. At 50% interest that's 2.6.

So even at 50% interest I'm increasing my utility by 10% due to the use of credit.

I suspect that the average person - actually, make it 99.5% of the people - is better off with advice along the lines of "if you can possibly help it, don't get into debt to buy anything that can't be used to make enough money to offset the interest, and be very careful even " then "get into debt as long as the utility offsets the interest."

I think so because I doubt that most people (regardless of how good they are at math) can trust their current selves to compare utility from consumption to disutility from having to pay back (meaning that their future self will often disagree strongly with their current self.) This is not to say that someone else should be trusted with decisions about savings and loans other than the saver/borrower (forcing someone to put money into a pension fund on the grounds that they're irrational and then not really paying the pension back is a bit too common for my taste), just that "by default, don't get into debt" is good advice.

More generally, IMO quite often clever utilitarian maximization works worse than simple rules designed to keep you out of trouble first, and seek "utility" later. (I guess I don't quite believe in people being utility-seeking machines, not to mention ones having stable preferences, nor do I believe that a person is truly better off having achieved more utility per unit of time.)

I realize it's not a satisfactory argument, of course, if one does believe in utility maximization as a good way to think about these things, and I really wish I could back this up so it's more than a hunch...

If I use credit, I can have utility log(5.5 / (1+r)), with r the interest rate. At 10% interest, that's 3.2. At 20% interest that's 3.0. At 50% interest that's 2.6.

Correct idea, incorrect math. The optimum is found with (11+r)/(2 + 2r) consumption in year 1 and (11+r)/2 consumption in year 2, for a total utility of 2 log(11+r) - 2 log(2) - log(1+r); at (10%, 20%, 50%) interest rates this yields (3.33, 3.26, 3.09) total utility.

Good catch, I wildly oversimplified. That's what I get for doing arithmetic before coffee.

Key idea is that since utility is concave, smoothing it out is a win. Now just trade off the gains from smoothing against the losses from financing, and you are golden.

Why is utility modeled concavely?

My utility from eating (in one time period) $800 worth of food is less than 2 x utility of eating $400 worth of food. Doubling my consumption doesn't double my happiness.

Concavity is a way of formalizing this intuition; it means, roughly speaking, that f(2x) <= 2f(x).

Econ uses log(x) as a simple model, but the same idea would apply to any convex function albeit with different arithmetic.

Thanks, that makes sense. I guess that's why flat income tax rates are considered "unfair" since they are modeled on a linear expectation of utility.

Why are you sure that for you, $800 worth of food is less than 2 x utility of eating $400 worth of food? How would you convince somebody who thinks you are wrong (e.g. deluding yourself, or not telling the truth)?

https://tgmstat.wordpress.com/2014/01/22/declining-marginal-...

Due to the Law of diminishing marginal utility.

In the scenario where you can predict with certainty that your income will increase by tenfold in one year, sure, that's rational. That is not a realistic situation for most people.

While that's a valid point, the parent was speaking in generalities across most people - given that most people have consistent incomes from wages, do they really need consumption smoothing?

Correct, but a bit misleading. You're taking a person that has income that increases tenfold over a year. For most people the rate of increase of income is smaller than credit card interest rates, and you can really justify high interest rates when you assume that you're going to make a lot of money next year, but then again Steinbeck said that most Americans think of themselves as temporarily embarrassed millionaires :)

Probably "year" is the wrong time period, but lots of people have very volatile income. A consultant can easily have 10x variance in income from month to month. A musician or actor might have 0 gigs one month and 5 gigs the next.

Shortening the time period just lowers the financing costs.

True, but still how many broke musicians and actors should be considering this month's zero income a fluctuation and get into credit card debt and how many should just be more conservative with their spending?

If you look at my example, the person with peak income of $10 spent a bit under $5.5/month. Both time periods were "fluctuations" from his average income of $5.5.

Yeah but the first one was 1 the second was 10, not the other way around. After one month at 1 how do you know you're going to average out at 5.5?

If you're going to go full economist, the correct use of debt is whenever the expected value of having something now instead of later exceeds the expected lifetime cost of servicing the debt.

So it would be very reasonable to take out a loan for a car or a house, especially with interest rates around 4%. It might even be reasonable to take out a loan for furniture or a TV, but fiscally responsible people will usually have enough cash to pay instead, so in practice most responsible people don't take out loans for TVs.

By the way, houses historically did not appreciate at high rates. The recent dramatic appreciation in housing prices in big cities is a giant blip in the data. You shouldn't bet on housing appreciating so well, and you shouldn't buy more house than you will use or rent. (If you think the increasing importance of big cities will automatically mean higher prices, ask homeowners in Tokyo how well that's been working for them.)

> 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 count the rewards and the tiny amount of bank interest they may receive.

[1]: http://www.creditcards.com/credit-card-news/credit-card-debt...

I don't even think of myself as using debt. I see credit cards as a way to get an extra $50-70 a month in rewards[1] and increase my credit score. I have never paid a cent of interest.

[1] I have a card that gives me 5% cashback in gas, groceries, and books up to a limit that does not often surpass what I spend and some rotating 5% cash back cards, in addition to a 2% general spend. I do not pay any annual fees for using the cards.

Interesting. What card is this?

American Express has a card "Blue Cash Preferred". You get 6% back on Groceries (up to $6k/yr), 3% back on gas, and the card has a $75 annual fee.

If you only use the card to spend $100/week on Groceries, you get $312 in cashback rewards. Subtract the $75/yr fee, and Amex paid you $237 to use their card that year.

(Amex isn't the only card like this -- there's lots from MasterCard and Visa as well. This card in particular just happens to be one of the rewards cards that I know the details of.)

I don't understand these reward schemes. Surely they are being funded by higher merchant fees, which means merchants charge more, which just means that the rewards are a transfer scheme between people who pay by cash/unrewarded cards and those with rewards cards.

You can also get Amazon gift cards at grocery stores that provide gas points. For example, at Safeway $500 Amazon gift card purchase will give you $30 AMEX cashback + $25 discount on gas if you dont mind bringing a couple of gas cans with you to the station.

Several different cards. Sallie Mae Rewards MC from MC (sadly discontinued recently for new signups), Discover It, Chase Freedom, and Double Cash from Citi.

I'm not well versed in the history of consumer debt, but 34% carrying month-to-month debt seems historically high, since consumer credit cards were only widely introduced in the mid-20th century[1], and took a few decades to reach mass penetration.

The page you linked to shows that even the events of 2008-2009 didn't set people back from expanding their personal debt, which is surprising to me. Given our fairly short history with widespread revolving debt, we might be setting ourselves up for another, bigger, debt crash that the government won't be able to bail out.

Of course, revolving debt does have a longer history than that, but it was often used as a "barely-there" facade for stealing money from the poor, e.g. coal miners living in a company town weren't paid enough to buy food at the company store, so they ended up in life-debt to their supposed employer. Of course, in that scenario, the company made money even if the coal miner died without paying them back the full amount they owed. These days, companies trade consumer debt like it's real money, and get in actual trouble when the music stops.

[1]http://www.creditcards.com/credit-card-news/credit-cards-his...

> The page you linked to shows that even the events of 2008-2009 didn't set people back from expanding their personal debt, which is surprising to me.

The page I linked, under the heading "Transactors versus revolvers," presents a chart that shows the percentage of households with revolving debt declining from 44% in 2009 to 34% in 2014. A 22% decrease over five years is rather significant, no?

Interesting. I was looking at the total debt, the first graph in the article. So fewer people carry month-to-month, but the total dollar amount of revolving debt is still going up. It is good that fewer people carry it, but it still looks like a significant portion of the population is increasing their debt level.

Wouldn't being able to continue your life unobstructed by the need for some potential purchases be an asset in the same way the parent described student or car loans as potential assets? If something comes up outside your usual cash flow, say a tire blows, and smoothing out that irregularity helps you keep your job, I would consider that a worthwhile investment.

Student and car loans are not assets. They are debts used to finance assets.

"Only" 34% ?

I imagine it is still a huge amount in absolute terms.

Yes, 34% of households is a lot of households. But part of the point of the article is that most people do not handle their debt well, however, most people with credit cards do not carry credit card debt month to month. It doesn't mean the article is wrong but it is certainly a point against the article's thesis.

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.

My understanding is that about 75% of households use credit cards. So, that's about half of them.

Debt is useful to change the time between income and expenses; it solves a cash-flow problem. That's the real key: treat it as a time adjustment in flow, and not as a stock. It's not something you can dip into, as it were; it's something you use to move consumption closer in time, in return for reducing potential consumption in the future.

If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman?

Businesses use debt for all sorts of reasons; cash flow, tax, paying out profits in a different form, or simply because debt is cheaper than equity.

> If you're using it to buy an asset that appreciates more than the interest on the debt, what makes you think that you're a better judge of asset prices than the people lending you the money? Why wouldn't they just buy the asset directly, and cut out the middleman?

Because it's not their (core) competency or they don't want the risk.

I could start my own company printing indie games. But I have no connections in the industry (well, not entirely true, but none that are exploitable for this), I have no experience running a business, but I do have capital. And someone else who does have those connections and experience wants to start up such a business. Collateral on the loan protects my money (partially) in case of failure to repay, while the risk is mitigated by having someone more experienced doing the work.

Someone working in a company printing (?) indie games isn't an asset, though (except in the accounting sense of the lender, as a stream of repayments; but that's not the perspective that's under discussion - individuals borrowing, not lenders lending).

Point being my rationale was slightly different; it includes more things - it's more general - and it's a bit more negative on the idea of simply buying a rent producing or appreciating asset.

You asked: Why wouldn't the lender buy the asset directly?

The reason is: They don't need it. They want income, not assets.

Lenders buy income streams; income streams are assets, from the lender's perspective.

> Why wouldn't they just buy the asset directly, and cut out the middleman?

Let's see, why doesn't Bank of America just buy millions of houses rather than lending out mortgages?

1. They don't need and don't have the manpower to maintain millions of houses.

2. Empty houses owned by the bank are not as valuable as houses with people living in them. If the bank owned every house in a neighborhood, nobody would want to live there and their value would drop.

3. They get to shift some of the risk to the person taking out the loan. If the value of the house drops, the borrower is still on the hook for paying the original amount (up to a point, unless they're willing to go through bankruptcy). So they don't get as much upside, but they have less downside too.

I'm sure there's other reasons as well.

> 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 earnings per share and make investors happy (but not providing any actual income). Another common use is commercial paper markets which corporations use for short term obligations (payroll!) and to smooth out cash flows, this is actually pretty similar to a credit card on a personal scale.

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 this field and have basically just skimmed through the soylent blog post

http://blog.soylent.com/post/133420708272/pricing-soylent-ef...

so in my mind, what we want to do is get the "interest-free loan" from our supplier of equal or greater duration to the credit term we give our customers.

I imagine this is a double whammy because suppliers offers better terms when the going is good and become strict when the going gets bad. Now that I think about it, perhaps Apple sitting on a pile of cash isn't such a bad idea after all right? 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? I don't know the rules about financial stuff but my perception is that as public companies there is only so much information you can withhold (and only for so long) without breaking financial regulations (and those regulations presumably exist for a good reason).

"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.

> 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.)

so in my mind, what we want to do is get the "interest-free loan" from our supplier of equal or greater duration to the credit term we give our customers

Yes, you got it :-) Although it doesn't always work in practice. As a small business, I have a UPS account with net-7 terms (they bill me once a week).

This is not normally considered debt, though. It's a liability, but there is no formal loan agreement. I may have a customer push payment out to 90+ days and I end up getting the same amount as if he had paid me within 30 days as agreed. So if UPS charges me $100 to send them an item overnight, but they don't pay me the $5,000 for that item for 3 months, I still have to pay UPS within 7 days.

I mean if I want to ship something, Fed Ex will ask for payment up front

They might ask for payment up front, but they'll quite happily take a credit card instead. Yes, credit cards are a form of transactional debt if you pay them off each month; they allow you to enjoy your purchases for ~ 1 month before paying for them.

I imagine the credit card payment processor pays at the end of the month? So when one accepts payment using credit card, is that an automatic 30 day credit the seller has extended to me?

I didn't think about that. So essentially, the credit card issuer didn't really spend "their money" at all. Wow. The more I learn the more I realize how little I know.

No, the bank that issues you credit will pay the merchant in a few days after the merchant charges your credit card account. The bank issuing your credit card is the one that extends credit to you, however, there is usually a few days between the merchant charging your account and the bank sending the merchant the money.

Afterwards, if you do a chargeback, the bank will yank back the funds from any other amounts the bank owes the merchants, but if the merchant has enough proof the cardholder participated in the transaction (aka, swipe and sign, or chip and sign, or use of CVC code online), then the bank will give the money back to the merchant. The bank still takes $30 or so from the merchant as a fee for getting a chargeback though, but I'm sure that amount and terms vary from merchant to merchant, depending on their purchasing power.

This is interesting. I'd think the card-issuing bank has incentives to delay the payment as long as possible though. I'd imagine 30 day is not that bad of a term. Why is that not the case? I mean what is the merchant going to do? Stop accepting American Express?

A friend told me about this case where a vendor charged his American Express twice. They called the vendor about this and the vendor yelled at him so he called American Express for a charge back. Apparently, American Express went in and did a charge back for the whole amount. I am glad they did the charge back but it must suck for a merchant if the charge was legitimate and the customer was being a jerk.

>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

You don't think buying a stake in a successful company (in this case one that happens to be your own) is buying an asset? The mechanations are slightly different, but you're still buying shares. An effect is rising EPS (due to retired shares), but that isn't the purpose.

   but that isn't the purpose

Sometimes that is precisely the purpose.

Not at all, it's a giveaway to executives (who get bonuses based on EPS) and long term shareholders. Some firms also borrow money to fund a dividend which is just a literal giveaway.

>Not at all, it's a giveaway to executives (who get bonuses based on EPS) and long term shareholders.

Putting aside the executive giveaway (because I have a hard time believing that there are executive bonuses so intertwined with EPS that the company can just burn money on buybacks to increase that bonus without any external fuss or anyone questioning why)...

...who or what else matters beyond the shareholders?

Share buybacks aren't a scam. They exist as a method to return capital to shareholders and can be smart or not depending on a variety of financial circumstances. Just like every other financial decision.

http://aswathdamodaran.blogspot.ca/2014/09/stock-buybacks-th...

You're correct that there are a multitude of uses for debt (e.g. working capital management). I do think the parent was on to something though - the cornerstone of the private equity/leveraged buyout industry is borrowing debt below your return on equity to amplify returns. This can be a wise strategy for individuals to cautiously replicate.

I can see how a share buyback would put upward pressure on the share price, but how could it have a positive effect on earnings? Seems like it would have to have a negative effect on net earnings over the long term if the buyback was financed via a loan, due to the need to repay the loan.

Parent was writing about "earnings per share", key word being "per share". So with fewer outstanding shares, this obviously increases.

Ahh, ok that makes sense, thanks.

And EPS is one of the big metrics for share prices (the PE ratio uses it for example). It makes sense that if there are less shares they should all be worth more, but EPS is the reason why that is the case.

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

Just appreciating is not good enough. You have to compare it to getting a safe investment paying market interest.

http://www.investopedia.com/terms/i/irr.asp

http://www.investopedia.com/terms/n/npv.asp

Unless you take some utility of the appreciating asset, you should always go for the best investment.

> Carrying a balance on a credit card is almost never an appropriate use of debt.

One exception: Credit cards with those introductory "6 months interest free" clauses. Sign up for as many as you can get, with as large a limit as you can get. Max them all out on payments into a mortgage offset account. Just before the end of the interest free period, pay them all off again. (I've heard of this being done but I'd bet it's a lot harder to pull off these days.)

Clever idea, but these days I think that would be tough to pull off. Most balance transfer offers come with strings attached, typically something like a 3% fee for taking the money. That is almost as much as the raw interest rate on my mortgage, and might actually be more than the effective interest rate (considering tax advantages).

I did that about 20 years ago to pay off about 12k of debt I accrued. Basically kept shuffling the debt from one "interest free for 6 months" balance transfer to another until it was all paid off. They are still around today, just not as popular.

My understanding of debt is as the cost of shifting purchases in time, in the same way as barrkel [0].

Working out what the cost is going to be up front only works if you stick to your assumptions throughout repayment, which is a good way of understanding part of the problem with debt - even if you calculate properly against uncertain events for the average case, you as an individual can be caught out by bad luck.

Attempting to subsequently solve the consequences of your bad luck with further debt seems to me an instance of the gambler's fallacy [1], and is another important part of the problem with debt.

[0] https://news.ycombinator.com/item?id=11135283 [1] https://en.wikipedia.org/wiki/Gambler%27s_fallacy

It isn't just credit cards, it is all monthlies. They add up and can catch many people by surprise. Another trap is not paying for small items like coffees, lunches and the like in cash. You lose a mental connection there.

Back to monthlies, the big ones are non negotiable and those revolve around your housing. For many the mortgage or rent will be with them for years. So pile on utilities and then comes nearly the near optional monthlies.

You get your phone, your internet, your various streaming sites, and more. Then toss a car, credit cards, and then more.

How to spot these people, look at ones who shop cars based on what kind of monthly payment they can squeeze up too. If they went over four years its a bad sign, if they went six plus, well end of story.

Oh, one last note. Track your food purchases, all of them from grocery to on the go. You might be surprised

Eh. I used to make a lot less money than I did now. I got into around $10k of debt, mostly buying "useless" things that made life fun, like ordering in, etc. Now I make 4x what I used to and the debt is trivial to pay off. Debt also makes sense when money is worth more to you now than later.

Money is always worth more now than later. That's why when you pay back money later, you have to pay back more than you borrowed (among other reasons).

Not in the case of negative interest rates.

Well written...

From experience (not mine) too many people consider only one factor when making the majority of purchases with credit:

Can I make the monthly payment...?

If they can they plunge headlong...

Of course just paying the monthly minimum on outstanding credit card balances is disastrous...it's kicking a loaded can down the road...

That's a good way to use debt, but far from the only rational one. The best reason to use debt is for consumption smoothing. For example -- a car breaks down unexpectedly, and now the owner can't make it to work. They won't get paid if they don't go. "Save up for a repair" doesn't work. This is perfectly legitimate reason to spend now, pay later. It's the canonical reason to use credit. The asset they buy -- a new alternator, or whatever -- isn't going to appreciate. The interest they pay is simply to pay for the service of having money now instead of later. That doesn't mean it's foolish.

Another reason to take on debt, as an individual, is to leverage your position -- It's indirectly related to provide income in excess of interest payment. An example would be to take on debt to purchase a vehicle to broaden the area where you can potentially work. You have to make sure that you buy a vehicle at the optimal marginal return (so close to a clunker.) and I think that's where the problem resides: I see individuals have possessions that cost way below the optimal marginal return for status.

Unless of course there is no interest for X months. Then what's the difference, assuming you are smart and pay it off in time.

Or, of course, if the furnace goes out right before Christmas and you don't have any money (except a credit card) because you were laid off 3 months prior and haven't been able to land a new gig yet. That's how I started the year with $700 more in credit card debt.

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

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

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 don't know why.

I highly recommend to anyone who's looking to take their financial situation more seriously do two things:

1. Read up on Mr. Money Mustache, a guy who managed to retire at 30. Even if you don't plan to retire early, it's eye opening to realize you don't have to spend your entire paycheck every month: http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-...

2. Check out YNAB (You Need a Budget): https://www.youneedabudget.com/. Takes a little work to start using, but once you do, you'll understand your money in a way you never thought possible.

> why do people buy things they can't afford and most often don't need

Advertising.

Most people are afraid?/too proud? to admit or even consider they may not be 100% rational or 100% in control of the own actions despite numerous studies showing you are not

Advertising, very obviously, manipulates people into making choices. Most of which are not in their interest. The original article even has an example; in the three kinds of ads for loan. One ad was twice as effective. In advertising, "effective", "conversion rate", etc all mean better at manipulating people into making the choice the advertiser wanted.

Some documentaries https://www.quora.com/What-are-some-great-documentary-films-... you can google for papers/studies. Or, just bury your head in the sand.

You've touched upon the idea of people unwilling to admit that they are in control of their own actions.

I read Blink by Malcolm Gladwell recently. He posted an exercise where by the end of it, it revealed certain internal biases I have towards black people people, namely that there's internal friction to associating positive words with black people as compared to association with white people (I'm not white).

I don't consider myself deliberately racist to black people. However, when I consider the representations of black people I get to see, it's usually negative (in the news, TV/movies) vs. the wide gradient I see for white people.

I know I unconsciously make connections between concepts, such as when I'm learning a new programming language, practicing an instrument, or reading article after article about a certain topic. I don't need to state a = b, because my mind will often make the connection for me. Given the amount of money and time invested in ads, surely I'm also influenced by messages that I consume and that they can affect how I connect certain concepts.

I've been able to attempt to counter it is to practice mindfulness, in order to be more conscious of these thoughts and question why certain feelings erupt. Additionally, reading more about automatic thoughts and the biases that influence them. Lastly, detaching myself from sources of 'bad' information, namely minimizing usage of Facebook Mobile (filled with ads) and television.

That's a fair point. It's sad that most people don't "wake up" from it and learn to ignore and disregard them. Those documentaries look interesting, thanks for the link.

I think the answer to your question depends on how much free will we actually have. There is strong evidence that we, speaking in terms of averages over the whole population, are successfully manipulated into purchasing unnecessary things. Even though it appears to each individual that each purchasing decision is an exercise in free will.

Mr. Money Mustache is pretty awesome but the guy had a very highly paid job that allowed him to retire early. Some of us are fiscally responsible and don't make all that much cash - I find that a lot of his advice is fairly useless unless you have some money to begin with.

"I find that a lot of his advice is fairly useless unless you have some money to begin with."

The bulk of Money Mustache advice is about avoiding paying money for stuff that doesn't really improve your life. This advice is actually more important for people who don't have money. As Mr. Money Mustache points out, most things we buy are "luxuries", we don't need them. And adding a little hardship to our lives, avoiding needless luxuries, actually improves our happiness. See, e.g., http://www.mrmoneymustache.com/2013/08/29/luxury-is-just-ano... --or-- http://www.mrmoneymustache.com/2012/03/07/frugality-the-new-...

In other words, "what the hell is someone doing buying a $1,200 tv on credit?!" What's wrong with a $400 tv? Or a $200 tv? Or no tv?

I'd disagree on that last part - I'd say that if you're not making a crazy salary his advice is even more valuable. Most people spend an obscene amount of money on things they don't actually really need. Some classic examples:

A $3 coffee everyday adds up to about $90 a month, when you can usually just drink free coffee from your office or buy some cheap pre-ground stuff.

Spending $5-6 for lunch each day at work can easily add up to another $100+ dollars a month, when you could just make a bunch of peanut butter and jelly sandwiches and spend a fraction of that.

So there's close to $200 a month, right there.

If you're trying to retire early, it's definitely way tougher on a lower salary. But improving your spending habits is an important skill for everyone, especially for those making less.

This is the best way to get depressed. It's always significantly easier to negotiate a $1k raise than it is to reduce your spending on basic stuff by $1k.

Focus on earning more, not saving (on useless expenses).

I'm reminded of http://www.theonion.com/article/man-brings-lunch-from-home-t...

>>This is the best way to get depressed. It's always significantly easier to negotiate a $1k raise than it is to reduce your spending on basic stuff by $1k.

Ideally. But in reality with bad habits you will spend that extra $1K you started earning.

>>Focus on earning more, not saving (on useless expenses).

Both. Without discipline its all useless. Why else do you think so many athletes or lottery winners lose those millions?

I like buying stuff as much as the next guy, but if not buying things you don't need would make you depressed, you probably have deeper issues that need addressing.

Or both.

The MMM philosophy isn't to deprive yourself. It's to learn to find satisfaction without the high cost.

Personally, I hate eating out every day. Packing a tupperware with leftovers is much more my style. I save about a thousand a year because of this, but I don't feel deprived at all.

If you don't have any sort of budget, making more won't solve your problems.

For an average American with household income $50k, getting a $1k raise (after tax) is probably not trivial. For techies in SF, definitely spend time on building your career, negotiating compensation, and try to save on rent.

>>I find that a lot of his advice is fairly useless unless you have some money to begin with.

Any investment advice is fairly useless without some money to begin with, investing is the art of bootstrapping.

>>why do people buy things they can't afford and most often don't need, putting themselves in this position?

Irrationality. They don't think the situation through.

"Do you know that my personal crusade in life (in the philosophical sense) is not merely to fight collectivism, nor to fight altruism? These are only consequences, effects, not causes. I am out after the real cause, the real root of evil on earth — the irrational." - Ayn Rand

Bad things happen to people when they decide to put their feelings above rational evidence and thought.

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

All I can say is YNAB worked well for me. Though it may only work for a certain type of person. It's one of those things where you really need to take them up on the free trial to see if it works for you.

The way I see Mint vs YNAB is: Mint is reactive while YNAB is proactive.

MMM isn't retired, he is a handyman and ad-supported blogger.

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 committed to 48 payments.

I know that paying an exorbitant amount for a smartphone is not a wise financial move. But here I am anxiously awaiting the release of the Galaxy S7 to see how great it is. I'm sure I'll want one. I'm sure I'll tell myself my life will be better if I can take beautiful photos with the camera and it will be worth the cost in that regard. (My current phone's camera sucks)

... 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.

Protip: The note 4 has a wonderful camera and quite often goes on bargain basement sales. If you're OK with used, you can pick them up for a song on Swappa. Personally I wanted a note 4 since it came out, and I waited until after the Note 5 was out to buy it. I love it just as much as if I'd bought it when it was fresh (plus the new phones don't have removable batteries or microSD, and who wants that?)

I think it's peer pressure, every small things that urge them to be the best in their job of consumers and that trick who is: actually paycheck is only valuable when (and not how) you use it (for most people).

When a late payment is $39.99 and a mark on your credit record, even the smallest, lowest-interest debts become high-risk. Reducing the number of risks (and mental energy managing them) easily outweighs the interest differences.

When you have to spend a 1/2 day to refinance a credit-card to an unsecured personal loan, it's not always a clear win: you might not get the loan, or the loan offered might have significantly higher interest rate than advertised, etc.

Exactly. Every small balance is a potential disaster in the making, an autopay that inexplicably fails, a teaser interest rate that expires, an unexpected annual fee or recurring charge from a merchant, a supremely annoying hour on the phone, etc. I had the exact same reaction to that part as you did. If you're going to evaluate economic actors for rationality you have to make sure your assumptions of what's rational are well grounded first.

I agree. I find my self doing this often with to do lists. Knock off quick and easy stuff so i feel like im making headway even if its not the most important / impactful. I find that more tempting in personal than work where i am only accountable to My self. So I can definitely to the "irrational" people in here, it's not so irrational when you think about all the consequences.

Also, typically debt accounts have minimum payments. One point in favor of the Snowball Method[1] is that it typically increases your working capital at the expense of greater total payments. For people with few assets, this can help insulate them from emergencies.

[1] https://en.wikipedia.org/wiki/Debt-snowball_method

Hmm.. I agree with this a bit, but I think (like all things) the answer lies in the middle. Speaking purely from anecdotes, I'm well versed in the math behind interest rates and debt management, yet I still find myself with urges compelling me to pay off smaller debts first. This is even when it takes no mental energy for me to manage my current situation because my payments are set up to automatically deduct. I think my own urges come simply from wanting to feel like the money I spend on a car payment is suddenly "freed up" and available, despite losing money by allocating it from other mathematically better uses of that money. I recognize that this is a misguided notion, but it's still tough to get away from, and I believe it has some to do with how my brain accounts for losses versus gains.

Now I'm also not saying that your situation doesn't happen either, so I'd still say this article is useful if it helps anybody who is truly misevaluating their debt situation to rectify it and pay less interest overall.

Many online companies now let you get a personal loan in far less time, id say in under an hour for most people. There may be a veritification process that adds on time but it's definitely not required for everyone (and usually are for people who are uncomfortable with online verification)

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.

Yes, in his course he explicitly explains this strategy is in deference to human psychology. Even if paying towards highest interest debts is mathematically optimal, better to have a strategy you are likely to stick with, than a theoretically better strategy you are more likely to eventually abandon.

I've found this train of thought has applications in maintaining an exercise routine as well. It was more about finding a routine that I'd actually stick to than one that was optimal for fastest/best gains, which was my original (failed) strategy.

That does sound rational though, by paying off the small debts you reduce the amount of information you have to comprehend. It may not be ideal financial advice, but it will make the remaining debt easier to manage on an emotional level. You also get the peace of mind that those smaller problems will now not spiral into larger problems. You are free to focus on a resolution to the problem.

We had a few small debts (2 student loans, credit card, car payment) and when a friend explained the debt snowball concept it was definitely the key factor in us paying off our debts faster. For me it felt like I was back in control because I actully had a plan that made sense and seemed actually doable.

And I think this is the key. Debt is a weight on people and it wears them down. You need to build that person back up even if that means not taking the absolute most efficient means to pay off the total debt.

I'm following the snowball method now. The reason I like it is that I free up money faster. If I have $4000 on a credit card and the minimum is $100 a month. If I pay that smaller balance off quicker I free up that $100 a month to be used towards the next debt.

I think you hit the nail on the head. My wife and I are using the debt snowball method and I just payed off one of our debts in full yesterday.

It may not have been the largest debt or the one with the highest interest rate but it's one thing I don't have to worry about now. It's one fewer company I have to deal with monthly. It instills a sense of hope that "we can do this!" that I'm hoping will bolster our budgeting and help us tackle the larger debts.

While I agree in that it obviously is not the smartest way of doing that, if it gets people to actually feel like they have a plan for taking care of their debt and to start making progress on doing so, then it's worth it.

Obviously they probably shouldn't have bought a bunch of things they didn't need, but hindsight's always 20/20.

This whole idea that "oh you have multiple creditors obviously you've made bad decisions" is misguided and naive in the extreme.

People have medical bills. People need the counsel of attorneys. You generally need a reliable car to get to work and a roof over your head. You can have huge mountains of debt and be forced to dig your way out by the skin of your teeth through no fault of your own.

Paying hundreds a month in credit card interest is not reserved for shopaholics.

Those are all valid reasons and of course it's understandable that you'd need to resort to using credit card debt if you had no other option.

However, had they been more frugal and put more effort into their savings prior to the event, they might not have needed to go into (as much) debt.

There is no reason to use credit cards for these sorts of debts.

If you need an attorney and don't have thousands of dollars in the bank, of course you'll need to use a credit card.

Attorneys aren't banks, it's not unreasonable for them to refuse to finance your counsel.

Yeah, they should use payday loans instead!

Seriously though, it is astonishing to me how many people are so entitled they just literally cannot understand why someone would have legitimate problems with money.

Not everyone is lucky enough to make a break out of poverty, nor is everyone born in middle class income or above. And yes, breaking out of poverty requires some luck in addition to hard work and determination.

I'm a pretty stupid spender. From personal experience, I find the snowball method is satisfying when, for example, you have 3 maxed-out high-interest CC's and 1 has a low max and probably the lowest of the interest rates (a difference of maybe 3%). But if there's a huge difference in interest rates, with the right numbers in your face, it's pretty easy to see how wasteful it can be. When I'm in payoff mode, I usually roll everything up in a spreadsheet and focus only on watching the total debt drop while paying the min on everything but the highest interest. A few other numbers I like to look at are lower % used credit and higher available credit, all the same numbers really, but it's satisfying to watch them all change, so I put them in the sheet. Obviously I can't completely hide the real numbers from myself, I keep them in a different tab.

Another mental factor I don't see mentioned often is the availability of the credit you payoff. If I put $1000 towards a CC that money is easily available if I need it. If I put $1000 towards one of those cards that can only be used for dental work, which are often the kind that have the highest interest rates, then that money is pretty much gone.

If you can't handle LoC/CC (and you obviously can't if you've collected so many debts that you struggle to manage them), it makes sense to pay off and close small ones. Because the risk you will run up those lines is worse than the sub-optimally paying off total debt.

I.e. For many, five loans with $1000 avail credit will become $5000 more debt. Better to make that four (or three, or one) loan, even if remaining loans have higher interest rate.

I have literally have people tell me that this is still rationality because it's the rational thing "for them". Like, the weirdest one was a cognitive psychology doctoral student.

I mean, okay, if you can redefine rationality to be completely subjective, then sure, rationality is flargikriggendurf.

You're conflating rational and optimal. It is rational and optimal to pay off the highest rate debt first. It is rational and suboptimal to pay off the lowest debts first if you know you'll achieve success through this route. When presented with a $100k debt at 6% interest plus several $5k debts at 1-5% interest, the number of debts and the size of the large debt are overwhelming, psychologically, and people stop behaving rationally (and therefore also behave sub-optimally). The snowball method gets them to act more rationally (paying off their debts successfully), but still sub-optimally. It's closer to optimal, less debt, than the path of not paying.

EDIT: This is similar to any other sort of debt that people find themselves in. I weighed 220lbs, couldn't bench 100lbs (maybe 2 reps), and could barely run 1/4 mile at a 12-minute mile pace before wanting to pass out. So I was in a health/fitness-debt. Optimally, I could've set aside 2 hours a day to some combination of aerobic and strength training to achieve my goals in a short period of time. But that required a massive change of habits that was unlikely to stick. Instead, I ran 3 days a week (well, walk/ran at the start), learned to set aside my time for fitness activities, and improved my cardio. As I managed my time more effectively, I added in other fitness activities that got me to my strength goals as well. Adding it all at once would have (for me) been overwhelming and I likely would have failed (again) to make a routine of it. Adding in each part piece-by-piece was the far better strategy, and entirely rational, bypassing the normal anxieties of my mind by making the large change occur over several smaller changes.

It is rational to realize human psychology is empirically real and take it into account, including our own. If anything, perhaps we should be even more skeptical of our own reasoning when we believe we are being purely objective and free of bias.

Optimizing the likelihood of consistently following through with a plan is very rational.

In addition to the other fine replies, let me point out that "humans are irrational" is the negation of a very small point. It allows us to think we know something, when in fact what that statement tells us is only that we don't know something about human behavior. It is logically much like saying "Humans are not 7-year-old bulldogs named Fido living in New Jersey on the second floor of a shared house." It's a true statement, but carries virtually no information because it only identifies an incredible small, precise part of the possibility space and negates it; it does not, on it's own, tell you much about what humans are.

Humans are not merely "irrational", they positively behave and think in very specific ways. No human is immune to this. It is, therefore, perfectly rational to discuss rational ways of managing the specific human behaviors that lead to irrational behaviors.

This is also while ritual denunciations of "homo economicus" are really quite sophomoric... the nonexistence of rational economic actors does not mean that you can simply model humans in whatever way you please to make your preconceived notions work. It means that you've got to go learn what humans actually do, which is going to be very challenging, and take that into account, which is almost certainly going to shock anyone who tries it. It means the problem is suddenly immensely harder, not easier.

>This is also while ritual denunciations of "homo economicus" are really quite sophomoric...

Admittedly, this is because "homo economicus" is sophomoric in the first place: it proposes an actor who has no computational or informational bounds and sees the world only in terms of a single real-valued variable called "utility", which is generally constrained only to be any monotonic, continuous function of their monetary net worth. This actor then optimizes expected utility with no regards to modeling causal structure or to which observables are actually ergodic.

No such creature ever has, or in fact ever can, exist in the real world. In limited domains where ergodicity holds, computational needs are few, and small sample sizes can yield very good inferences, we can do thought experiments about what such a creature would do, and act according to those if we please. But holding that such behavior is the normatively correct way to act when it's actually impossible is the kind of religious thinking one gets when composing "normative theories" without experimental basis.

Isn't it rational to use the strategy you know you will follow?

Logic depends on a subjective choice of axioms, and an unstated one is "a plan that motivates permanent improvment is better than a temporary one".

Rationality is about which objective function you want to optimize. If it's money, then the snowball is not rational. If something else bothers you more, it might be.

To be more mathy:

Option A (snowball): Total Cost if successful: $X Likelihood of success: 90% (just making stuff up here)

Option B : Total Cost if successful: $Y Likelihood of success: 80% (again, making stuff up)

If 80% * Y + cost of failure > 90% * X plus cost of failure, even if X > Y, then a rational actor will choose Option A.

Sure, the "chance of success" is subjective, but ignoring it doesn't make the likelihood of failure go away.

I have also read and successfully applied Dave Ramsey's debt snowball method (suboptimal yet effective). While I was reading the article, it confirmed to me that Dave Ramsey's method falls in line with a large portion of the general public's tendencies. No wonder he is so successful, he has a large market already psychologically primed to believe and apply his method.

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.

I've used this strategy, and it's pretty awesome if you have a lot of smaller debts that snowball pretty quickly.

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 foreclosed on, all that prepayment is just cash down the drain. If you had completely paid down some smaller debts instead, you would be in a better position.

Basically, paying down higher-interest debt first is optimal only if you're certain that you'll never default on anything.

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.

If all things were equal, and your repayment terms were a fixed artifact, the strategy assumed to be optimal in the article would be correct -- it would make more sense to focus on the higher interest rate to avoid accruing interest. But they aren't.

Credit cards in particular are tough -- if you have alot of debt and credit lines and don't make significant impact on principal, they start cutting credit limits, which incurs fees. Interest on fees and fees have payment precedence over regular interest and principal, so it starts a vicious cycle. You end up in a situation where the banks assume you will default, so to compel you to pay more to them, the credit card will drop your limits to trail your balance.

So you really have two priorities: paying down debt and maintaining credit lines to avoid capricious changes in your payment terms.

When you have lots of credit lines, minimum payments start to matter alot, as they sap your re-payment power. If you focus on closing the smaller accounts and walk your payment focus up the stack, you'll be able to make more significant payments and stay afloat. When you make alot of progress, you have a higher likelihood of refinancing the bigger debts, which is ultimately where you save on the high-interest accounts.

I find myself a bit bemused that the article specifically mentions student debt as an example of something that people can refinance but don't. I hadn't ever had any student debt until marriage, but since then (and until recently) my wife and I have been working through a great deal of it together.

As someone who has worked through paying down a large amount of student debt, I can tell you that student debt is very difficult to refinance. Our student debt balance was much higher than the median, but I believe that our experience with refinancing was very typical: we couldn't refinance our student debt at an interest rate that was even remotely attractive.

We reacted to the dearth of refinancing options by deciding to eliminate our debt as quickly as possible, and when we first got married we dumped about $35k into debt reduction. We chose to go after the high interest rate first, which was also the largest loan. Had we gone after the smallest loans first we could have paid off several of them instead of merely making a (significant) dent in the higher rate loans, and this is where the psychology comes in.

Dumping a ton of money into a debt without changing anything but your principle balance is discouraging. It was for us, and it is for nearly everyone else too. Personal finance counselors like Dave Ramsey actually instruct people to intentionally pursue the smallest debts first because the feeling of momentum helps most people to maintain dedication to getting out of debt, which in many cases will more than offset the difference in interest rates (paying down faster due to more resolve = less interest overall). We sold stuff and skimped like crazy people and we killed our debt, but it's a very common thing for people to run out of determination before they run out of debt. Since that's such a common problem, I'd say that it's not necessarily a bad thing that people pay debt in a financially non-optimal way if the method is at least psychologically optimized.

I used to think that the medieval western distrust of usury was backwards and foolish.

Then I read about the roman experience with debt, and now I am far less sure of that.

Tell us more!

Is there a book/article you'd recommend?

Without endorsing all the ideas in them, here are two interesting books:

https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

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

Can you provide more info about romans and debt?

Edit: Somebody was faster. Thanks for posting links

Isn't this really more a case of the dosage making the poison?

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.

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 entails makes life more relaxing and pleasure full.

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.

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

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

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.

We all know why people don't manage debt, health, relationships and everything else better.

Because they're dumb :)

Debt is just another tool the folks in power have to exploit the poor.

When you have 100 mil, you can hire a smart person to take advantage of debt.

When you have 100 dollars and you live around other people who have 100 dollars, you know what happens, you're the one being taken advantage of.

Everything else is talk.

ps. I am just starting to not be dumb and I'm almost 30 and I've had a ton of support and luck go my way. Most people will hopelessly get exploited and spend their days coping. Just have a look around - don't believe the 'hi how are you' smiling faces, they're pretending and you know it ;)

"The greatest shortcoming of the human race is our inability to understand the exponential function." --Albert Allen Bartlett

Considering that 97% of the survey participants allocated their debt payments in financially suboptimal ways, perhaps the second greatest shortcoming of the human race is our inability to understand the compound interest.

"Put God in your debt. Every stroke shall be repaid. The longer the payment is withholden, the better for you; for compound interest on compound interest is the rate and usage of this exchequer."

--Ralph Waldo Emerson, Compensation,' Essays, First Series (1841)

Paying off debt in the way that saves you the most interest over multi-year timeframes may be optimal financially but is not necessarily optimal psychologically or logistically.

If you've got a 2% debt you can pay off in 6 months to open up $200/mo in cash flow that may be better psychologically than plugging away at $80k in student loans that are 4/5/6%. Yes 50 years from now you will have slightly less money. Suboptimal does not mean wrong.

Compound interest == exponential function.

Not understand that is our greatest shortcoming :-)

The more time a person spends analyzing their debts and trying to find the optimal repayment or refinancing strategy also brings the unpleasant debt to the foreground. I think people prefer to pretend that it's not even there. It hurts them financially in the long run, but avoids confronting a painful reality.

When I got out of college, I had some debts to repay (car loan, credit cards, student loans). Someone who I thought was a friend ended up bringing her manager with her to hard sell me on starting a retirement account with them.

Partially because I was stubborn and annoyed at being tricked into the sales call, I simply stonewalled for 3 painful hours. I tried to be nice (I suppose I am too nice), so I didn't kick them out. I simply kept insisting that I was better off putting $0 into investments until my higher interest debts were paid off. They pulled out a bunch of lines about "starting a pattern of saving" and so on, that are definitely correct on some level, but I stood by the math.

Eventually they got the memo, and left. Once my debts were paid off, I started putting money towards my 401k and short term savings. Every time I've gotten a raise or a big bump from switching jobs over the past 10 years, virtually every additional dime has gone into savings.

Have good principles. Then stick by your principles.

This article makes much of rationality, but the concept of a rational actor in economic terms is really way more complicated and sophisticated than these sorts of analyses. So much so that it's possible to argue that there is no such thing as an objectively defined rational actor at all.

To do my best to shorthand the issue, assume that a rational actor is defined as someone who takes the course of action presumed to have the greatest likelihood of a positive (or the most positive) outcome. In order to evaluate their current strategy for rationality you have to have forward looking prescience to determine if the strategy is in fact the most probable to lead to the desired outcome.

This runs headlong into the issue of uncertainty, familiar stuff like sensitive dependence on initial conditions or just simple complexity.

For a thought experiment, consider a game such as chess. The game is completely discrete, all possible game states can be easily defined, the rules are known, and there is no element of random chance or rules changing during the game.

Nonetheless, the idea that you can put an average person in front of a chess board and say "OK, play rationally" and expect everyone to cheerfully plot out the exact same sequence of moves is obviously ludicrous. There are too many possible outcomes and threads to reason about fully, there are competing priorities in any strategy, etc.

Then when confronting an economic system that is certainly as or more complex than a simple game of chess, we expect rational economic decisions to be an objective truth?

I had a single mother and she had 3 bank accounts, all about 500-1000€ in the red for most of my childhood. This made me rather adverse to taking credits.

I only took one, for paying study fees. And it was "only" about 4000€ which I paid back one year after getting my first job.

After that I always tried to have enough savings to live from for a year.

I've never needed or carried any debt my whole life, unless trying to build some credit on purpose when I was younger. But, "unfortunately" my car is in great condition and over 10 years old. I have zero need for a new car as I work remotely and live in a walkable neighborhood with metro and uber, et al.

But beware: Credit expires after 10 years! I didn't know that. You wouldn't believe the hell we had to go thru last time we moved. Trying to get a landlord to accept a tenant with "no credit" was like pulling teeth.

Wow, this is mind blowing. 10% interest rates are really, really high in the current state of economy - they don't become a great deal just because there are credit cards with even worse conditions. I don't have a problem with borrowing money when I need it. I'm indebted for the years to come because I needed a 200k loan to buy a house. But that's okay because I'm paying 1.2% APR on it. This is far less money than I would have to pay to rent a house so it's a great deal. I've not even used all the cash I have when buying it because some of it yields higher (guaranteed) interests then what I pay for the loan. So there's still a lot of wiggle room for emergencies. And this is the first time that I hear that you need to have a history of loans to get large loans. What a devious system... I have a VISA credit card too, because it's convenient to pay with, but I don't pay any interest on it. I just pay a flat fee per year for the service and they settle the balance each month by direct debit authorization. (Sorry for the bad english)

Easy: there's a saying, you borrow somebody else's money for a time, but pay back your own and for good. So paying off debts is inherently a much less pleasant activity, which people want to avoid thinking about. Combine that with the complexity a typical financial arrangement entails, and peoples inability to comprehend basic math, and you can see why they don't manage their debt better.

Debt is basically an illusion that you owe money in the future. And people commit things for the future without thinking about the consequences. Its always easier to commit to eat healthy food next week, or planning to go to gym next year- But doing them in the present is what is difficult. For the very same reasons people are bad at saving and investments. They think they have a lot of time in the future, so they might as well splurge a little today.

From that perspective, you always feel you have time to buy a home, or start saving for a personal retirement fund. Or time to pay off your credit card bills, or the illusion that you borrow money for luxury today and defer it for the future.

As time passes and you become more cognizant of the fact that your energy levels and motivation to commit to large financial slogs like a house or a retirement fund are wearing thin, you just think you should've started being a little disciplined long back.

Paying off small debts first isn't just a "natural tendency." Consumer advice sites actually encourage this as a motivational strategy. Every single one of them.

Having read this, now I question the objectivity of those types of advice pieces.

For example, here's a story on US News that covers three strategies for paying off credit card debt. The first tip is to pay off higher interest cards. But the second is to pay off the smallest debts first and pay the minimum on the other cards. What?!?

http://money.usnews.com/money/personal-finance/articles/2014...

This "3 strategies" thing is very widespread, and all of the sites are the same, from bank sites to credit recovery sites to financial reporting in magazines and newspapers. The first that's presented always sounds complicated (calculate bla bla bla). The second strategy is always "pay smallest debt first." Nice and simple. If both are presented as good strategies, which do you choose? The one that requires work, or the one that seems simple?

I used to read these types of advice pieces when I had high debt following a layoff in 2002. I've recovered since then (paid off $65k in debt all at once with a cash out on my house, thus avoiding bankruptcy). And now the No. 1 rule is do not use credit cards to pay for things you can't afford. Use them only as a tool to stay on the grid so that you have a good credit rating so that you get better deals on everything that involves looking up your credit rating. (You'll get a lower price on a car, for example, if you have a better credit rating.) So take out a couple cards; make small purchases; auto-pay on a regular schedule. (Do not change you payment schedule or make extra payments. Some credit reporting agencies lower your score when you do this.)

Not all articles on this are so clear, but at least this US News one is:

The optimal (highest rate first) approach is a slow slog that can be discouraging and result in relapses. The sub-optimal (smallest debt first) approach shows progress much faster, and if paired with the snowball approach (as debts are paid off, freed cash goes to the next debt), it creates the illusion (until high value debts are all that remain) of fast progress. It's psychologically easier to stick with.

> But the second is to pay off the smallest debts first and pay the minimum on the other cards. What?!?

Again, this article in particular, but the actual recommendation is to pay at least the minimum, which is not the same.

Here's another debt choice: given a mortgage with over 20 years left on the term and a sudden cash windfall of, say, 20% of the remaining principal, and assuming there's nothing better to do with the money than applying it to the mortgage would you rather (1) pay off some principal now thus effectively shortening the term but allowing the monthly bill to stay constant or (2) re-cast the loan by paying off some principal, still have 20 years left of payments, but each monthly bill is now smaller? ... Personally I'd opt for (2) because it immediately gives more breathing room especially if something bad were to happen. Going with (1) may save more money ultimately, but doesn't reduce the financial risk until the final payment is made.

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.

I used to manage debt and save money until I got too sick to work and ended up on disability. NO my wife and son and I live paycheck to paycheck and had to file bankruptcy chapter 13 due to medical debt. If I didn't get sick I'd be managing my debt better. Even with health insurance you can still rack up a lot of debt and go over your head.

I worry that one day we might lose the house and end up homeless. I am not medically cleared to work, and trying to find work as a freelancer when you are disabled is really hard to do. Can't get a 9 to 5 job either. I have a mental illness and medicine that threats it that makes me drowsy and hard to focus and concentrate. I can't even drive a car anymore.

Good article and interesting study with multiple psychological inputs. I think debt in general is difficult to process mentally because "negative" money is quite different than "positive" money. Money that you have can be visualized - you can spend it or even pull it all out in cash and see exactly how much it is and how it grows or shrinks. Debt is purely a number on piece of paper or a screen. You can't "run out" of debt or go to the bank and get your debt in negative dollars. So without paying careful attention to financial rules like compound interest, dealing with debt is something that humans just aren't inherently very good at.

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.

Even professional economists struggle to understand the exponential function.

Professional economists struggle to understand economics.

One wrinkle here is that some debts have variable rates. For instance, if you have a balance with a 3% variable rate and one with a 5% fixed rate, but you are in a rising interest rate environment, the 5% fixed rate loan is effectively a hedge on the 3% loan. It drags up your effective loan rate while interest rates are lower than 5% but it lowers your effective rate if rates rise above 5%. You can determine whether this is a valuable hedge by estimating the likelihood of rates exceeding 5% long enough to make exceed the cost of the hedge.

Wouldn't this depend on how frequently it's capitalized? If it's continuous or even monthly it's better to just look at the APR.

Because they don't have any money to pay it off with. Sometimes the simplest, most obvious explanation is the most correct.

Could someone well-versed with bankruptcy please explain the pros/cons of going that route? I have heard that credit card debt is essentially free money because filing for bankruptcy will wipe out all the debt.

If you already own a home/car, and have no intention of getting a loan in the next 10 years, what is wrong with this strategy?

I guess that varies with where you live. In Europe the deal is usually e.g. if you buy a house the safety isn't just the house, it's the house AND the future lifetime income of the buyer. If you manage to buy a house in what turned out to be Detroit and its value goes from $1M to $1k, then the bank might take the house but you will also be paying off that $999k for the rest of your life. Not to mention you'll never get any credit again.

Personal bankruptcy will let you off but not easy. You'll make a plan to live att the poverty line for 5-10 years paying everything you earn to the bank, so they can get maybe 1/3 of their losses, and write off the rest. And after this of course you still won't get a loan again so you'll be a renter without credit cards for the rest of your life.

"If you already own a home/car, and have no intention of getting a loan in the next 10 years, what is wrong with this strategy?"

It's dishonest and is the work of a scoundrel.

Because, at least in the US, bankruptcy laws have changed such that it is difficult or impossible to get a "clean slate" debt wipe. If the courts think you can afford to pay your debts (you had enough money to buy a house and a car outright in your scenario), they may restructure your debts to make payments more manageable, but not eliminate them.

Also as mentioned below, it ruins your credit and might be construed as fraud.

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.

Each state is different, but they'll take your car and some of the equity in your house to make up the difference.

California for example would take all the equity from your house except for 75k so a single person with moderate income.

What if your car breaks?

It's interesting to think that somehow I am better off than most americans living in a third qorld country even if most have at least 5x my income just because I don't have any debt.

We don't have credit cards with higher than 0 credit limit here. Those credit lines sound very generous to me.

"Managing debt" is an oxymoron. You have to manage your life better in order to reduce debt. Most things that talk about debt or money management or budgeting talk about it like it is a math problem. It isn't. It runs a lot deeper than that.

What is scary is that "how to manage money" is secondary to "how to manage debt". For the most part I have thought about my bank balance first and figured that my credit score would take care of itself and that has generally been the case.

Same reason people don't manage their weight better; the bad behavior is instantaneous and easy, the good decisions are extremely lengthy and difficult.

Color me shocked that most MBA students don't have enough math skills to intuitively choose an optimal payoff strategy.

There are a number of factors in the way that people manage debt payments that the article seems to question as illogical.

Just take a standard setup of a mortgage where we'll give a generous 7% interest rate, along with a couple of credit cards with a 15% rate and let's put some decent sized balances here for sake of comparison:

$300,000 mortgage @ 7% over 30 years $10,000 credit card @ 15% $20,000 credit card @ 15%

This is a random hypothetical with numbers made up out of thin air and without factoring in tax deductions. From a sheer cash flow perspective, say you have $4,000 to apply to your payments and the minimum payments are something like:

$2,500 for the mortgage $300 for the first credit card $500 for the second credit card

So you've got a total of $3,300 in payments with an extra $700 to use to accelerate payments that you've got to decide how to allocate between them.

If I apply it to the mortgage, this would be how the payment structure pans out over time (using Debt Repayment calculator)

$300,000 at 7% with payment $2,500 = 208 months or 11.4 years to payoff with $212,241.36 in interest (total paid $512,241.36)

$10,000 at 15% with payment $300 = 44 months or 3.5 years to payoff with $2,983.59 in interest (total paid $12,983.59)

$20,000 at 15% with payment $500 = 57 months or 4.75 years to payoff with $7,802.46 in interest (total paid $27,802.46)

Now, let's look at two strategies to applying the extra $700 cash with the mortgage vs the small debts.

First the mortgage way:

$300,000 at $3,200 = 137 months or 11.4 years to payoff with $184,138.98 in interest (total paid $484,138.98) $10,000 at $300 = 44 months or 3.5 years to payoff with $2,983.59 in interest (total paid $12,983.59) $20,000 at $500 = 57 months or 4.75 years to payoff with $7,802.46 in interest (total paid $27,802.46)

Now the smallest debt way:

$10,000 at $1000 = 12 months years to payoff with $1,354.08 in interest (total paid $11,354.08)

But now our formula changes because after 12 months, I now have $1,000 to apply to the next smallest:

$20,000 at $500 for 1 year (total interest $1,642.62, principle paid $4,357.38) $15,642.62 remaining principle then at $1,500 after one year = 12 more months to payoff (24 months total) with $2,091.00 in interest (total paid $23,733.62)

And now after 24 months I have $1,500 to apply to the mortgage.

$300,000 at $2,500 for 24 months (total interest $24,489.39, principle paid $35,510.61) and then at $4,000 after that on the remaining $264489.39 = 86 more months to payoff with $107,086.21 in interest (total paid $442,597)

When you factor in cash flow into a total debt payment allowance you end up with an increase in applied payment if you payoff the small stuff first. The result here is a total net payment of $477,684.70 and no debt after 110 months or 9.16 years vs a total net payment of $524,925.03 and continual debt payments for 11.4 years.

EDIT: I need to go back in and adjust the mortgage way to accelerate payments more when the 2 credit cards are paid off. My bad.

Don't fall into debt. If you must fall into debt, then do so to a friend at no interest. If you still have to fall into debt, do so to a reputable bank and pay it off as quick as you can - sell whatever assets you have if you must.

This of course applies to private individuals, not companies, banks or other institutions.

I would advise people not to lend money to friends and family. I have done it several times and every time it led to problems and a lot of pain.

Tread loans to family and friends as gifts. Treat any payments you receive in return as gifts of gratitude. If you're not comfortable with this idea then you are not comfortable with loaning money to your friends and family.

Polonius: Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.

Giving money, that can work. With a glad heart.

People won't accept gifts. Give a "loan" but treat it like a gift --never mention the balance ask for the repayments.

From my experience even that doesn't work. People will feel guilty about not paying and resent you even if you stay quiet. But they also won't pay. At least that's my experience with two members of family and one business partner.

I tell them "Pay it forward". That way they can accept it and agree to pay it back - but sometime in the unspecified future.

I never lend money to friends or family. Either I give them money or tell them I cannot help.

Reply on news.ycombinator.com