What happened to "stop buying things you don't need"? I had a friend tell me he was considering a consumer loan because repaying his other loans didn't leave him with enough money.
I swear, it's as if people have never seen money before.
Elizabeth Warren said that in their bankruptcy study, the vast majority of people who filed for bankruptcy didn't do it because they "bought things they didn't need". They did it because they overextended themselves to get a house in a good school district and then one of them lost their job or they had a medical emergency.
It's easy to paint those people as irresponsible, but according to her, it's very far from the truth in most cases.
I remember a study on general aviation plane crashes. They found that very few plane crashes came about because the pilot made a single, obvious mistake. Instead, the common pattern was a series of missteps, each so small that you couldn't properly call it a "mistake" in and of itself, the pilot was just cutting corners on the recommended safety margin. And then something happened that was out of the pilot's control, like bad weather or distraction or mechanical failure. Because the safety precautions that make it normally possible to recover from these events weren't followed, this resulted in a crash instead of merely a nerve-wracking landing.
I think the same thing happens with finance. If you look at the proximate cause of bankruptcy, it's almost always that somebody has a health emergency or a death in the family or loses their job. But many people have health emergencies, deaths in the family, and stints of unemployment without going into bankruptcy. And the reason why is the same thing Benjamin Graham and Warren Buffett have been espousing in investing for years: Margin of Safety.
If you always live on the edge, then it's a given that sometime you're going to fall off. Hold back 6-12 months reserve of salary, and suddenly unemployment doesn't look so scary. Health insurance makes a sudden medical emergency not quite so scary. Have $10-20K in the bank, and you don't need to worry that totaling your car is going to send you into crippling debt.
The irresponsible part is not that these people got sick or lost their job, it's that they didn't prepare for contingencies where they would get sick and lose their job. There's this culture in America where as soon as you start earning more money, you have to spend it on something, otherwise you're wasting it. But there's a tension between resiliency and efficiency, and if you're always being perfectly efficient, things tend to go very wrong when they go wrong. Make your bargains accordingly.
Man, you are clearly speaking from a position of privilege on that one. How the hell do you hold back 6-12 months salary when you can barely afford the rent, utility bills and the costs of raising some kids to begin with?
Haha, just hold back 6 months salary! You make it sound so easy!
It's not that they didn't prepare, it's that many of them have no means to prepare, and barely have the means to continue as is.
Many also believe that it is worth risking living on the edge to support a better school for their kids (ideally breaking the cycle), than moving to project housing and dangerous gang-controlled areas in order to enjoy their "margin of safety". I can't fault them for that.
And, if you're in such a position, and aren't fortunate enough to have your area of expertise and interest involving computers, good luck getting a job without a degree. So what do they do to pay for the outrageous tuition costs these days? Take a giant loan from Sallie Mae.
If you're willing to move, and live with roommates, it's fairly easy to live comfortably (assuming no children) on 12k/year total. Assuming you're making minimum wage-ish, that's 8k to put in the bank every year.
yeah, what? that's a lot of assumptions. people don't live with assumptions, they live with the realities of having a kid or a spouse or a family or even a girl they just can't get over.
I was responding to a post about 'holding back 6 months salary' as a safety measure, with a simple example of how to do so. Obviously, this is something to do before you go and start a family. My point was not that it's possible for everyone, but rather that it's not as unthinkably hard to do as one might think, even on minimum wage.
I think your point about having financial reserves is relevant, and I also think that having the motivation to have a reserve requires financial sense that, unfortunately, is not wide spread.
I am an attorney that does volunteer work by handling bankruptcies "pro bono" through a local non-profit. Every bankruptcy case has it's one unique set of circumstances but there is a consistent pattern. First, the debtors don't have a good understanding of money or personal finance. Usually that's a product of not having parental examples of good money handling. Second (and perhaps because of the lack of understanding) they don't pay attention to finances if there is a resource to pay for things (cash or credit). Third, there is a watershed event like a loss of a job or a major health crisis. Fourth and finally, they wait too long before getting help. If I were king for a day, I'd make sure that financial education was mandatory in high school and was spread out throughout the high school years rather than being taught in a single quarter or semester.
Health insurance makes a sudden medical emergency not quite so scary.
Until the insurer refuses to pay, and the "insured" lacks the resources to pursue a lawsuit. Maybe I'm the only one who's ever had that happen, but I rather doubt it. Reading further down, looks like someone else here has been through it too.
If it's a calculated risk, why is this a problem that needs a YC startup to fix, rather than simply a risk that didn't work out?
There're certainly people that take on debt as a calculated risk because they believe it'll pay off in the future. My parents did that to send me to college, and it did pay off. But when it fails, they usually just go "Well, shit," and fall back on their contingency plans for how to handle it if it fails. If it's a calculated risk, they've been making those plans, right?
But the fact that there's a startup out there to solve this problem (several, actually, but this one seems more above-board than the alternatives on the radio) indicates that this wasn't a calculated risk for many people. The essence of a calculated risk is that you go into it having done all the due diligence you need to weigh the possible consequences, and then make your calculations based on that. What's there for this startup to sell if people have already done that?
You're taking a calculated risk every time you get in your car, right? So, what's your backup plan in case someone T-bones you and you end up a paraplegic? You have one, I assume.
you're making the definition of calculated risk much more technical than it needs to be.
I ain't saying they did a formal cost-benefit analysis of the whole thing.
You seem to think that people can or ought to have an answer for every situation, should be prepared for every contingency; that there is a perfect understanding that one can just _follow_ and have everything turn out alright. That's great if it's how you can live your life, but 1) one day I bet you'll find that your preparation and contingencies were just an illusion, that luck has had its way with you--I mean, haven't you ever wondered what would have happened to you if your dad just died when you were 12? _That happens to people who were just like you_; and 2) most people don't have that and have to make choices without knowing what's behind the next door.
It's a YC startup because even if a person was willing to accept the cost of the contingency labeled "risk that didn't work out," there's still a valuable service in saying, surprise!, you will pay less for taking that risk by using our shiny software!
“Families with children are tightening the belt one more notch,” she says, “are working extra hours, are sending both people into the workforce, to try to get into the best possible school district for their children.” But she adds one key, and very humane, caveat: “Families are in financial trouble, not because they’re irresponsible but because they’re too responsible.”
Warren is of course sympathetic, but she is obviously using the "search for a good school district" as only one example of how families are "too responsible".
Not that I believe Warren's last sentence is correct: my simpler and less charitable framing of the facts is that people simply bought homes that they could not afford.
No, her study didn't show that. Her study does not address causality at all.
# bankruptcies caused by a medical emergency = # of bankruptcies x [P(bankruptcy | medical event) - P(bankruptcy | no medical event)] x P(medical event)
Warren's study only measures P(medical event | bankruptcy). A bunch of innumerate reporters drew the same conclusion you did (admittedly, with help from Warren's confusing language), but that just shows the media is stupid.
I truely don't buy into the whole "good school" thing as being overwealmingly important for a child's future happiness and success. Though this is based on my own personal experience rather than solid data.
Certainly in my childhood and young adult life there were a number of factors to my success or lack of it that had nothing to do with which school I attended. I think the main factors to my economic success was being taught to enjoy reading at a young age by my parents. I have always devoured information and through that have made a career without any qualifications.
The emotional/social success and general happiness I experience is a little harder to point to a source but certainly didn't come from the shit hole high school I attended. I generally attribute it to my parents teaching me what to value and growing up in an emotionally secure environment.
This security and parenting happened even though my parents fought each other constantly and divorced in my early teens. The were both dedicated parents who presented a consistent set of rules and values.
Of course I could just be on the further end of the bell curve?
>Certainly in my childhood and young adult life there were a number of factors to my success or lack of it that had nothing to do with which school I attended.
But would those factors be the same at a different school? I'm going to commit a minor sin and say a statistic without a citation; the average ACT score among teachers in Chicago was 19 a few years back.
You say you went to a shit hole high school, in which case you really _should_ have a sense of perspective on the whole thing. If your school was a shitty as you say, you must have been near the very, very top of your class (not in class rank but in overall success). That's a huge distribution of people who are _not you_, who went on to more desperate lives.
Is the debate here about poverty or is it about debt?
Money is just the messenger in the economy - it transmits information to you about what roles might or might not be valuable, and from you as to what goods and services you would like to consume. It's not hard to stay out of debt - you simply have to heed the message that money is transmitting to you.
Poverty is a wider question, and includes whether or not it is fair & just that some people have to make the sacrifices needed to stay out of debt. When I say that you can simply choose not to send your kids to college to avoid taking on crippling student loan debt, that is a 100% factually true statement. When you then say "But one shouldn't have to forgo an education to avoid going into debt", that's a normative statement. It's one that I'd probably even agree with you on, but it's a much broader conversation with no clear answers about how to fix it or even what the problem definition is.
It is about both. Debt means plunging closer towards poverty. Escaping from poverty means being careful about debt.
The debate is actually about what informational tools people have available to them. This is demonstrated by your statement:
>It's not hard to stay out of debt - you simply have to heed the message that money is transmitting to you.
which is equivalently "It's not hard to stay out of debt if you're equipped with the attitudes that let you stay out of debt" which is tautological and therefore a non-statement. My point is that poverty _means_ being less likely to understand money.
My point is _not_ accurately summed up by "But one shouldn't have to forgo an education to avoid going into debt." I make no assertion about what a person _should_ do because that doesn't have anything to do with what they actually will do. I would prefer the phrasing "People _will_ choose a risk of debt in order to have their kids better educated" as that more accurately captures the situation. Not all of the people who put it all on the line to live in a better neighborhood ended up in debt. Some of them got lucky and did not have medical emergencies--for them, the risk paid off.
So your statement about whether or not schools are "overwhelmingly important" is true but irrelevant. Schools aren't overwhelmingly important, but they _are_ important. They improve the odds of success. Your personal success in a shit-hole school does not speak to the average of that school nor does it comment on whether or not it is sensible for a parent to risk additional debt for a better school.
That may be true in your situation, but when you have long-term obligations like a mortgage and kids in school, you're a bit less agile in your ability to respond to changing economic situations. If what you're suggesting is simply to not take on any long-term obligations that you don't absolutely know you can afford, that's a bit naive I think. For most people, being unable to work for a year will mean you either liquidate your life or you go into debt. Most people may not end up there, but according to your statement, everyone should live like they would.
It's not something I'd do, but I have a hard time blaming someone for making that sacrifice.
a) Why is it that you won't do it?
b) The issue is that they're sacrificing the financial security of their kids by living on the edge and that is irresponsible if you're someone's guardian.
Imagine a company/government says we'll go into heavy debt because we want to give our shareholders/citizens a good shot - is that not irresponsible?
Imagine a company/government says we'll go into heavy debt because we want to give our shareholders/citizens a good shot - is that not irresponsible?
Those are two different questions.
When it comes to a company, the answer is very often Yes. The purpose of most companies (there are some exceptions) is to maximize profits using all ethical and legal means. If the expected payoff of the capital investment the loan would finance is greater than the interest of the loan, then taking it very often makes sense even if it would risk bankruptcy if something goes wrong.
When asking about the government, it matters a lot about what you think the purpose of government is, and that is a philosophical question I will leave alone for now.
Mainly because I don't have any plans to have kids, but I'm also not the sort to take that kind of risk. I'd rather supplement a bad school with good resources at home and plenty of guidance.
They are risking having their kids grow up with less access to resources in order to give those same kids one of the primary benefits of access to resources. If they did the research, understood the consequences, and were sincere about their reasons, it is the very epitome of a calculated risk.
It's not like the potential downside is living in the car. The potential downside is maybe being forced to rent in a worse area, and having trouble buying things on credit for a while.
The parent wrote: "They did it because they overextended themselves to get a house in a good school district and then one of them lost their job or they had a medical emergency."
So, they overextended themselves and THEN lost a job or had a medical emergency. The problem is people choose to live on the edge financially, which I think is irresponsible, especially if you have others who depend on you for their life.
Health insurance, but the problem is that pre-existing condition clauses can prevent you from getting insurance coverage at any cost.
The other alternative is simply "die", but rationally, there's little reason to choose that over bankruptcy. I wonder what happens to medical debts if you commit suicide over them... (Or what happens if you try to commit suicide and fail?)
"So, they overextended themselves and THEN lost a job or had a medical emergency. The problem is people choose to live on the edge financially, which I think is irresponsible, especially if you have others who depend on you for their life."
This is exactly true. Someone above mentioned that people buy houses, to get into a good school district. Why can't we allow people in bad school districts to go to another school? I will give you the answer: teacher's unions.
I always try to have at least 6 months (IE: I could survive for six months without a job) salary in the bank. I got laid off a couple of weeks ago and now I'm fine. Many people I know, that decided to live beyond their means, are now worried that if they lose their job, they will be in trouble.
Everyone wants to blame the medical system (which does need work) and ignore personal responsibility. Medical emergencies that result in bankruptcy probably happen to less than 5% of the population. It's almost as bad as the terrorist fear mongering.
> Times your "probably less than 5%" by twelve and you're closer to the truth:
Nope. They miscounted and several other problems. (When someone goes broke because they're an alcoholic and lose their job, do you really think that's a medical bankruptcy?)
Google "mcardle atlantic medical" and start reading.
The most useful way of thinking of CC debt is how much it INCREASES THE PRICE of what you buy.
That nice lunch might cost 20$ if you paid cash, but use your CC and it's really 20$ + the interest you are going to pay. If it's going to take you 4 years to pay off your 20% APR CC debt then that 20$ lunch is really 41$ 50c.
PS: That is not to say paying cash for lunch changes the numbers when you are in debt; CC increases the cost of "everything" you buy without exception.
You know, obviously you are right. But, I think people (especially intelligent HN type people) greatly underestimate how much psychological tricks affect them. I know deep down that spending with credit card is the same as spending with cash. But, I tracked my spending using cards and only withdrawing from ATMs and using cash. I spent about 20% more. And my life didn't feel any better or anything. Now I use credit cards on the big stuff- like travel, transportation costs, and other large ticket items where credit versus cash is unlikely to affect me spending habits. Point is, you get some tiny cash back, but I think for 99% of people you spend more than you get.
I find it's easier to track spending by credit card.
I download a csv of my transactions, import into ledger (https://github.com/jwiegley/ledger/wiki/ it's like mint, but for the command line), then just "ledger balance --cost expenses". All my CC transactions are labelled ("expenses:entertainment:bar", "expenses:computer:github"), then I have a big black box: "expenses:cash".
This is actually the reason McDonald's started taking credit cards. Studies find this again and again that people buy more when putting it on their credit card.
Do you think giving 2% cash back is just the credit card companies being generous? They are making way more through that scheme. Plus, those cash-back cards generally take a higher percentage which will lead to higher prices to compensate.
I'm the opposite, when I withdraw cash and spend it, I have no idea where it went. When it is electronic, then my weekly accounting will show me where I've been spending money and I'm more careful with it.
The best thing I ever did to save money was to track where I'm spending it.
It helps to know that but the problem is that you don't really feel the weight of the extra cost as we tend to discount the importance of things we see as being off in the future. Sure that dinner is going to ultimately cost me $41 but that's spread out between next month and 4 years from now whereas getting that dinner now gives you an immediate reward and our brains are wired to weight immediate rewards more heavily.
Considering that this is pretty much the primary way that education is paid for these days, simply repeating "debt is a bad idea" hardly seems adequate.
(and I am personally happy to be debt-free but I can see why my indebted friends made the choices they did, however badly they may have worked out).
Unless you're going to a top-tier college and majoring in a marketable skill, that is a bad idea too.
There's a bubble in higher education where many people are being promised a good life merely by going to college. These people get out of college, find out that such a good life was just a mirage, and then find out that the $200K in debt they took on for it wasn't such a great idea either.
The responsible thing to do there is to just say no. Don't go to college, and find ways to prove that you can add value to people without that college degree.
Well, I'm in Quebec, so a BEng at a very good university like McGill costs less than $4k a year, all fees and insurance included. Granted, the US appears to be more expensive.
Though you're being rather flippant, I agree this is the key.
When there's a mountain of debt before you, the little spending decisions you make today seem to have no consequence on your fate. The cappuccino and Wired magazine that you buy on the way to work are of no consequence compared to all the money you owe.
Clearing debt can feel like digging at that mountain with a dessert spoon.
> Clearing debt can feel like digging at that mountain with a dessert spoon.
Right, and the prize for those who have the discipline and patience to finish? nothing. (well, nothing tangible anyway)
It reminds me of the "Bee Sting Theory" article (http://news.ycombinator.com/item?id=1467832). We are conditioned to view our finances in a competitive way, as a measure of our social value...and people deep into debt feel like they are so far behind their peers financially that they can't ever catch up anyway- so rather than futily trying, they cheat and try to buy the status symbols on credit instead. Stupid yes, but easy to understand on a psychological level.
It's really much more complicated than this. There are a lot of people in this country who live paycheck to paycheck. Some of those people got there by living irresponsibly, and some didn't. When you're living paycheck to paycheck and an emergency comes up, you use whatever means you have available to get through it. I've certainly been in situations where I've had major unexpected expenses (medical, auto, home, business, etc) that had to be covered, and the only option was to put it on a credit card and hope I could pay it off later.
I can understand living paycheck-to-paycheck if you're making $20K/year.
I can't understand living paycheck-to-paycheck if you're making $100K/year, and yet many people seem to do that. Why not live like someone who makes $60K/year, which is a perfectly adequate lifestyle, and bank the rest for emergencies?
Definitely, but I don't think that's how the majority of people get into debt. My cousin can't make ends meet (he has a deficit of 100 EUR/mo) but he won't quit smoking and he just got a ceiling mural painted. When I asked him why he did it, since it set him back two months, he said "I didn't realise until after the guy had started painting".
I swear, it's as if people have never seen money before.