Loans Answers

Why more debt?

Question: One thing that came to my mind is that there seems to be a lot of cultural pressure going on, in these middle-class families who are getting squeezed and going bankrupt. They may have a lot of “fixed expenses”, but the amount of those fixed expenses depends on choices – like the choice to have kids at all, or to have more than one; or the choice to buy an expensive house in a good school district rather than one in a less expensive area (or to rent); or to have more than one car – now that’s a choice that’s often overlooked as a choice; it may not be convenient to have two working people and only one car, but it can be done (I’ve done it). I think in a lot of these areas, there’s an assumed “of course you have to do X”… but that can get people into a lot of trouble if they don’t examine it in their situation. I don’t think “I want to have a(nother) child” is somehow a magical thing that excuses not being able to afford one, for instance.

Answer: I agree with you 100%. Many middle-class people these days seem to assume that a large house in a good school district and two newish cars are absolute necessities, as if life isn’t worth living without them. And they cheerfully choose large credit card debt and no savings in order to afford these “basics” along with all the other “necessities” like two cell-phones, cable TV, etc.

At times it seems to me as if the majority of a whole middle-class generation simply does not have any financial common sense. These people make decisions without using any critical thought/analysis about what the long term consequences of their choices will be. There is no plan, no strategy, no perspective. I know I used to be that way, and it has taken years of thought and research to open my own eyes to how I was shooting myself in the foot with my spending choices.

What I think is curious is that in our culture many of the middle class receive very little mentoring or education about handling personal finance. My parents never talked much about their financial philosophy to me. I don’t remember much, if anything, about personal finance in high school. I took a decent class in college, but it was an elective, and it didn’t really go much beyond explaining how the stock market and bonds work. The mainstream financial advice industry is pretty useless about fundamentals. There are lots of articles on the technicalities of mutual funds, but very little on how to structure your life so you have enough to put into a mutual fund. The media also has an alarming rate of giving bad financial advice, like how you can use a home equity loan to afford more stuff, or using a home equity loan to pay off your credit cards.

I think part of the required high school curriculum should be a real world skills class that runs for at least two years. The class would cover everything from financing a college education, shopping for a car, renting an apartment, opening and balancing a checking account, investing, hiring a contractor to do work, credit cards, starting your own business, etc. The final semester would be a computer simulation where you have income, make purchasing and saving decisions, buy a home and a car, get a job or start a business, etc, and then your final grade depends on your net worth at the end. A class like this would make a bigger difference in peoples lives than geometry or calculus.

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