They may not properly score “government confiscation risk” either, but they can sure imagine it happening to them.
Between federal income tax, social security tax, medicare tax, and state income tax, it’s likely that his after-tax income was more like $50M, or $5M per year, which works out to about $14K per day. Fly private everywhere you go, stay in the most egregiously luxurious hotel rooms wherever you go (Las Vegas has rooms for $100k per night), buy rounds of Cristal for the whole bar, and I think that kind of cash burn rate starts to look possible. Dumb, but possible.
14K per day is easy to spend.
L Ron Hubbard, of all people, had a fantasy story in Unknown from around 1941 about a man in NY who was cursed by having to spend $100 a day. He was not allowed to buy things like jewels. He found it very difficult.
Also, I like paying myself for getting my taxes done. I don’t mind doing taxes, but its much easier to do them when you know there is a payday at the end of it for me. So I figure I’m letting the government hang onto some of my money, but, as you said, its close enough to zero in terms of impact on me that it isn’t worth worrying about AND it helps me get through tax season with taxes done before mid-April.
funny enough, I got ‘financial education’ in school, and it strongly emphasized that Debt is Bad. It was Dave Ramsey’s curriculum. (he’s outwardly Christian and big in evangelical circles) I’d say it was a bit ‘cautious’ about credit card debt but overall it was a good program.
I can’t blame the caution about CC debt either, it was a huge problem in America and continues to be a problem for many.
It also had many cautions against ballooning mortgages which, of course, were a big problem.
also, student loans have NEVER been at 2%. that’s ridiculous. mine were around 7-8% 15 years ago. it also can’t be discharged via bankruptcy. it’s almost always bad debt to have. if you fall behind on repaying you might end up with wage garnishments.
I consolidated mine at 1.5% in about 2003 or so. So they were definitely that low at one point.
My late first wife’s student loans for undergrad and law school from 1972 through 1979 were at ~2%. The repayment terms were also very easy. We slow-rolled those for a decade or more after we got married well into the late 1990s because just accounting for inflation we made money every month the balance was outstanding, even before you consider us investing the money we didn’t need to send to the loan company yet. Paying those off early would have been an act of abject financial folly.
A few years later student loans had completely turned into a racket to bilk young people to prop up the banking industry. I think that may have been Reagan’s doing, or at least occurred during his administration.
If you don’t make very much money, student loan interest is deductible “above the line” on your 1040 (in the US), meaning you don’t need to “itemize deductions” to take advantage of it. Not very much is deductible, and the income limits mean that it’s never going to help at a high marginal rate, but it’s better than any other kind of interest as long as you’re eligible.
Financial literacy never sank in for me even though my Mom tried to teach me. She wouldn’t share anything about our personal finances so it was very abstract and I didn’t get it. We were a very feast or famine household though, often barely scraping by, and despite my mother’s good example, her husband was constantly running up credit cards and mismanaging things. Result? I was a financial mess. I did okay as a legally emancipated teen, but that was a situation where I was paying for gas with rolls of nickels. As soon as I hit college I discovered credit cards. I tried to keep up with my well-off peers by putting everything on credit card. I also had undiagnosed ADHD so I kept forgetting to pay things and ended up in debt to two different banks due to overdrafts.
Don’t know why I was so impaired in this way. Money just didn’t make sense to me. I started to turn things around when I worked with a credit card counseling organization and did a debt management plan with them. That got all my accounts current and amortizing. Then when we got married (age 23) we got a huge check from my husband’s grandparents and we paid off all my debt.
Then I discovered You Need a Budget. Something about the system just clicked. The app gamifies money management. Thirteen years later, I am extremely fiscally responsible. My credit is outstanding. I’m in charge of the household finances (my husband handles the investments) and I’ve saved so much money and weathered so many financial crises. If an unexpected expense hits my account I know about it and investigate it immediately. I review my budget at least once a day. I am a YNAB evangelist.
We still have a substantial amount of student loans from graduate school, but we have investments as well. My husband has mostly insisted we invest money rather than pay down the loans. I’ve struggled a bit with that because I grew up with the hating debt mentality but my husband says rich people aren’t afraid of debt. This may be a classic case of Rich Dad, Poor Dad. He comes from substantial wealth. He doesn’t care if he dies with student loans because of all the money we’ll supposedly have earned. Meanwhile I feel like the federal government owns my soul. We’ve struck a small compromise where I’m using this game called 100 Envelope Challenge and whatever money I scrounge up with the challenge can be used to pay off debt. I paid off my car this way. So $5,000 a year max goes toward extra debt payments. The rest of the money goes toward investments, my son’s college fund, down payment on a house, and my husband’s next car. It would be glorious if we could purchase his next car in full.
The best way I can explain the mentality I grew up with is that you either have money or you don’t, and if you have it, you should spend it, because it’s one of the few pleasures you have in life and it might be gone tomorrow. It’s not rational but it is very human.
Do the investments have a higher rate of return than the loans interest rate? I didn’t pay off my mortgage, though I could, because the tax break lowered the effective interest rate to below my investments. Once that went away, I paid it off immediately.
As you noted, sometimes it is not illiteracy but rather psychology. My daughter started being interested in behavioral economics when the first thing her boyfriend’s father did when losing a job is buying a new car. She couldn’t understand why anyone would do that.
Probably. The loans are at 6.5%. There’s no guarantee of course, but if the market rate of return is consistent with the average rate of return for the last 40 years, then yes.
What really bothered me is when the loans were in negative amortization (We are on a REPAYE plan), but I don’t think that’s going to happen once the payments kick in again. It’s hard to say because we have a kid now, which we didn’t have before the student loan pause, but we also have a higher income too.
I’ll go on the record and say I don’t think REPAYE plans and the like are really good for borrowers. I would have been much happier being forced to pay off my loans in 10 years.
Also I have no idea what’s going to happen to our money now because my son just became medically expensive, indefinitely. Whether we will be hitting our out of pocket max annually for the next five years is hard to say, but it’s a real possibility.
I think that there is a combination of things that are obstacles to financial literacy. The specific items mentioned by the OP in the first post seem easy and intuitive, but I think that that stuff may seem too much like a continuation of work in your time off.
And if you deal with a good financial planner, you can suddenly be exposed to the myriad of government financial and taxation policies that he/she has both the time and professional requirement to become familiar with.
Superficially it all makes sense but once you get into it in depth it can seem quite overwhelming.
Considering that your student loan debt is typically discharged upon your death, your husband is right- there’s no point in paying them off early.
That’s precisely one of the things I was trying to get at with my original post- that sort of “windfall” mentality is exactly NOT the sort of delayed gratification mindset you have to have in order to be fiscally literate. Or at least to understand it fully.
By contrast, I was taught to save, save, save from my father’s side of the family. You never know when you might need that money. It’s as irrational as the upbringing you have; the healthy course of action is to save and spend as it’s prudent. Which may mean to buy top-flight expensive stuff when it stands to be something that you’ll really use often and hard, like say… tools for your job. Or hiking boots if you’re a Boy Scout. But it also means that you don’t spend every dime you have, or buy the very best on everything either. Frequent new cars were always something of a no-no; the expectation was that you’d drive the wheels off your car, and replace it prudently.
Basically it took a certain level of awareness about what and why you were spending money, and clear level-headed decisions about that. Lots of people have trouble with that- it’s really hard to sock away $100 for a rainy day, when you could go out to dinner tonight and enjoy it.
I think my husband and I balance each other out pretty well that way. I’m a little on the spendy side and he’s more frugal, but every once in a while I convince him to splurge on something more high quality, and he’s like, “Damn, I’m glad we did that.” For example one windfall we got, we took part of the money and spent it on a Tempurpedic split king adjustable bed. This was years ago. Probably one of our favorite things we ever bought, and we enjoy the benefits every day.
In other words, it’s complicated. Even highly financially literate people can make good decisions which turn out to be wrong. Especially when you are trying to predict the future.
I think there are different kinds of financial literacy. From my perspective, anyway, there’s “big-picture” (or “strategic”, if you will) financial literacy, and then there’s the day-to-day business of being financially organized and doing the right tactical things. I make this distinction because I’m generally pretty good at the strategic stuff, but absolutely terrible at the day-to-day stuff.
For example, I’ve done very well by always insisting on owning my own home rather than renting, and buying in areas that had good potential for appreciation. I’ve generally avoided investment scams (by “scams” I include aggressively marketed mutual funds with high management fees) and have gone with conservative investments like bonds, interest-bearing certificates, and sometimes index funds to capture rising markets.
OTOH I’m terrible about paying credit cards on time – I manage to combine the virtue of paying them in full with the stupidity of paying them late. I tend to pay bills late and not only accrue late fees but possibly a hit to my credit score (not that I care about that all that much). I’ve filed income tax returns late (sometimes years late) even when there are refunds and benefits coming to me. Some of my friends, especially those who are careful with their finances, have written me off as hopeless with respect to financial matters! I guess my problem is that I find any sort of accounting insufferably boring, and in fact, money in general to be an extremely tedious subject.
Autopay is a great way to have your bills always paid on time without you having to do anything. Most bills these days have the option of having the payment drawn automatically from a bank or credit card account every month. Even if you are good about paying bills on time, autopay is still worthwhile because it saves you from the chore of paying bills. Provided you are living within your means, autopay can save you the monthly effort of paying your bills and will prevent those late fees.
That was the upbringing I was brought up with – always set aside as much as you can because eventually something bad is going to happen, even even if nothing bad happens, you need to get a pile of money to live off of some day when you can’t work any more.
I think the biggest problem is that it came with a side of fatalism about jobs. Like, you can exist in one of two states, employed and unemployed, and if you’re the former, just consider yourself lucky you’re not the latter, no matter how underpaid you are. The biggest jump in my savings level came from shaking that off and getting better work that paid me appropriately for my skills, rather than scrimping to save 25% instead of 20% of a much lower salary.
Probably good advice, but one of my financial quirks is I greatly dislike giving anyone access to automatically debit my account, especially for amounts that can be wildly variable. Other than my own bank, the only party that regularly debits my account is my home and auto insurer, where my bill-paying forgetfulness could have unacceptable consequences!