Why do people take on so much debt?

[Dakota731]

My dad always said if you can’t manage money when you only have a little, then nothing will change when you have a lot. Which makes sense when you see how many lottery winners end up going broke after striking it rich. We are doing kids a great disservice in this country by not teaching them basic economics snd money management. You can do your child a much bigger favor training them how to handle money than by handing cash to them.

 

[Mackenzie Click-Mickelson]

A really frugal person like me would get the book free at their library or online at their kindle free library not buy it

Love the library, it's an underused public place, but we both know that wasn't the point

 

[hertamaniac]

During my life, I learned from what my friend's spending habits were doing to them. They were in a constant new-shiny-toy mode of which I participated in for years. Savings/retirement were second fiddle and accrued debt was the norm. In so much as it was almost a race to see who could get the highest credit limits on as many cards as possible. How foolish was I.

Fortunately, I dropped out of that race and began to treat each paycheck as my last. The mindset shifted to a no debt, maximize retirement accounts, invest in various markets and have sufficient instant liquid savings for a curveball. It took some discipline, but I wanted no mortgage or vehicle debt as a secondary goal. And I wanted to do it by myself and without a marriage partner which could merely slice my assets in half in any moment at the stroke of a divorce pen.

 

[iivye]

I was someone who went into debt for vacations. Ever since my daughter was 9 yo we would take a nice vacation every year. We couldn't afford to pay for it in cash so we would charge it and pay it off over time. I know it wasn't the best decision but at that point in our lives we wouldn't be going on vacation without charging it. I've continued to advance in my career and at this point the only debt I have is a mortgage. I don't regret any of it. We traveled all over the world and have great memories that I wouldn't have if I would have waited until we could "afford" a nice vacation. My daughter is 20 yo now and no longer goes on vacation with us but my husband and I still do a lot of traveling (pay in cash now). I have a fairly easy, well-paying desk job so I am in no hurry to retire as I enjoy going to work and interacting with others.

 

[Starport Seven-Five]

just going to say-

'millionaire' on paper is very different from someone having immediate or quickly accessible liquid assetts. perceived (current 'market rate') assetts do not nesc. equate to actual liquidated value.

someone whose net worth is based in large part on their home's 'market value' today can find themselves with much less (or a negative) net worth in the matter of months or days (ask those of us who owned when the housing market crashed....or sold just before).

NW is variable in general so that really isn't an issue. Homes generally appreciate/depreciate slower than the market so it's probably a bit more stable if anything.

It's just a very different lifestyle if someone has 100k liquid and 900k in home equity vs 800k liquid and 200k in home equity. I don't think anyone pictures the first case when they hear about a study of millionaires nor should they emulate that path.

The $1000 emergency fund IS a very low number. It's meant to be a starting point, so that if you're trying to get out of debt, you don't get derailed by a blown tire or broken washing machine.

A set of tires for our current car is a little over $1,100. It is AWD so you cannot replace just 1 unless they're very new.

This is the kind of thing I'm talking about when I said the $1,000 is based in the past. It just needs to be a larger number or you're going to go into debt with a relatively minor issue.

 

[barkley]

It's just a very different lifestyle if someone has 100k liquid and 900k in home equity vs 800k liquid and 200k in home equity. I don't think anyone pictures the first case when they hear about a study of millionaires nor should they emulate that path.

might not think of it reading a study but i've known far to many who had that mindset for their own finances. saw their home's perceived equity as their savings/nest egg and used/planned accordingly. i've seen folks willing to spend much more freely using their heloc dollars vs. if they had to pull it out of their liquid savings.

This is the kind of thing I'm talking about when I said the $1,000 is based in the past. It just needs to be a larger number or you're going to go into debt with a relatively minor issue.

i agree. i've always thought the ramsey $1k figure was outdated. for homeowners the figure should be at least the amount of their homeowner's insurance deductible (and i don't know a single person with one at or below $1K).

 

[mjkacmom]

My dad always said if you can’t manage money when you only have a little, then nothing will change when you have a lot. Which makes sense when you see how many lottery winners end up going broke after striking it rich. We are doing kids a great disservice in this country by not teaching them basic economics snd money management. You can do your child a much bigger favor training them how to handle money than by handing cash to them.

My young adult kids and their friends are WAY ahead of where we were at that age with knowledge about finances (and I grew up in a very secure financial environment with well educated parents).

 

[Lil Micky]

I'm late to the party but a big finance nerd and wanted to throw my 2c in.

There's good debt and bad debt.

Good debt can be a hedge against inflation. We took out a mortgage @ 2.75% in 2020, and inflation has already made it nearly 20% cheaper to pay off in today's dollars. The money we left invested instead of putting more down up front has substantially outpaced inflation. Good debt allows you the flexibility to acquire things now that you would have bought anyways while leaving your money working for you in places with higher returns.

Examples of good debt: 0% financing on a phone to replace your 5 year old one with a cracked screen. 1.9% financing on a new car you intend to keep for >10 years. Mortgages are (generally) good debt and a forced savings mechanism since you are always building equity, but specifics (ex. PMI, rates last year) can change things.

Bad debt: Credit cards***. Luxury goods. Payday loans. Timeshares.

I see a lot of Ramsey references in the comments... I'm not a fan, but following his advice will generally leave people who tend to make very poor financial decisions in a better place. The content in the r/personalfinance subreddit is much higher quality in my opinion.

We're currently in the process of buying a DVC contract that had $132K financed @ 10% in 2021, was sold last year for $70k with ~$60K financed @ 15%, and went into foreclosure this year when the owner failed to post dues. The public records containing these details tell a tale of a series of inadvisable financial decisions by multiple parties. Our use of good debt provided us the flexibility and liquidity to be able to purchase it without any financing and now our family vacations will be more economical for decades to come.

***: I love credit cards. I buy everything on them. We even purchased a timeshare on a credit card, which combines two of the things I said were bad! But no - it's not that they cancel each other out - we just don't carry balances on any of our cards and only use them to optimize rewards/points on things we can afford to purchase. The DVC points we bought direct got us back 4.8% of the purchase price in rebates.

 

[tvguy]

Love the library, it's an underused public place, but we both know that wasn't the point

Ours even lends out tools and small appliances.

 

[tvguy]

Examples of good debt: 0% financing on a phone to replace your 5 year old one with a cracked screen. 1.9% financing on a new car you intend to keep for 10 years.

All perspective I guess. A cracked screen on a functioning phone would not merit replacement even at zero percent for us. I kept my first cell phone 14 years and only replaced it because they were phasing out analog phones.
I just paid off our 2020 Camry Hybrid, purchased new on a zero percent loan. And I would never buy a new car and only keep it 10 years. We had our 1987 Suburban for 31 years and our 2000 Mercury Mountaineer 21 years. Heck, the hybrid warranty on our current Camry runs 10 years and 150,000 miles. As my mechanic pointed out the key to keeping a car a long time are as simple as changing the oil, and buying a popular model like a Camry, Accord, Taurus etc because parts will be available for a long long time. In an extreme case, I can get EVERY part down to the smallest trim piece for my 1965 Mustang just because so many of them are still on the road, although most are no longer daily drivers.

 

[DawnM]

I hear you. I do worry about my kids and what they will be able to afford.

 

[crisi]

My kids got financial literacy in school - I did too in the dark ages. And I'm willing to bet most of your kids got it in various ways - from interest calculations in algebra to budgeting in home science. The problem is that school - even late high school - is too early. Its part of the yada yada yada teens hear from grown ups at a point in time where they know everything. I even remember helping my son fill out a fake tax return when he was in ninth grade. Does he remember that assignment? Nope.

And then know everything kids go out into the world and live lives before they learn better. Often with the examples their parents set down - a cycle of car loans and consumer debt.

Add in that its nearly impossible in parts of this country to live independently at 18 or 22 without debt - and some parents pushing their kids towards independence. My son does it by renting a house with four of his friends. My daughter could do it by moving in with her boyfriend, but then....how would she get out of the relationship when she needs to - so we aren't pushing her to move out? One young friend moved in with her grandparents, who need the help so it works well. Another inherited his grandfather's townhouse.

 

[barkley]

budgeting in home science

what is home science? is this like the old home economics we had in the 70's (which none of the districts where we lived in california or where we live in washington offer now or has in decades)? the only reason the high school my 2 attended here still had any of their old home-ec equipment (few stoves, sewing machines and a dedicated space) was b/c special education used it for life skills.

 

[crisi]

what is home science? is this like the old home economics we had in the 70's (which none of the districts where we lived in california or where we live in washington offer now or has in decades)? the only reason the high school my 2 attended here still had any of their old home-ec equipment (few stoves, sewing machines and a dedicated space) was b/c special education used it for life skills.

Yep. Its like old home ec - only now used to teach "life skills" or "home science" - few schools teach you how to sew in a zipper now. For a while our school district was actually requiring "life skills" for high school seniors - but dropped it because - yada yada yada - seventeen year olds don't want to know how to adult - and the ones that do, figure it out on their own.

 

[Lil Micky]

All perspective I guess. A cracked screen on a functioning phone would not merit replacement even at zero percent for us. I kept my first cell phone 14 years and only replaced it because they were phasing out analog phones.
I just paid off our 2020 Camry Hybrid, purchased new on a zero percent loan. And I would never buy a new car and only keep it 10 years. We had our 1987 Suburban for 31 years and our 2000 Mercury Mountaineer 21 years. Heck, the hybrid warranty on our current Camry runs 10 years and 150,000 miles. As my mechanic pointed out the key to keeping a car a long time are as simple as changing the oil, and buying a popular model like a Camry, Accord, Taurus etc because parts will be available for a long long time. In an extreme case, I can get EVERY part down to the smallest trim piece for my 1965 Mustang just because so many of them are still on the road, although most are no longer daily drivers.

If it ain't broke, don't fix it.

That said, I don't think the product lifetimes you've enjoyed are reasonable to expect on average. A phone nowadays is rarely used to talk to people and instead serves as the average person's primary personal computing device and camera. Batteries lose capacity, network speeds upgrade, cameras get substantially better... plus carrier incentives mean you can often trade up to a new device and get much more than your old phone is worth (ex. I got $800 off my last upgrade for trading in a phone worth $200).

I used 10 years for cars because that's around the point that it makes sense to purchase new vs. used based on historical depreciation charts, but agree they can last longer in most places. The average car in the US is 12.2 years old but that means a lot of them are older than that.

 

[firefly_ris]

I buy refurbished phones for like $150 and keep it about 4 years. I get squeamish thinking about how much money people drop on phones.

 

[tvguy]

If it ain't broke, don't fix it.

That said, I don't think the product lifetimes you've enjoyed are reasonable to expect on average. A phone nowadays is rarely used to talk to people and instead serves as the average person's primary personal computing device and camera. Batteries lose capacity, network speeds upgrade, cameras get substantially better... plus carrier incentives mean you can often trade up to a new device and get much more than your old phone is worth (ex. I got $800 off my last upgrade for trading in a phone worth $200).

I used 10 years for cars because that's around the point that it makes sense to purchase new vs. used based on historical depreciation charts, but agree they can last longer in most places. The average car in the US is 12.2 years old but that means a lot of them are older than that.

At least here, old cell phones are repurposed by a charity and given out to victims of domestic violence since cell phones by law must be able to call 9-1-1 even without being linked to a service plan.
I expect a modern car to go 10 years without repairs, and that has been my experience. After 10 years is when I start judging the quality of a car. I also never consider depreciation since I expect to keep a car to the point where it has little cash value. My judgement on the value of a car is the cost per mile to run it. The longer you keep it, the cheaper the cost per mile. Depreciation is just buying you air. Of course the last 4 years have been anything but ordinary when it comes to car prices. My daughter bought a 1 year old 2017 Ford Fusion from Hertz with 16,000 miles on it ins 2018. It now has 60,000 miles on it and the blue book NOW is higher than it was when she bought it.

 

[barkley]

If it ain't broke, don't fix it.

That said, I don't think the product lifetimes you've enjoyed are reasonable to expect on average. A phone nowadays is rarely used to talk to people and instead serves as the average person's primary personal computing device and camera. Batteries lose capacity, network speeds upgrade, cameras get substantially better... plus carrier incentives mean you can often trade up to a new device and get much more than your old phone is worth (ex. I got $800 off my last upgrade for trading in a phone worth $200).

I used 10 years for cars because that's around the point that it makes sense to purchase new vs. used based on historical depreciation charts, but agree they can last longer in most places. The average car in the US is 12.2 years old but that means a lot of them are older than that.

i guess we are not avg. car owners-we have 3 (2006, 2007 and 2013). the '06 has about 160K on it but the '07 and '13 are both below 60K. '06 is def. showing it's age but still serves it's purpose and i honestly likely wont get rid of it b/c the multicar insurance discount we get for having 3 cars is more than we pay to register it every year (we made the mistake of going from 3 to 2 cars once-our insurance rates increased ).

I buy refurbished phones for like $150 and keep it about 4 years. I get squeamish thinking about how much money people drop on phones.

the implementation of 5g required me to get a new phone otherwise i would still be using my apple 4s-got over a decade of solid use. the newer phones seem much more flimsy.

 

[_19disnA]

Living within your means regardless of your income is what matters. How you calculate 'net worth' means nothing if you are living beyond your means.

 

[tvguy]

the implementation of 5g required me to get a new phone otherwise i would still be using my apple 4s-got over a decade of solid use. the newer phones seem much more flimsy.

You had to upgrade to 5g? I had to upgrade the cellular module in my burglar alarm from 3g to 4g at the end of 2022 because they phased out 3g. But cell phone providers at this point are required to keep 4g operating until 2030.