I’m not being flippant here, I promise - genuine question. How immediately is “immediately?” Because if you offered me this kind of deal right now, today, I could buy $100 worth, and that’s the last $100 I have in the bank. It needs to last me 'till payday next week. If “immediately” means anything other than “literally right this second” then no, I can’t take advantage of that free +18%, no matter how obvious a move that is.
At certain points, lenders are keen to encourage people to take on debt. When we first applied for a mortgage 25 years ago, we figured out what we thought we could safely and comfortably afford. The bank urged us to take out a mortgage for 3 times that amount, assuring us it would be easy to handle and that the price of the property would rise, etc. We were ticked, went to another lender, same story. That one even offered a slightly lower interest rate on a larger mortgage. It’s hard to make good decisions when someone’s job–the expert–depends on selling you stuff you don’t need.
We’re also subject to “decision fatigue.” When even sorting M and Ms by colour taxes our brains and leads us to make worse decisions after the sorting, it’s hardly surprising we have a hard time with things we don’t know much about. I think about consumer advice: read the labels, compare costs, make your decision. Try that with toilet paper: different prices, different numbers of rolls in a package, different numbers of plies, different numbers of sheets on a roll, different sized sheets, different levels of quality…Now do that with every item in your shopping cart. Next week, do it all again.
And I find it hard to blame people for trying to sneak a little joy and ease into their lives. We’re told every freakin’ minute that the “good life” is about buying stuff and you know what, sometimes living at a bare subsistence level is just frustrating and depressing. Yeah, I know the whatever I’m looking at won’t bring me eternal happiness, but hell, a couple of minutes of not feeling bad might just be worth it.
That this is part of reality for so many people, and it is unnecessary, given the wealth of the world, depresses the heck out of me.
Yeah, when we bought our current home 20+ years ago, we got the same schtick urging us to go bigger and spend more than we were initially comfortable with. It must be taught in “Realtor 101” or something. “Oh, the value of the home will increase, and you will be earning more over the years to cover this!”. We stuck to our plans to have a manageable mortgage if ever I lost my job we’d not lose the house.
I like this old saying: “It is not the man with silver and gold who is rich, but the man who is content with little.”
I think that’s just standard salesman tactics. Same thing happened when I went to buy my first vehicle. I didn’t have much for a down payment, and I knew exactly how much per month I’d be able to afford for payments.
Very first salesman I met with started pushing a truck that would have been well over my monthly payment budget, and when I pointed that out, he said, “Well, you can reduce the monthly payment if you put $X thousand down…” I had already told him I didn’t have anywhere near that amount for a down payment.
It’s…almost as if your company, and many others offering like plans, know that the take rate will be so low, and the only reason they offer such “free money” is because it’s not really free so much as it is a discount on what they might otherwise be expected to pay in wages alone to attract equivalent talent. They offer matching funds up to 10K, for example, but only have to pay out 30 cents on the dollar because 70% of employees don’t take them up on the offer, but they still get to advertise it as part of overall compensation. It’s an obfuscation, used by those with the greater bargaining power to mislead the financially unsophisticated (illiterate, if you prefer, but I don’t think that’s fair) employees into thinking they’re getting up to 60K a year, when in reality the average is closer to 53K per year.
Consider also that maybe it’s not that the people who don’t contribute to the 401K are just too stupid to see the value in it, rather that they have more pressing/immediate needs for their money (for example, student loan debts or medical expenses) than retirement savings than long-term retirement plans. Which, again, shows how matched 401K contributions might really just be a way for employers to conceal how exploitative and manipulative they are. Because, again, they are choosing to offer this kind of compensation not out of the goodness of their hearts but, presumably, because they consider it to be more cost effective than just offering straight up cash for each worker to do with as they choose.
All that to say, I cringe when I see lack of “take” for matching 401K schemes put forward as an example of financial illiteracy, rather than what it really is: yet another example of how wage laborers are exploited by the job market.
This was the early-90’s, but the money would, quite literally, have been tied up for mere seconds.
No disagreement with you on the contention that 401K plans can be a smoke screen for employers. Heck, they were created by the government to offload retiree obligations to those very employers.
But I am not talking about hourly timecard punchers - these are salaried staff making decent coin. Yes, they may be saddled with student debt and other situations that prevent contributing, but that cannot be everyone. A friend of mine is a VP at another company and when he has encouraged his team to participate in the 401K and discounted employee stock purchase plans, he gets the same blank stare reaction, but then reports the parking lot has a lot of shiny new sports cars. For some, yes, they have challenges preventing participation, but not all.
I’m super curious how that works but reluctant to further derail, haha.
Check out the link in that post of mine. Our plan allowed the employee to sell the purchased-at-a-discount shares immediately.
/hijack
You are absolutely, 100% correct. Technically.
But that completely ignores the psychology of the thing. Assuming your average not particularly large return, a couple minutes of endorphin rush can vastly outweigh the few extra dollars you’d be gaining by investing the money over a year 
. I used to try and manipulate my withholding rates through the year to try and get my return as close to zero as I thought I could. But at a certain point in my life I said ‘fuck this’ - not worth the minutes involved in remembering to do so. I hate paying at the end of the year (psychology, again) and would rather just have them take out more for a guaranteed positive return without me thinking about it.
The impact to my own financial bottom line? Close enough to zero that it is not worth my time to scrutinize. Mental buoyancy in my case is better served by being less financially efficient. If you’re the sort of person whose mind can’t let go of the details of profit and loss like a dog worrying a bone, I’m sure the opposite is true.
Hardly. The reason they offer the matching funds is because highly compensated employees in the company are limited in the amount they can contribute to the plan if not enough lower paid employees participate. And why would highly compensated employees want to maximize the amount they can contribute themselves? Because it’s a pretty good deal for them. At the same time, it’s also a pretty good deal for the lower paid employees, but financial illiteracy hamstrings them, not the employer.
https://smartasset.com/retirement/401k-highly-compensated-employee
There’s another factor that comes into play sometimes. There have been times in my life where if I wanted $1k to go on vacation or to buy a new couch , the only way I could get it would be to have taxes over withheld and get a refund. In theory, I could take $20 a week and put it in a savings account or in a shoebox under my bed but in reality , it would never get to $1k if I had access to it. Something would happen - my car would need a new battery or I would need a new winter coat . The taxes - I can’t get at that money. The only other thing that comes close is a sou-sou and not every job has had those.
Two issues:
- Most people can’t do any math much past counting, addition, and subtraction. Compound rates (if I’m reading correctly) is in the 9% territory listed here: What’s the latest U.S. numeracy rate?.
- Most people can’t plan nor remember past about a week or two. (Personal observation based on a) the number of people who can save money, b) presidential candidate polling after debates, c) the number of people who use payday loans, etc.)
One reason financial literacy is not so common is that this situation is rarely so cut and dried in the real world.
Student loans, in particular, are notoriously tricky. If it’s a federal loan with a fixed rate, probably this is good advice.
If it’s a private loan, good luck getting any solid advice that doesn’t involve picking through the loan terms and your own financial situation with an expert.
You may not have a fixed rate loan, meaning maybe it’s been a low rate for the last few years but will jump in the future (especially these days).
And if the interest rate is high, maybe there are prepayment penalties involved or limits on how much additional principle you can pay off, so the prepayment calculus can be affected and it’s a good idea not to prepay for that reason.
If you’re still a student, the interest is probably accumulating every month but payments are deferred until you are no longer a full time student, which can exacerbate issues later.
Maybe you can potentially invest a windfall at a higher rate of return but your income is highly variable. If there’s a chance your income will be unpredictable or drop in the future, it may make sense to take an ‘on paper’ hit to potential future earnings to keep those funds liquid or pay more of the loan principle off to avoid payment issues later.
So, even ‘simple’ situations can become very complicated very quickly even without the usual innumeracy and general lack of planning that’s always been present in society.
Today I learned what a “sou-sou” is:
Did the employees know about those mere seconds?
Do they know the procedures for buying and selling the stock?
A lot of people are afraid of doing anything that’s new and unfamiliar.
The stock market is full of scary stories— about booms and busts, and “experts” who make it rich, then die poor, etc.
Some people suffer not just from financial illiteracy, but also from “financial phobia”.
If you want to sell them the stock at 85%, don’t just tell them about the easy profit. First, tell them what the procedures are , and how easy it is to do.
Then give them the numbers.
I would argue that the latter tends to be primarily an outcome of the former.
It sounds like ‘free’ money but that’s assuming the stock price stays constant or doesn’t drop much.
The offer period usually precedes the purchase date and the price at which you purchase is often discounted from the average stock price over some period of time (a month in our case) while the price you sell at will be the spot price for that day.
If the stock holds constant over that period, sure, free 15% (or whatever). If it has been dropping, it’s not a great feeling.
I worked up the maximum purchase numbers at my company and figured out that even assuming just flat or reasonably increasing stock value over the period and taking into account maximum purchase limits, I’d stand to make $200-$400 a year on it. There were better ways for me to invest for that sort of return.
My take is the acceptance of debt as not bad or even good is far too prevalent, and not very financially literate. IMO the attitude of my parents generation (that it should be avoided for everything except a mortgage) is generally much more sensible. A lot of society has gotten used to interest rates being close to zero, and we aren’t going back to that for the foreseeable future, and that kind of thinking will have a serious cost.
True there is the odd occasion, as described in the OP where you can beat the system and get debt at a lower rate than a risk free investment will pay in interest. But that is rare, as a regular consumer you are more likely to get a high interest rate (that whole “0%” thing only applied to big rich institutions, poor schmucks like us always had to pay through the nose) on your borrowing (much higher than anything can be remotely described as risk free), in most cases borrowing to invest is a really really bad idea. And the best thing you can do to increase you financial solvency is to pay off your debt.
Yes. If someone has excess money, they’re used to using it as a tool to get more money. If someone has little or no money, they’re used to money being a tool other people use to beat them with.
I’m the former, my younger brother is the latter. Despite us growing up in the same very comfy lower-upper class household to the same parents, our income trajectory since has placed us on opposite sides of this conceptual canyon.
I used to work with a guy who had himself previously been a bottom level exec at one of the regional US phone companies. He was at the lowest tier of the exec compensation plan. His wages when he started that new job were ~$150K/year back in the early 1990s.
When he was first getting set up with his new employer the HR rep told him he could sign up for a payroll deduction to buy company shares at 50% of that day’s price. The “catch” was he had to hold them 60 days before he could sell them on the open market.
It took him not even 3 seconds to think to ask them “How much can I buy?” When they said “100% of your otherwise take home pay” he was flabbergasted. He instantly signed up to take 100% of his take-home wages in half-price stock.
Went home and told his wife: “I have good news and bad news. The good news is I’m now being paid $300K per year, not the $150K we expected. The bad news is I have to work for 2 months for free. But I’ll get an extra two months of those doubled wages for no work at the end after I quit.”
That’s how the game works when you already have money. He had to be able to afford to work for two months for zero income, having just finished a (short) period of unemployment. Obviously had he been more skint he could have waded into these waters instead of cannonballing into the deep end, but since he wasn’t skint he could cannonball.
He later learned that of the hundreds of execs within that plan, he was one of like 3 who took all their wages as stock. The discount was even better for the folks farther up the food chain and they still didn’t take the offer. An investment that pays ~100% in 2 months or ~600% per year and they get few takers from a room full of MBA’s? Some folks Just. Don’t. Get. It. Or are already in debt up to their eyeballs. Even so they could wade into the deferred double-plus comp plan and obliterate their debt load quickly if they thought to do so.