Psychological Merit or Hogwash?

[Tommy_Dolitte]

I have a friend (co-worker also), that has just received a bonus which will allow them to pay off all of their credit card debt (~$7 K).

Afterwards, she would still have ~$2,500 left to begin saving.

Enthused at her opportunity, I told her we should celebrate her freedom from debt! However, I was stunned when she replied that she was not going to pay down the balance.

When I asked why...her response was along the lines that she has never had this amount of money in lump sum..and that by finally "having" something, she would feel more empowered to save more.

I acknowledged her perspective and offered up that by paying off this debt and keeping it paid, her life would take on a different path. And that the peace of mind she would gain is worth more than the $'s paid.

She's planning a vacation to Mexico and I noticed today @ lunch that she had a used car book in her hand.

Is this normal? Should I just let it be?

What would you do---in her case...and mine?

TD

 

[Cut-Throat]

Is this normal?  Should I just let it be?

What would you do---in her case...and mine?

Yup, completely 'normal' for most Americans. That's why I never wanted to be 'Normal', I wanted to be exceptional! 8). Also, that is why the Average American houselhold has less than $15,000 Saved for retirement, outside of Home equity.

I would do nothing, because you're just going to piss her off. Besides, someone has to keep working to pay our Social Security

 

[Tommy_Dolitte]

HAHA! Never thought about the source of my success.

It's sad though...very sad to me that she has this wonderful opportunity and may blow it.

TD

 

[KB]

It's very sad. Opportunity wasted. Happens all the time (not in my household).

 

[ats5g]

Hi Tommy,

Sounds like a classic case of "Mental Accounting." Having savings and credit card debt is a good example.

From Effective Financial Planning in the Presence of Judgmental Heuristics:

How Can You Tell?

How does one tell if a client may be using mental accounting? Although many signals may exist, there are two simple signs that are easy to identify. First is the existence of savings and credit card balances. This condition reflects the mental assignment of too little value on borrowed money and too high a value on savings...

See also Mental Accounting Matters, by Richard Thaler.

A book that really helped me understand my behavioral biases is Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics, by Gary Belsky and Thomas Gilovich. Very easy to read, and pretty funny. I said, "Hey, I've done that" a couple of times. Very affordable as well.

- Alec

 

[MJ]

I guess saving and LBYM is an abnormal trait most of us seem to share.
I also agree that you really cannot convince that type of person to change her lifestyle. She just doesn't have the LBYM genetic defect and frankly I'm glad. Like CT said, we need people with high income to continue contributing to our future SS pension fund.
I have decided selfishly only to preach ER to my few closest friends and relatives. If I hear any contrary arguments, I just smile and inwardly thank them for their continued support.

 

[Tommy_Dolitte]

Hi Tommy,

Sounds like a classic case of "Mental Accounting."  Having savings and credit card debt is a good example.

From Effective Financial Planning in the Presence of Judgmental Heuristics:

See also Mental Accounting Matters, by Richard Thaler.

A book that really helped me understand my behavioral biases is Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics, by Gary Belsky and Thomas Gilovich. Very easy to read, and pretty funny. I said, "Hey, I've done that" a couple of times. Very affordable as well.

- Alec

Fascinating read...thanks Alec!

 

[haha]

By nature I am not a cheerleader. So I never encourage anyone other than my own family to do this or that.

First, I really don't have many answers that I am sure enough of to recommend to others. I enjoy spending money on some things, but I also am cheap and enjoy holding on. Maybe that other person just enjoys spending, and would be bored crazy or frustrated by saving.

Second, I consider the world a laboratory. If I go around trying to influence all the different experiments, what am I going to learn?

Third, this behavior gets easier with age, at least for a man. Young men can be really bossy. I sure was. But it ended when I turned 64. 

Ha

 

[Mr._johngalt]

Hi Tommy,

Sounds like a classic case of "Mental Accounting."  Having savings and credit card debt is a good example.

- Alec

Hey! I have savings paying 3.50% and credit card debt over 100K, from -0-% to
1.99%. Anyway, I've made quite a pile of cash during this period
of CC promo offers. Long may they continue (tax free too)

JG

 

[azanon]

Hey! I have savings paying 3.50% and credit card debt over 100K, from -0-% to
1.99%. Anyway, I've made quite a pile of cash during this period
of CC promo offers. Long may they continue (tax free too)

Getting these offers, filling them out, paying the bills that came in later, etc. would seem too much like work to me. Maybe you should consider accounting JG - the pay's higher than what your getting on that. Work is work.

 

[laurence]

Getting these offers, filling them out, paying the bills that came in later, etc. would seem too much like work to me. Maybe you should consider accounting JG - the pay's higher than what your getting on that. Work is work.

Amen.

I have preached the gospel of ER to all my heathen friends. They nod sagely, they well up with tears, they come down to the altar to repent and get saved!

......then they buy a $3000 guitar while still living at mom and dad's house. Forget it. Either you get it or you don't. Everyone knows I'm into this stuff. If they come to me, I refer them to millionaire next door and 4 pillars. Otherwise, I'm done trying to save the hopless spendthrift sinners of the world. Plus I need them to keep SS afloat.

 

[FlowGirl]

I think if this person were a credit card abuser who has finally seen the light then using a windfall to build an emergency fund before paying off debt could make sense. It's often discouraging to pay off the cards only to have to use them again right away for a car repair or other disaster.

If I were in your friend's situation I would put $1000 in ING for a short term emergency, put the rest in CDs that are "out of reach" for a longer term emergency (like unemployment). and transfer all debt to super low rate cards. Then I would attack the credit card debt with gusto.

The only problem with this plan is that it takes a little discipline not to spend the windfall on toys, and those with that kind of discipline usually don't have credit card debt in the first place. I agree with the others - just let it alone.

 

[Mr._johngalt]

Getting these offers, filling them out, paying the bills that came in later, etc. would seem too much like work to me.   Maybe you should consider accounting JG - the pay's higher than what your getting on that.  Work is work.

If it felt like work I would avoid it. Feels like "money for nothing"
(great song - Dire Straits) to me. Besides, a few extra thousand
per year may not mean much to some on this forum. It's big money to me.
I am guessing that since these offers began I have netted $5,000
and since I hold my income below the total of my exemptions and
the standard deduction, no fed. taxes either.
JG

 

[Mr._johngalt]

Just on observation. If a person was somewhat financially
astute and a bit hardnosed, they could simply negotiate their way out of credit card troubles. The CC cxompanies would much rather do that
than risk a protracted fight or bankruptcy. OTOH, if you were smart
enough to negotiate these "deals" you probably wouldn't be in
trouble in the first place

JG

 

[laurence]

JG brings up a good point. Back when I had CC debt, I called one card and said, "hey, I'm thinking of transferring my balance, what are you going to do for me?" and they lowered my rate 3% right there on the spot. That was quite beneficial considering I was lying since my credit rating stunk at the time and no other company would take me....

 

[cute fuzzy bunny]

Pretty simple.

You have a pile of dirt.

Would you rather create a mountain or fill in a hole?

 

[Jay_Gatsby]

Pretty simple.

You have a pile of dirt.

Would you rather create a mountain or fill in a hole?

You can't build a mountain without a firm foundation. Without a foundation, your mountain will collapse into a sinkhole (and take your castle with it).

 

[Nords]

Pretty simple.

You have a pile of dirt.

Would you rather create a mountain or fill in a hole?

Judging from the torture that's inevitably going to be evoked by this mangled metaphor, it's not as simple as it looks!

I'm impressed that she's looking at used cars instead of new. And if she pisses away that lump sum that she's never "had" before, then the experiential learning that results when it's gone will be worth more than even having Bogle & Bernstein sitting in her livingroom with their helpful suggestions.

Yeah, OK, TH, let's see what everyone can do with that visual image...

 

[maddythebeagle]

JG

- 100k in credit card transfers? Geeze, you are da king. how many cards do you have open at any one time? I wonder what the world record is before they stop issuing you new cards, lol. Any credit card companies that you would avoid? I assume that you use bill pay to pay the min. payments each month.

 

[VoyT]

Well, TD, maybe she needs to replace her car

Too bad she doesn't realize that the credit-card interest is going to pile up faster than her savings rate, but I gotta go with the majority here. Let it be. It's her money. And she'll probably tell you you're "lucky" when you can RE...

 

[Mr._johngalt]

  Well, TD, maybe she needs to replace her car
   
   Too bad she doesn't realize that the credit-card interest is going to pile up faster than her savings rate, but I gotta go with the majority here. Let it be. It's her money.  And she'll probably tell you you're "lucky" when you can RE...

DW basically ignores her CC interest. But...........the balance is not large
and it is her money. I would probably get involved in this except it
would cause arguments and plus..........I operated in a similar fashion for years. It is kind of like burning money though.

JG

 

[Patrick]

If it felt like work I would avoid it.  Feels like "money for nothing"
(great song - Dire Straits) to me.  Besides, a few extra thousand
per year may not mean much to some on this forum.  It's big money to me.
I am guessing that since these offers began I have netted $5,000
and since I hold my income below the total of my exemptions and
the standard deduction, no fed. taxes either.
JG

JG, how do you keep the balances @ 0%? Just keep transferring to a new 0% card?

Thanks,

Patrick

 

[VoyT]

DW basically ignores her CC interest.  But...........the balance is not large
and it is her money.  I would probably get involved in this except it
would cause arguments

   I can understand that ... some things just ain't worth it ...

 

[Mr._johngalt]

JG, how do you keep the balances @ 0%?  Just keep transferring to a new 0% card?

Thanks,

Patrick

Yep. Or, if I can't, I just pay them off when the -0-% is about to expire.

A tip. If you are applying for a new card with a promo rate, you will
be better off to give them the transfer request up front, with your app.

JG

 

[markplus4]

I've tried spreading the LBYM religion amongst friends/family & it just winds up irritating them.  Kind of like your father preaching to you. 

The interesting paradox is that widespread adoption of RE/LBYM by the masses would ultimately be deterimental to the equity & bond markets...those same markets we current RE's rely on to throw off investment income.   Imagine all the missed quarterly sales targets due to a less consumer focused society, and the corresponding impact on stock valuations...and the ability of companies to repay debt., etc.

Who would do all the work if a high % of the population RE'd?  A shortage of workers & corresponding high wage inflation would be unhelpful. 

On second thought, I kind of like things the way they are now....