Why are so many people woefully ignorant of financial matters?

In My Humble Opinion
101

All true. I was using “mortgage” too generally and should have been more clear. Any debt on your main home is deductible. Equity lines are sometimes called (probably incorrectly) second mortgages. Also, there is a way to deduct interest on a second home if you live there enough. Thanks for the corrections.
I didn’t want to get into the whole small business thing which is why I specified “personal debt” but this is true too. Interest that is a business expense is deductible as well.

I forgot about student loans. They were deductible, then they weren’t for a while (like when I had mine, dammit) and now they are again.

Good point. You can use your equity line for anything you want, not just for home expenses. A lot of people do that. When I bought my last car, Honda had a 1.5% financing deal so it made more sense to finance it the regular way or I would have done that.

For a long term investment, buying a house where you will live is one of the best things you can do. Get a home inspection to make sure that it’s in good shape first obviously but over twenty years you almost can’t lose in a good area. There are exceptions like East St. Louis I suppose but those are the exceptions.

102

Here are my own personal priorities:

  1. Make sure my style of living can be covered today…(i.e. live within my means).

  2. Have an emergency account set aside (because we have two incomes and can now live off just one, our emergency account is actually pretty small).

  3. Save for retirement at a “get the match” level.

  4. Pay off consumer debt (we don’t tend to carry it, but this is the priority order when/if we do).

  5. Max 401ks

  6. Have non-retirement medium term savings started and regularly contribute.

  7. Pay off mortgage (we finished this one last Spring)

  8. Regularly contribute to kids 529s for college

  9. Increase standard of living (we haven’t really gotten here yet. We are starting to travel a little more).

103

For your own home, unless you live in a time and place where real estate is overvalued, yes - your own home is one of the best invesstments you can make. The tax benefits, the building of equity over time.

Buying real estate on spec to “flip” is a dangerous investment.

104

what I said was:

and I would be genuinely interested to hear why that advice would not apply to mortgage loans as well as credit card or car debt. I understand that the math is more compliacted because of tax deductibility, but wouldn’t the logic be the same?

105

Anyone looking to do this should watch the entire season of Flip That House on TLC. The biggest risks with flipping a property are:

  1. underestimating your financing and being unable to finish the repairs
  2. failing to estimate the market and then incurring high holding costs (your mortgage payments) until you sell it
106

I love “Flip That House.”

I think people somtimes make finances into this magical complicated thing that only Wall Street Bankers can do. The fact is, your grandparents probably had the right idea. Don’t take on credit card debt. Live within your means. Put some away for a rainy day. If people are confused, living on cash only would fix a lot. When the dollar bills are gone, they’re gone.

Really I think some of the biggest changes we now have to deal with are health care and retirement. This is where a lot of people go wrong. If you don’t have health insurance, no emergency fund is big enough for what you could face. If you don’t put money away for retirement, you cannot depend on Social Security or a private pension to support you completely. Even when my husband was unemployed for about 5 months last year, we found our own health insurance policy over the internet and insured our family. It sucked to pay for it when we were struggling to make ends meet, but there is no way I would have gone without it even for a day. We are all healthy but all it takes is a car accident or a cancer diagnosis and you are bankrupt.

401K’s should be started as soon as you get a job, or if your employer does not have one, start a Roth IRA. If you never see the money as part of your take home, you learn to budget without it. Then you get statements each quarter and you get to see that money grow.

I also think people are nuts about their cars. I can’t justify buying a brand new car even though we can afford the monthly payments. I won’t spend so much on something that goes down in value until I am a millionaire and can afford to throw that money away. I know people that have tons of credit card debt and no savings yet they drive 2 brand new cars. That is the definition of stupid.

You can teach even little kids basics about saving and spending. Give them 2 or 3 piggy banks and have them put a portion of thier income or allowance in saving (maybe even break it down into short and long-term) and spending. You can add another for charitable giving if that is a value you want to teach. When they are old enough open a bank account with them and explain how it works, let them learn to use a debit card before they are off on their own. Let them see how you make a budget and pay the bills, even let them see how expensive the electric or heat bills are so they have some idea.

I think kids get into college, get their first credit cards and think they will make enough money when they get out that it doesn’t matter. I saw a survey somewhere (nice cite, right?) that showed college kids believed they would get jobs right out of college making $50-100,000 per year when in reality it averages more like $30,000. To someone who has only ever worked part time minimum wage though, even $30,000 seems like more than enough to pay off $10,000 in credit cards. Add $20,000 in student loans and they probably think a few thousand more won’t even make a difference.

107

Hey, want to add psychology into the picture now?

I paid off my student loans at a HORRIBLE exchange rate (US$ loans while earning Czech Koruna)…I’m talking 'bout probably adding upwards of 30%, of course depending on methodology used, to the ‘total’ amount.

Know what happened the day I paid off my loan and realized I had no debt? I slept better at night. I really did. I began working FOR something, instead of against something. Now…that dream ultimately failed because of a bad business deal financially, but, honestly, when that bad business situation happened, I didn’t have to worry about paying off debt on top of everything else. I was mainly worried about going back into debt…but zero is better than negative.

Taxes, etc. might be a logical way of looking at where to spend your money when it comes to investments, but there is definitely something about waking up and being able to say “Today I make money for ME. Not American Express.”

This is just an introduction to looking at your risk profile. If you feel comfortable floating $1,000,000 of debt while bringing in $1,100,000 in the same period, then guess what? You made $100,000! I know developers here that do that on the order of $20,000,000 and $20,100,000 every year. At anytime their house-of-cards may fall and they’ll be up the creek, but right now they earn a good living, and the possibility that they’ll owe $20,000,000 one year while earning $20,500,000+ keeps them going.

But the one thing for most normal people to consider is that while you may say you can accept more risk and play the game…sometimes that is just an excuse for laziness and/or not understanding the true stakes. You just might benefit more from paying off your debts and waking up in the morning after a good sleep and saying “Everything I do today benefits ME, not someone else. And if life smacks me with something unexpected…I’m still going to be A-OK.”

YMMV.

-Tcat

108

If you want to throw a real wrench into calculation of future value, you might want to consider the future loss of money not spent before you die. This is assuming that you don’t plan to leave an inheritance to children. But if you want to get really technical about it, when considering the value of retirement money that you will not withdraw until you are 65, you should factor in the possibility that you die before you get to spend it, or that you will be infirm and in no condition to enjoy the money. A 50 year old male has about a 10% chance of not making it to age 65. and a 20% chance of not making it to 75. Add in the percentages for surviving but not in a condition that allows you to enjoy your wealth, and that’s a pretty big risk factor to put on your retirement savings.

This happened to my grandparents. They saved all their lives and lived a very low standard of living. Everything was geared to retirement. They were going to travel the world. But when they retired, my grandmother needed a knee replacement, and couldn’t get one because the waiting list was very long. She finally got one when she was almost 70, but shortly thereafter had a stroke. She died, and my grandfather followed a couple of years after - their retirement savings almost completely untouched. All their lifelong savings? Their children went after it like a pack of ravenous wolves, and a lot of it got burned up in legal fees. It also destroyed the family.

It is possible to save too much for retirement. I know lots of people who had big plans for retirement when they were young, and saved a LOT of money. They retired wealthy, and then realized that at age 65 or 70 they didn’t have quite the burning urge to buy that sailboat and cruise the world that they had at 35. Instead, they’d rather stay home, paint, watch TV, and go on a trip or two every year to visit the grandkids.

You should save enough money to maintain your current lifestyle, minus work expenses and mortgage payments (assuming you are on track to pay off the house before retirement). You should consider your primary residence as an asset to that end - you can remain living in it and draw down the value with a reverse mortgage if need be. Make sure you have good life insurance and health insurance, and save a little extra for emergencies. But don’t go nuts. It’s important to live a balanced life. Don’t squander all your money now, but don’t live like a pauper and put it all into savings, either.

109

Yeah, I meant to say far enough below the current rates.

110

Along these same lines, when computing what you need for retirement, it’s a mistake to assume the same income level is required each year. Even if you are active at 60 or 65, you are not likely to be at 80. When you retire, if you can do it, don’t put it off.

We learned a similar lesson with our house. When we sold our last house, I had some time off with a great buyout, and we spent a lot of effort fixing it up. It sold during the open house. The downside was that we wished we had a chance to live in this new beautiful house. So save, but also enjoy things for yourself.

with two more years of college to pay for, we just started our rennovation today with a new kitchen sink. :slight_smile:

111

I strongly recommend any of David Bach’s books. Smart Women Finish Rich is the best of all of them for basic information about how to spend and save wisely. There’s a couples version as well.

His book Automatic Millionaire talks about putting into practice saving/investing goals, and Start Late, Finish Rich has detail for people who are in debt, or behind the curve.

I think his titles can be offputting, but he is NOT out to push any get rich quick schemes. On the contrary, he is about helping a person get their finances together so they can live the life they want. He spends a lot of time on retirement planning, but emphatically believes you shouldn’t put your dreams off until retirement, either.

112

I’m late to this thread but I love this topic.

Investing and stock & bonds are one thing. Personal finance is another. Sometimes people just don’t seem to think for one second about these things.

Example 1: Frontline did a big story on credit card debt a couple years back. They were talking to 4 people who all were carrying balances on their credit cards over $4000. They also all said they had enough in savings to pay it off if they wanted to but they liked having the money around in savings for “emergencies”.

That is,

A) They were paying interest to avoid something that MAY happen, but

B) What kind of emergency is going to arise for which you can’t use your credit card anyway?

That’s just flushing money down the toilet. It’s not thinking about your dough except on the most shallow surface level.

Example 2: I was listening to this local home-buying advice show on the radio this weekend. A mortgage broker was telling a lady that on this $300,000 house she probably wanted to go with some kind of loan that was going to go from like 5% to 6% to 7% over the next three years.

Typical question: “do you expect to be making more money in a couple years?”

Of course.

But think about that for a second. She’s paying about $15,000 in INTEREST the first year of that loan, and about $3000 more each additional year (that’s disregarding the amount of principal she’s paying into, which isn’t going to be much anyway). You need to be making $85000 a year (before taxes), and getting a 4% raise to cover that additional $3000 per year! Not too many people are doing that.

I know the home buying mantra has become “well, with renting, you’re just flushing money down the toilet”. But people need to realize that with buying, you’re flushing interest payments down the toilet. Sure, you can write off that $15,000, but you’re still losing most of it. Imagine if your landlord raised your rent from $1000 a month to $1250 a month to $1500 a month over the next three years. You’d flip out. That’s what one of these mortgages is doing, though.

And long term home appreciation values have not out paced inflation by very much. about 1.5% compared to the roughly 6% that the stock market has done.

113

Maybe but you buy a house on margin.

114

**Sam Stone ** makes an interesting point. It doesn’t do you any good to work yourself to death and have a ton of untouched money in the bank. That’s the reason a little debt is not necessarily a bad thing. It lets you buy stuff - house, car, education - that it would otherwise take you a lifetime to save up for.

You can’t live each day like it’s your last because it probably won’t be. And you can’t constantly be preparing for a future that may never come. Ultimately what you want to do is establish a sustainable lifestyle and live within your means. You

115

One of my options in High School was two years of Accounting (in the first year you got basic concepts, in the second they taught you how to do taxes); I chose Draftsmanship instead because I just happen to like it better :slight_smile: and being the child of a Finance father and a Catalan mother (think Uncle Solomon McDuck, only scroogier) I’m a goddess of budgeting. And I knew Lilbro was going to become an accountant like Daddy, so my taxes were solved :smiley:

My last year of college included “Introduction to Management of an Industrial Company (aka How to Speak with an Accountant).” It was considered an easy pass; it was also very well taught. And yes, it was an easy pass, but getting anything higher than pass was not easy at all. Lilbro says the notes for that class are absolutely fabulous: very little detail (after all, we were engineering students, we weren’t expected to do finance’s work) but the concepts are marvelously clear.

Still, one of the hardest parts of getting a Real Job with Real Benefits in the US was getting it through people’s skulls that “I don’t know what a 401K is” and “they don’t exist in Spain.” The concept of “balancing a checkbook” was completely alien to me as well, we barely use checkbooks and once I understood the concept I realized it was just what I’d call “making sure the bank hasn’t stolen from you.”

116

I can’t believe that everyone thinks that financial knowledge should come from schools. Schools are already responsible for feeding kids, teaching them how not to punch the next kid, making them physically fit, teaching them about sex, how to cross the street, how to do things they don’t want to do (homework) and not to mention educating them to pass a million standardized tests.

Schools are not parents. Yet parents want schools to replace their parenting duties and at the same time aren’t afraid to go apeshit on the school when the school does something they wouldn’t have done.

There’s a million different avenues to consider when planning your finances. How on earth could all of this be taught in school? Who is qualified? Heck, half of it is opinion.

And requiring it in college? Yeah that’d be swell, I can see all of you financial wizards raising hell if you were in school and had to take a class with all of the mouth-breathers who couldn’t balance a checkbook.

Learn what works for you. Teach your kids basics. Pass along sound advice. Don’t whine because schools aren’t doing your job for you.

117

I agree with you in theory, but how can the parents give what they don’t have?

I work in the same office space as a call center, all women. Most of these women barely finished high school. Most of them had kids and were married within 2 years of graduating. In between calls they are on the phone with their husbands, banks, or credit card companies fighting about money. Our company has 100% match in our 401(k) up to 3% of your salary, and you can put pre-tax money into accounts for medical and childcare expenses.

When I talk to them about it I just get a blank stare. Their parents are all in their 50s and 60s living in rented housing or with their parents with no retirement savings. Their adult children are boomerangs, returning to live with them time and again. It would be funny if it weren’t so depressing.

118

What they don’t have? If you have success, you have good advice on what to do. If you have failure you have good advice on what NOT to do.

“I keep overdrafting my checking account because I never learned how to balance a checkbook. Learn to balance a checkbook.” (the instructions come with the damn checkbook!)

“I’m going to die broke because I didn’t save for retirement. Save for retirement.”

“I can’t buy you that because my credit cards are maxed out. Don’t max out your credit cards.”

My folks were hand-out and hand-me-down poor when I was growing up. They had mounds of credit card debt. They eagerly taught me how to not fall into the same traps they did as I was growing up, and now they yell at me and my brother about money every day. We’re actually learning together (they are incredibly financially stable now - but not thanks to me, thanks to them learning from their mistakes.)

119

I think basic information should come from schools, and putting learning in context where it is useful.

You can learn exponential growth by talking about bacteria, you can do it with numbers and no context, or you can talk about interest on a savings account - and interest paid on a credit card - which is going to be most meaningful to most people over the long term?

You can talk about economics in Social Studies and talk about the Laffler curve - or you can talk about practical economics.

You can talk about history and discuss the Great Depression, or you can play a stock market boom game and one day have the market go bust. Then you can talk about how in a busted market, firms can’t raise capital, so they can’t expand, so they can’t hire people. (Its simplistic, but its a better understanding than most people ever get).

Schools have a long tradition of career day - give kids realistic expectations of what a starting salary for a policeman, teacher, accountant, hair dresser are.

120

In my opinion, you can’t afford NOT to have someone financially advise you. Many places will sit down with you and talk to you about yopur financial situation and setting up a plan without charging you (they make money when you buy something off of them). Whie this isn’t the BEST possible use of your money, it is a GOOD use for it, and will net a return on your investment. Anything is better than nothing at this point, and right now you just need someone to help you plan. Once you have a plan, you’ll know what you can and can’t accomplish.

A friend of mine had a nasty break-up with a girl he had a child with. She moved to another state and was pursuing child support. I told him he needed to get a lawyer. He insisted he couldn’t afford one. I told him he should borrow money if he needed it, but get a lawyer. He ended up representing himself…and he now pays a ludicrous amount of child support and isn’t even allowed to see the child at all. Even going into debt for attorney fees would be rapidly paid off if he would have cut his child suport payments in half.