The real problem is our culture of entitlement. People have been lead to believe that NOTHING is outside of their grasp, leading them to live well outside of their means by buying expensive houses and cars that they can't afford because they can make the payments now. I have no sympathy for these kinds of people, it's absurd to say it's not their fault. Good financial planning is common sense: Pay yourself first, save for emergencies, live within your means.
Don't pass this off on society, it's an issue of choice. You choose to buy a house you can't afford, or a car. The only person to blame for your debts is yourself.
I'm not going to say that you're wrong. Your approach is a wise one, and it's one that I follow myself.
But there is more to it than that. You shouldn't let society off the hook, here. The problem with a society where credit grows on trees is that it pushes the price up on everything. Why does that tiny house on the corner cost $700k? Because if you offer $350k in cash you will be outbid by the unemployed guy down the block whose bank is willing to loan him $700k.
If you won't take those loans... perhaps you don't get to own a house. That's okay with me, but I'm relatively well paid and can afford some fairly well-located rental housing. A less well-paid person like a schoolteacher or a librarian might have to choose a two or three-hour commute, or leave the city of their birth altogether, unless they're willing to become debtors like the rest of their peers.
Think about college. Does your determination to avoid debt extend to college? Is your desire to attend MIT evidence of your "sense of entitlement"? When you're interviewing with the Ph.D.s at Google and you show them your degree from the DeVry Institute, do you think they're going to congratulate you on your good financial sense? Um, no. But to attend MIT you're going to have to compete with the people who are willing to go into debt -- and, because the easy credit of the last decade has encouraged colleges to raise tuition through the roof, you will need lots of debt of your own, or a very big pile of cash. Colleges wouldn't be so expensive if credit weren't so easy to get.
Being financially prudent is smart, but it's hard to do it on your own when society is swimming in the other direction.
MIT's a bad example now, since tuition is completely free for anyone whose household makes less than $75k/year. Same goes for Stanford (under $100k), Amherst (under about $60k), and a bunch of other top colleges. I paid only about 1/3 of the Amherst sticker price, less than the UMass sticker price for a much better name & connections, with the rest being covered by outright grants.
This trend is new, last few years only, so nobody who went to school 10+ years ago should feel screwed over. (Other than having a bad birthday, of course.)
I'm just worried that a lot of people who could've made it into MIT or Stanford or Amherst say "This is too expensive" and don't try for it. If you can get in and really want to go there, they will find a way for you to be able to attend. Always compare financial aid awards before deciding, and know that you can often get back to the financial aid department with "Well, I really really want to go to Amherst, but I just can't afford it" and odds are good that they'll up your financial aid package. (Assuming you really can't afford it - you should expect to have to sacrifice some lattes and vacations.)
The rest of your post is right-on. It's really the middle-tier colleges and state universities that are inflating rapidly though, because those are the ones whose student bodies rely the most on loans.
MIT's a bad example now, since tuition is completely free for anyone whose household makes less than $75k/year.
Yeah, it's easy for us old-timers -- or those of us whose friends and relatives are trying to afford those middle-tier schools that don't have this policy -- to forget this fact.
But good for MIT, Harvard, and the other elite schools for taking this new path. It might have made a big difference in my life had it happened years ago.
If you can get in and really want to go there, they will find a way for you to be able to attend.
Yes, and this was true back in my day as well. They make it possible to attend... by going into debt. The amount of debt that is considered possible is, however, constrained by the supply of credit and by the amount of debt that society considers "reasonable". That's a much larger number today than it used to be.
My point is that societal factors like credit policy, accounting practices, banking regulations, and the popular acceptance of the debtor lifestyle change your environment in ways that are difficult to ignore and resist, even for those of us who are informed enough to try to avoid debt.
I'm not saying all debt is bad, in fact I have a decent amount of debt towards my college education. However I manage it responsibly. Debt as a necessity is one thing, paying $750k for a house because your bank will loan it to you is poor judgement.
One person's necessity is another person's luxury. I was prudent: I turned down MIT because it was too expensive and took a full-tuition scholarship to a less prestigious school, and it hasn't hurt my career any... or has it? It might have been fun to have been living in a startup hub just before the web was born, back when PG was still a grad student...
It's also much easier to see, now that the bubble has burst, that $750k for a house is a bad move. It wasn't so clear back in 2002, when my friend was kicking himself for having refused to pay $350k for a house back in 1999 because he knew it was terribly overpriced (he was new to the Bay Area). In 2002 the equivalent house was selling for $450k. Such houses may have hit $700k before the bubble burst four years later.
(Fortunately, my friend stuck to his guns, perhaps with some help from the housing-bubble-related articles I sent him two years ago. He's still a renter. But remaining a renter was an extreme fringe position in 2004: No newspaper would tell you that buying was a bad idea (real estate agents buy ads!), so you had to find out from blogs, or by having older friends who had noticed the housing crash of the early 1990s, or by reading Malkiel or Charles Mackay. I'm proud of being numerate, but I can forgive most of society for being less numerate than I am.)
The funny thing about housing is it's still over priced in most places. Post bubble it's much cheaper to rent in most areas unless you are in the highest income tax bracket. And with the 30 year ROI which approximates inflation most investments are much better in the long term.
EX: 1.5k per month to rent vs. a 350k condo with 300$/month condo fees looks good until you add in property taxes (.7%), maintenance, and transaction costs.
Post bubble it's much cheaper to rent in most areas unless you are in the highest income tax bracket.
Yeah, that sure is funny, isn't it? It's almost as if "post-bubble" is the wrong word, the bubble is still in the process of deflating, and housing prices are likely to continue to fall for the next several years!
It's not realistic to directly compare rent with a 30 year mortgages because at the end of rent you have a house and at the end of renting you have nothing and your rent is going up every year while your house payment is constant.
IMO it's best to compare interest only loan on $1,589,000 to renting @ $5,000. So 6% a year = 7,945/month but that's pretax so it's closer to 5561.5. But to keep up with inflation it's reasonable for the home value to increase at ~2%/year and rent should also increase at that rate. But you need to add in ongoing costs like taxes etc. If you run the numbers renting and owning a home cost about the same over 15 years and investing the difference in value which is reasonable. The problem is you want to buy the house you want in 20 years so most people go for a larger house than they need today.
Note: Owning a home is risky but so is renting. When you rend you can randomly have increases of 20% per year or it stagnates for a while but with home ownership you’re stuck in that area so your job or other local issues become a much larger problem. Basically having an affordable mortgage in a good area is not bad as long as you don’t need to move.
I think you are making this too easy. Yes, technically it is the people's own fault. However, not everybody is a supercomputer making perfect rational decisions. People look to advisors and also their neighbors and peers for orientation. If advisors tell somebody he can afford something that somebody can not afford, they are also guilty to some extent. And why does anybody have to be guilty anyway (I hate scapegoat mentality).
And why no sympathy? Be happy that you are smarter and maybe had a better education and smarter peers that enabled you to make better choices. Personally I feel that kind of luck could also enable you to feel with the less lucky ones.
Edit: I just saw your one submission to HN so far, "recommendations for investing books". So apparently you acknowledge that it is not a trivial problem. You may say that everybody is free to go buy such books. But believe it or not, depending on your environment, it may not so obvious to do such a simple thing.
Another example, to clarify what I mean by luck: occasionally you hear about "wonder investors" who started trading while in school and made millions before they came of age. But if you look closer, usually they have some family member who led them down the path of investing. To their peers, it does not even occur to get interested in investing while still in school. I say that kind of thing is luck on behalf of the young investor, not stupidity on the part of the non-investors.
I suppose I was harsh, my intention was not to say that anyone who has debt is an idiot and could have done better, I have sympathy for the poor kid from nowhere who gets himself way in debt so he can become a doctor, or so he can do something with his life. My lack of sympathy is for those who continually make poor decisions. In the article the woman felt bad because of her medical issues and continued shopping from home even though she already had previous debts, as well as her new medical debts. I have issues feeling for a person like that. I suppose I was too broad. Her issue sounds like a pyscological one, and perhaps she simply had no one to help her, but in the end she is still ultimately responsible for her own desitiny.
She is responsible, but so are we, unfortunately. Because when you get enough of these people making bad decisions, it impacts the economy as a whole.
Figuring out why people are continually making poor decisions regarding debt is not about finding someone other than them to blame. It's about trying to figure out what needs to change in our system so we can avoid hurting the whole.
I totally agree with you. It is the responsibility of the individual. Still there is a wide cultural problem in the U.S. that has to be recognized.
My sister and her husband who live in the US,started making a lot of stupid decisions. The rest of the family who live in Mexico warned them. My sister said that that is the way is done in the U.S. and that everybody lived like that. Needless to say they buried themselves in debt and went bankrupt. It was so weird for us since our grandparents and parents were very, very thrifty.
Not so fast. "Everybody" does not live like that. In fact, even before the credit crunch it was common to hear about folks who got in over their heads with debt. (The ads for "credit counseling" and "debt relieft" are commonplace.)
The US culture gave them more opportunities to succeed. Those same opportunities can let them fail. If they can't handle the opportunities....
For the past 7 years, the federal funds rate has been around 2-6% while the monetary inflation rate has been between 4-8%. In other words, interest rates have been negative. This isn't a problem of "culture". People are responding to incentives.
That's the number for price inflation. Price inflation is monetary inflation minus increases in productivity. Price inflation is useful for determining how standard of living has changed. Monetary inflation ( another word for it is money supply growth or dilution) is the right number to use to determine if interest rates are negative. I was using nominal GDP numbers as the number for money supply growth, although some people use M2, M3 or MZM. Each number has its pros and cons.
IndyMac stockholders took a big bath, so did Countrywide, so did Bear Stearns. Whether the management at those companies were given due anguish is another question.
The salient point of the article is that between the towers of personal responsibility and social protection, the community determines the culture. In this case, the culture of credit card debt (plus more) became socially acceptable.
This point gave me pause because our startup changes our spending habits depending on the community we're around. Let's take the small example of cooking. When it was just us, we would focus on the product, and then each night, someone would cook (cheapest possible method). Then when we started getting into the tech community and received a little bit of seed funding, our culture shifted toward eating out more and we stopped being as stingy. The more we read Techcrunch, go to SXSW, hang out with designers, the more we get lax. We aren't on fire, we're just in a hurry.
Sorry, I just don't see what's so complicated. This isn't about "buy vs. rent", listening to what popular media says, keeping up with the Jones's, maximizing your long term possibilities, competing with anyone else, and certainly not about "society".
It's about paying your frickin' bills.
A bill unpaid, for any reason, is a broken promise, and gets little sympathy from me. It will, however, get help from me on April 15. Something's really wrong here.
There are two financial "Worlds" you can live in. One is the world of Debt, the other is world of All-Cash. You can prosper in either one of them - but if you get stuck having to go back and forth between them, you will feel pain.
well all I can say is I owe my lifestyle to the payday loans store on the corner. If it weren't for those nice people, I wouldn't own all the nice things I own.
Don't pass this off on society, it's an issue of choice. You choose to buy a house you can't afford, or a car. The only person to blame for your debts is yourself.