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The article everyone is talking about today

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…is the phenomenal New York Times article written about how a woman named Diane McLeod got into thousands of dollars of debt. It’s remarkable because it includes a rich set of multimedia features that let you understand how many of us get into so much debt — and also allow you to compare yourself to others. They include:

Want to watch it all? Click here to start.

Here’s my take: On one hand, we all know people like Diane, who make poor financial decisions, never take the time to get educated about money, and sink into a hole of financial quicksand. These people are easy to judge because they have all the visible signs of financial stupidity: New cars every two years, expensive high-definition TVs, vacations, houses they can’t afford. And yet, on the other hand, financial institutions, advertising, and social influence have all coordinated an attack on us to spend more. In fact, we’ve been told for decades that owning a house is the single-best financial decision we can make. It’s not.

Is education the answer? Maybe, but it’s not a panacea.

Should we just stop spending so much? Of course we should, but that’s like saying we should all lose weight by making better choices. Easy to say, extremely difficult to do. I’m hopeful that the current environment calls for a restructuring of our priorities. I hope that we get conscious about our spending and start prioritizing saving over spending. With extended hardship, this will become more likely. We all need to be conscious of our finances, but we’re playing in a world with the deck stacked against us.

I’m tired of demonizing people for making poor spending decisions. It might make you feel good about yourself, but it doesn’t actually change behavior.

And fundamentally, that’s what this site is about. It’s not about making people feel better about themselves by looking down at other people. It’s about getting behavioral change. In that vein, the 557 examples of changes people have made as a result of reading this site are probably my biggest success.

I fully expect lots of commenters to brag about how you got out of debt by making hard choices (just as they annoyingly bragged about their inexpensive weddings in the comments of this post). That’s great. But I’m sick of those comments that tell people to “just spend less.” Not everyone can stop spending 30% of their money on going out, because a lot of people don’t have that extra money.

There’s nuance to these arguments that’s missed by idiots who blather about how we should all “make better choices” and “start being responsible.” Of course we should, and if you’re reading this blog, you’re already doing this. But there are details that are missed by such superficial statements.

Here’s what I suggest: Read the New York Times article. Then, read the 152 comments from other iwillteachyoutoberich readers about how they got into debt. That’s 67 pages of startlingly honest stories, most of them having to do with educational loans. Then, I would encourage you to carve out some time for two resources to understand some of the nuances of why many people — especially poor people — can’t get ahead. Here are two resources I fully recommend:

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Nickel and Dimed: On (Not) Getting By in America

Also, check out 30 Days of Working Minimum Wage, a video in which Morgan Spurlock (who brought you Super Size Me) and his girlfriend work minimum wage. Sure, it’s gimmicky, but it’s a truly eye-opening movie that provides insights on why it’s nearly impossible to get ahead if you’re earning a certain income.

I’d love to hear your comments.

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57 Comments

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  1. My parents wouldn’t let me get a credit card until I was out of college. By then, I had student loans out the wazoo and with no credit history, I was a bad candidate for credit cards. I had a secure card through my bank with a $500 limit, which moved to $1,000. That right there was too much for me to handle. I couldn’t pay it back when I was laid off – so I worked with my bank to close it and got put on a repayment plan. (I’m halfway through repayment.)

    It kinda sucks, but I’m glad I can’t get a credit card for now. I know I’m just not in the right place for it currently. I would spend, spend, spend on the idea that one day I’ll be making more than I am now, but want things (new computer, iPhone, clothes, blah blah blah) now.

    It’s tough to choose between a tune-up and oil change or a bag of groceries while watching smug people “save” by only going to Starbucks once a week while you chip away at your credit debt with the only $50 a month you have to yourself.

  2. I don’t really get the impression that you want to hear our comments, Ramit.

  3. Sorry if that’s what my post conveyed, but I am interested. What do you think?

  4. Thank you Ramit! That’s exactly how I feel when I read most PF Blogs! How can you save 30% of your income when 100% is dedicated to necessities for your family!

    However, we can’t sit around and feel sorry for ourselves… we must take action, whether that be getting a 2nd job, or whatever we need to do.

  5. Ramit, the NYT article goes out of its way to paint a sympathetic portrayal of this woman, and does a good job of that. But let’s not get carried away here. If she is emblematic of “why so many people can’t get ahead,” it isn’t much of a story. She’s not a nickel-and-dimed minimum wage earner who can barely afford food and shelter. She’s a middle-aged woman who, despite holding several middle-class jobs, simply failed to save any of her income and whose solution to soaring credit card bills was a series of ever-larger home equity loans. While a social safety net rightfully exists to help those like her in their time of need, we should be careful about drawing too many conclusions about the “stacked” nature of our system based on her example.

    Ramit writes: “Should we just stop spending so much? Of course we should, but that’s like saying we should all lose weight by making better choices. Easy to say, extremely difficult to do.”

    Having options, I guess you could say, is more challenging than not having them. I guess that’s Ramit’s point. Should the government limit the availability of credit? Should we return to the old ways of lending, where only the wealthy could borrow enough to buy their own homes? Or should we get rid of credit cards, forcing people to wait until their paychecks come in before they can buy the monthly groceries?

    Point is, many “average” Americans benefit from the easy availability of credit. If you take too many steps to limit Americans’ options, merely out of sympathy for those of us incapable of controlling their spending habits, you’ll end up screwing over an equally large number of people who use credit to their great advantage.

    Perhaps the solution is to focus less on bemoaning the present state of economic affairs (as is so popular amongst my over-educated, under-paid comrades), and more on educating those who want to be educated about how to play the financial game as it exists. It is not so “extremely difficult,” or else a 20-something recent college grad couldn’t have much to say on the subject. This isn’t Ph.D-level stuff, brother. A little effort goes a long way. Just because the subject of the article wasn’t willing to exert that bit of effort on her own behalf doesn’t mean you have to ruin things for everyone else.

    Suggesting that the economic deck is stacked against us implies that there’s some unseen hand out there conspiring against all of us “little guys.” That may be true in much of the world, including China and India. But in the U.S., the fact that so many “little guys” have learned to play the American system as it is and become “big guys” suggests that you may be overstating your case more than a bit. The fact that so many blogs exist to help average Americans improve their daily finances (and actually offer useful advice!) only reinforces the notion that it isn’t so hard to find out how to use the rules of the game to your advantage.

    If you really think the deck is stacked against most of us, then why bother even offering this advice?

  6. We are just greedy here in America. Until we get our “wants” in check with our NEEDS, this will never end. Honestly, I’m tired of hearing about the horror stories of debt, because it is easier to avoid then most believe. Just don’t borrow money unless you need to buy a house or go to school That’s it! Don’t go into debt over a car, a TV???, clothes, etc.

  7. In most cases people get stuck in these cycles of just putting money on the credit card. They rack up enough debt to put themselves in serious situations. When this happens it makes it increasingly more difficult to get yourself out of the situation. Credit cards make it so easy to lose track of how much you are spending because you don’t see how much you are spending until after you have done it.

    I know plenty of people like Diane and I would never make fun of somebody in such a terrible situation. I could only think of how easy it would be for me or anyone else in my situation to be in her shoes.

  8. On Nickel and Dimed –

    I understand why you recommend Ehrenreich’s book – her interviews and personal interactions with America’s working class definitely shed some light on “why so many people can’t get ahead.”

    I do remember, though, that her portrayals were a bit too stereotypical, something that the NY Times article certainly parallels. Gooch is spot on when he says to “be careful about drawing too many conclusions about the ‘stacked’ nature of our system based on her [Diane's] example.”

  9. Hi Ramit – Sligthly off-topic, but here’s one aspect of this whole topic I still don’t understand: who is buying all these terrible loans and why? This article (and others) talk about how the viability of these loans don’t matter as much as they used to since the loans are bundled & sold off. I’m just not understanding who buys them & why they would buy a bunch of risky loans?

  10. When I read stories about this, I can’t help but feel exceptionally grateful for the example set by my parents as they raised me.

    As a family, we lived below our means. They bought a house they could “afford”, only drove used cars (paid in cash), BIG summer trips included the Zoo or amusement park, our video game was pong and we often frequented the 2nd hand stores in town.

    Only on occasion would my father comment that we had the money for that fancy new car or boat or > but he would ask me, ‘Why do we ‘need’ that??

  11. I have a problem with the graphs in the NYTimes article, including the one you included in your post. Why do they compare debt to savings? The comparison should be debt to assets. It is true that a lot of people have large mortgages, but those who bought before the peak (2005) have a house whose value exceeds the debt.

    I would also add that thanks to the warped incentives in our tax code, over the past few years it made much more sense to take out a large mortgage than it was to rent and save cash. Interest rates were low, which encouraged debt over savings. Also, mortgagees get both a mortgage interest tax deduction and an exemption from capital gains tax when they sell. Savers in money market accounts, on the other hand, pay full income tax.

    One more point: Warren Buffet said that he is taxed at a lower tax rate than his maid (thanks to Bush’s tax cut on dividends). This is another example of how flawed our tax code is.

  12. I think a good response to ‘Nickled & Dimed’ is ‘Scratch Beginnings; Me, $25, and the Search for the American Dream’ by Adam Shepard. Barbara Ehrenreich goes into her experience with the attitude that she can’t get ahead, so she doesn’t get ahead. I’m not saying that’s the situation for everyone, but attitude makes a huge difference and Shepard sets out to be an example of that.

  13. Amy, that’s a common criticism of the book, and one with which I sort of agree. I really appreciate the book recommendation, so thank you for posting it.

  14. CK, you’d be suprised, but practically anyone can buy debt. And because the credit card companies have already written it off as a loss on their books, they will sell the debt for pennies (yes, pennies!) on the dollar. It can actually be quite lucrative. Case-in-point: my boyfriend is an attorney for a firm that specializes in buying credit card debt and collecting on it. Let’s just say, they’re doing pretty well right now.

  15. Sorry! That response was actually for Robert!

  16. Hi Ramit,

    These are great insights from the readers. Thanks for sharing with us!

    Just one reminder, in your link to “152 comments from other iwillteachyoutoberich readers about how they got into debt”, you probably should remove people’s email address or anything consider private.

    Keep up the good work.

    Edward.

  17. What I find funny is that the article seems to be concealing the real problem in the third clause of each paragraph. Italics mine:

    “Separated and living with her 20-year-old son, she worked two jobs so she could afford her small, two-bedroom ranch house in suburban Philadelphia, the Kia she drove to work, and the handbags and knickknacks she liked.

    “Her first mortgage, originated by the EquiFirst Corporation, charged her $14,136 a year, and her second, held by CitiFinancial, added $4,000. Capital One, a credit card company that charged her 28 percent interest on her balances, billed $1,400 in annual interest. GE Money Bank levied 27 percent on the $1,500 or so that Ms. McLeod owed on an account she had with a local jewelry store, adding more than $400.

    “…In January 2006, her doctor told her she needed a hysterectomy. She had health care coverage, but she could no longer work at a second job.

    She made matters worse during her recovery, while watching home shopping channels.

    Apparently this journalistic manipulation works, because I have read so many people on other boards who actually feel bad for her! They also conveniently ignore the part where she got fired for her own stupidity in “writing inappropriate e-mails.” Yeah, that was the evil credit card companies’ fault too.

  18. Nicole Leonard Link to this comment

    I hear what you’re saying about people’s reactions. I know I often feel sanctimonious and judgmental when I read stories like Diane’s. For me it comes from a sense of unfairness. We have chosen to live simply and go without. I read stories like Diane’s and I think “Well I like shoes. I like TV’s. I’d like more clothes, I’d like more X….but I do without.” It hardly seems fair that people can just use credit and get all those things…and then not pay for it and we can all throw them a pity party. Between the lines is: where is MY pity party for going without!? Where is MY medal for saying no while I watch those around me say yes!? Oh, how we all love to describe how frugal we are and what *great sacrifices* we’ve made in the name of frugality.

    The sad thing about all of this is the underlying message. The truth is that, as Americans, we have so, so much. No one is really doing without. As a PP said, we’re just greedy. Absolutely people struggle but we still have *so much* in comparison to people say in Haiti or Africa. I don’t know anyone here who has to eat dirt or give their children to an orphanage. Look around you. LOOK at how much we have!

    What I’d like to see more of on PF is celebration of what we DO have. I think appreciating our abundance will do WAY more than all these pity parties and finger pointing to helping American’s live w/in their means.

  19. Mbm, excellent point. It’s not just “society” or The Man who’s forcing people to buy things, and we certainly can’t just blame credit card companies. We need to take more responsibility managing our personal finances.

    One thing I write about in my book (coming out in Jan) is that Americans spend more time preparing their Thanksgiving dinner than understanding their employee benefits, such as 401(k)s. That’s ridiculous.

  20. I’ve read elsewhere — and didn’t see discussed adequately in this article — about two “technical factors”:

    First, some huge proportion of bankrupts hit the wall around medical issues. Either they lose work time due to illness or they go broke on the medical bills themselves. In fact, credit card bankruptcies obscure this reality – doctors didn’t used to take credit cards AND many doctors probably wrote off debt rather than force their patients or their survivors into bankruptcy.

    Second, credit card interest used to be tax deductible. So, even those purses and shoes and other unwise or reckless purchases did not used to have the same effect. True- people need to be more aware of the long-term math; however, a game that was previously sustainable for both the compulsive buyers and the credit card companies was rewritten in tax reform that compensated for tax cuts at the top with additional taxes to the middle, i.e., from the second-yacht buyer to the middle-class $400 handbag buyer.

  21. To your question “Is Education the Answer?” then my answer would be Yes…partly.
    Education about money can only take us so far, it is then up to us and our decisions to be able to use that education and take it to the next level.

  22. Barbara, I know that study (about bankruptcy primarily being due to healthcare) and found this counterpoint. Not sure about who’s right, but I thought you might find it interesting.

  23. I don’t think that people only fail because they go into something with the attitude that they will fail. True, attitude plays a large role in determining one’s success, but rags to riches stories don’t happen often (which is why when they do, they get publicity). Not everyone can start their own business from from nothing. I found the Nickel and Dimed book to be relevant–not stereotypical–and true the struggle of the working class. However, to another commenter’s point, Diane was not a minimum wage worker (sidebar: what kind of emails was she sending at work that got her fired?).

    Thanks for bringing attention to the NYtimes article. It certainly shows how one can continue on a path of indefinite debt, until something unexpected comes up: medical emergency, death of a spouse, etc. The question is for me, how is Diane going to dig herself out if this hole?

  24. Do you believe Diane ever considered her options i,e to not become over-leveraged? If not, should she “be allowed to fail” like a business venture i,e bank? If so, will we (as taxpayers) pay more or less for that failure? It’s easy to shrug without answering that question, and thus — even on this site — we are unlikely to solve this directly.

    As has been noted by Katherine Milkman: “Choice architects can use … insight to improve decision making by ensuring that the available default is the option that is likely to be best for decision makers and/or society. Making 401k enrollment a default, for instance, has been shown to significantly increase employees’ savings rates (Benartzi and Thaler, 2007).”

    The U.S has already given Diane a default, i,e bankruptcy versus the historical poorhouse, and is working towards others, i,e housing assistance via legislation presently under debate within Congress. Will it give Diane’s of the future more ‘default options’? Regardless, there does appear to be an element of laziness/greed which many simple but pointed Aesop fables address but unfortunately are infrequently recalled. How does one address the distracted and media soaked Diane’s?

  25. I liked Nickel and Dimed, but I feel like it’s one of those books only good for people like me (who, for the most part, don’t have to worry about making it on minimum wage) to realize how bad things are in the US today. But what’s the solution? Tough to say, but it may just be a reality that’s tough to accept: some people are going to be at the bottom of the ladder, forever stuck in a subpar financial life. Is that too harsh?

  26. I think the cognitive dissonance occurs when we try to moralize subjects that are black & white. Money is black & white, it obeys not the laws of an imaginary god but of mathematics. Go read Dickens or just about any piece of classic literature and you’ll understand the inevitability of poor decision-making, and the harsh results. Even Jesus said “the poor will be with you always”. This inevitability gives me some comfort at least. As a society, we have made a conscious decision to provide safety nets for individuals, for better or worse. Whether playing the fool ant is better than watching the grasshopper starve is hard to say, but it’s the direction that our society has evolved. I should also say that I don’t think any economic system is inherently or perpetually stable. As Marx pointed out, Capitalism will work beautifully until it doesn’t. No system can make up for man’s greed, stupidity, and insatiable need to follow others to self-destruction. To be sure, I’m shocked there aren’t more Nihilist PF blogs.

  27. [...] The article everyone is talking about today | I Will Teach You To Be Rich How are/did you get in debt? (tags: debt economy financial finance usa) [...]

  28. Helen, to clarify: my point wasn’t that attitude is everything, just that attitude is important. If you go into something with the perspective that you’re going to fail, you’re more likely to fail… and if you go into something with the attitude that you’re going to succeed, you’re more likely to see the opportunities to succeed when they present themselves (or make your own). That doesn’t guarantee automatic success or failure… obviously there are a lot more factors that go into it… but it does play a role, and I think it plays a bigger role than people like Ehrenreich tend to admit.

  29. I feel fortunate sometimes that I am young. People in their fifties and older grew up expecting to be able to rely on pensions and social security and not realizing health care costs would be totally out of control, and I don’t think they can be blamed for that. At the very least, our generation should realize we are going to have to fund our own retirements and though that is daunting, at least we know relatively early.

    I do think, however, that when we get older, we’re all going to get a reality check when it comes to health care if something with the current system doesn’t change. Most of the people who read this blog are probably in their twenties and thirties and don’t have to think much about a health crisis wiping us out. We think we’ll be prepared and it makes it easier to judge someone who isn’t. I don’t know about you, but although I make pretty good financial choices, and I have a good job with excellent health benefits, an unexpected health problem that insurance wouldn’t cover (medical or disability) that was going to cost $100K out of pocket would pretty much ruin me. My accountant’s husband has a weird muscular problem sort of like MS that has left him unable to work more than 20 hours a week, but hasn’t been diagnosed by a doctor and so his disability insurance won’t cover him and he just got let go by his job since he couldn’t work as much as they needed. This could happen to anyone.

    I expect a day when health care costs take up the biggest chunk of our spending, overtaking rent/mortgage, for everyone, not just seniors. I wish Congress would set up a tax-protected accounts like an IRA that we could put money in to prepare at least a little. HSA’s are kind of like that, but you can only have one in certain circumstances through your employer, and you have to have high-deductible health insurance.

    I don’t mean to sound like an alarmist, but I think it’s the biggest threat to our future financial well-being, and we have almost no control over it.

  30. I really don’t like the NYT’s graphic on how much debt you have (comparatively). For instance, my only debt is my mortgage. Is debt on a 15 year fixed mortgage bad debt? No. The problem debt isn’t mortgages/trad student loans. It’s CC’s, car payments, and other revolving debts.

  31. If we as readers can’t offer fiscal responsibility as a solution to getting out of debt, then good luck to those people who are in debt.

    We all make our beds so to speak when it comes to finances and other life decisions. If you choose to spend more than you earn, then you are destined for financial hardship, plain and simple.

    Not everyone can save 30% of their income, that really only applies to those who can live off of the remaining 70%. To tell people to save a certain percentage of their earning isn’t always applicable, but what is, is not wastefully spending what money they do have. Be responsible.

  32. JAlpino, I agree with you to an extent, but did you check out either of the resources I suggested above? The book or the video? I want to emphasize that financial success is not as simplistic as “just take responsibility for yourself.”

  33. Sara, you can set up an HSA without going through an employer. There aren’t very many good administrators for individual HSAs yet, but there are some out there that let you invest in Vangaurd index funds. Employers often help fund HSAs for their employees but that doesn’t mean that you can’t set one up on your own.

    As for the education issue, I think it would help a lot of people but not everyone. Everyone knows smoking is unhealthy but a lot of people still smoke. Everyone knows working hard in school will help your future, but many people don’t bother. The difference is, financial education isn’t nearly as common as anti-smoking education so there are still some people out there that would follow the advice if they actually had access to it. The people that just ignore advice will still ignore it, but there’s a huge group of people that may be receptive to financial education if they had it shoved down their throats like anti-smoking / stay in school education.

  34. Thanks for your honest opinion that demonizing debtors does nothing to solve anyone’s problems. The truth is that Diane didn’t expect to be a bad case. Before her medical problems sent her over the edge, she was making it, albeit not in great financial shape, but she was paying her bills. We all hit unfortunate circumstances every now and then. Rather than telling someone deep in debt to “be more responsible,” maybe a more helpful approach would be to ask how it happened, how did they build up a lifetime of little habits that cascade together into a lot of debt. Perhaps working it through without feeling judged could help change some of those little habits. Just like when someone is out of work, rather than telling them to “get a job” it would help more to ask what is keeping them from getting that job and helping them overcome those barriers. Very rarely is someone in debt or out of work just because they want to be a drag on the system. We are all worthy of a little compassion. Thanks for pointing it out in your usually blunt and refreshing way.

  35. Ramit,

    I completely disagree with the NYT’s story.
    Please read the following article: http://articles.moneycentral.msn.com/Banking/CreditCardSmarts/TheBigLieAboutCreditCardDebt.aspx

    Furthermore, using NYT’s calculator, I plug in my numbers (under 35, 0 debt) and a respectable 14% of families are in the same situation, with a solid 22% of families with debts no larger than a seemingly-manageable $3,200.

    I am afraid (and I hate to say this) that once again, some media outlets are taking advantage of public hysteria. We could get into this but this blog is not a political one. It’s not even worth it.

    It’s very simple: live below your means. I’ve lived outside the USA, and it IS possible. We Americans need to examine our lifestyle. When people complain that salaries nowadays go 100% to living expenses, I put a grain of salt to that. Is cable really necessary? Do you really need a plasma TV? I’m not suggesting living like a fakir or a hermit, but “living expenses” is a very subjective term.

    Very simple things: turn off the lights if you’re not using them. Walk more. Don’t throw away food or buy junk. Cook more and eat outside less. Start a diet and don’t eat so much. Work on a budget and stick to it. The list goes on and on. It’s common sense!

    Cases like Mrs. McLeod are – in my opinion – the minority, just like the article I mention above suggests. Most Americans are smart and are in very little debt. If you read between the lines, her first surgery wasn’t really what threw her off. It was her QVC shopping spree while being in bed what made things worse.

  36. Hi Ramit,
    Yow! I liked Nickel and Dimed, but I felt that it made a few assumptions that were a bit presumptive. For example, BE never even tried to purchase anything at a thrift store, but she claimed that buying used was just as expensive as shopping at Walmart. I liked Elizabeth Warren’s Two Income Trap. Her claims are much more rigorous.
    I do agree that for many people it can be difficult to get ahead. I don’t, however, believe that the reasons are entirely financial or the result of a normal decision making process. Watching Dianne’s video, I couldn’t help wondering about the role of mental illness in debt and credit card abuse. IMHO, that woman just didn’t seem very healthy. It makes me wonder whether the aspects of our culture that push us to spend are seriously compromising our collective mental health. Does anyone have any thoughts on this?

  37. Tyler: Great comment! I’m a big fan of paternalism if used correctly (heh, that’s a little ironic). Check out a great book called Nudge that talks about “choice architecture” in getting people to do what’s good for them.

  38. No doubt about it, Ramit. I have tried to get out of debt before in my life and failed (twice). I’m not out of debt yet, but I’ve paid off over $13,000 in less than a year. Of course, I am also earning more money now than I ever have before in my life.

    It’s amazing how much easier it is to pay off debt when you have more than $1,000 of income each month above your basic living expenses. *not really amazing, that is the point of why it is so tough for people who don’t earn a lot of money

  39. Why is she worried about her credit card debt?

    With all her health problems, I bet her only income at this point comes from SS disability, which is not attachable by any private creditor (neither are any assets in an IRA or 401k)

    She should simply contact her creditors and inform them (per FDCPA) that they are not to contact her further.

    After foreclosure and eviction is complete, she can file bankruptcy to discharge all her debts, including any deficiency from the foreclosure.

    She appears destitute enough that she would qualify for complete discharge, even under the new, stricter bankruptcy laws.

  40. Do retailers want you to overspend? Certainly! Do all the ADs in TV, radio, print, internet encourage spending? YES! Do credit card companies enable overspending for their profit? Definitely! Does they force you to make bad financial decisions? NO!
    I think education has to be the answer. My 5 year old said something interesting to me: Why don’t you put it on a credit card so you don’t have to pay it? I immediately corrected him that I still had to pay off the full amount and would owe even MORE if I didn’t pay it all off when the bill came! Wouldn’t that little bit of education save a lot of people from CC problems?
    Even though my Dad never told me this lesson, I still got it by reading the bill. If I don’t take the time to read my bill and see how much of my hard earned money the CC company is taking isn’t it my fault? They itemize all of the charges on the bill, why not read them after one month? Then it is certainly an option to cut back so you can pay off the amount in full. Isn’t that the responsible thing to do?
    I also second Amy’s recommendation of ‘Scratch Beginnings; Me, $25, and the Search for the American Dream’ by Adam Shepard. Shepard wrote about how it was possible for him to succeed starting from nothing- but it took sacrifices. I really believe virtually everyone in the US could make their future better by making some sacrifices today.
    -Rick Francis

  41. The problem with predatory lending is how far in debt you can get before your finances collapse around you. People who are making poor financial choices will always have problems. With better lending practices their finances will collapse sooner. Then at least their financial recovery will be less arduous.

    Take Diane for example. With traditional lending her finances should have collapsed when she maxed out her credit cards, couldn’t pay her car loan, couldn’t get any more credit, and couldn’t get another mortgage. Instead her second mortgage just allowed her to postpone the inevitable and get deeper in debt in the process. As the article’s title suggests given a shovel, Diane dug deeper into debt. She was going to be in horrible debt anyway. She didn’t need the shovel of predatory lending to help her get in deeper.

  42. Hi Ramit;

    I am glad you brought up Nudge, the novel point in that book being that it is more effective to change the environment — reducing people to “the default option” — instead of changing behavior. Again, Milkman: “It should be noted that many strategies designed to reduce decision biases by encouraging System 2 thinking” (…reasoning that is slower, conscious, effortful, explicit, and logical…) “have proven unsuccessful. For example, performance based pay, repetition, and high stakes incentives have been shown to have little if any effect on a wide array of biases in judgment.” Thus, Nudge does not speak to a effective changes in personal behavior — such as the buying of purses on eBay — but a reduction in options “for your own good”, which the majority of 401k holders ‘willingly accept.’ Which is great; But it does beg the question: can will power be addressed? Otherwise: “They change when they feel the heat.” Please read:
    http://www.nytimes.com/2008/07/22/opinion/22brooks.html?em&ex=1216872000&en=266d0c9c7fcffe27&ei=5087

  43. Spend less than you earn is simple, and I agree not always easy, yet that doesn’t make it any less true or important. There are a dozen and one caveats, examples, what ifs, and’s, or but’s on both sides of the financial responsibility isle to push forth any particular agenda, or belief.

    The problem that I have with articles like the NYT and many others of a similiar nature is that they have a pitying and often conscending tone. Poor so and so can’t get ahead because the ‘system’ is set up against them, so let’s pat them on head, and make that mean old government (or whoever is the villian/savior ot the day) fix it for them. I don’t see that as any better, and maybe even worse than the down your nose look many others give. It implies that humans on the whole are too stupid to take care of themselves and need someone else to do it, and that responsibility should be handed to off to those ‘better’ able to see to our welfare.

    While self-aggrandizing snobbery doesn’t help, neither does as equally self-aggrandizing pity. There is a point where valid reasons become excuses for not even trying.

  44. Have you noticed that in recent decades, both debt and obesity have both increased?

    I don’t think it’s a coincidence.

    We now live in an environment that constantly encourages us to consume more, whether what we’re consuming is debt or food. Restaurants encourage people to super-size their drinks, server gigantic portions, and food stores making healthier food more expensive compared to cheap junk food. Financial companies are doing the same thing — encouraging people to super-size their loans, buy more house as they can afford, and sign up for more and more credit.

    If these companies could offer smaller portions of both food and debt, and make it more difficult for people to consume too much, that would help ameliorate both of these problems.

  45. I cannot feel sorry for this woman – she seems to suffer from the disease that many in contemporary times suffer from – entitlement. Obviously she feels as though she is entitled to “things” and will acquire them regardless of the consequences. Manage money poorly this is what happens. I cannot feel sympathy for someone who has, by her own free will, put herself into the position that she is in, nor can I feel sorry for her when the resulting events that are occuring are logical consequences of her decisions. You choose X = X will happen.

  46. I completely agree with J’s comment about Nickel and Dimed and Two Income Trap. I’ve read both books, and think that Two Income Trap is not only the far better book, but far more relavent to the NYT article. I’ll repeat the first half of J’s comment here:

    “Yow! I liked Nickel and Dimed, but I felt that it made a few assumptions that were a bit presumptive. For example, BE never even tried to purchase anything at a thrift store, but she claimed that buying used was just as expensive as shopping at Walmart. I liked Elizabeth Warren’s Two Income Trap. Her claims are much more rigorous.”

  47. For me, deciding to actually care about my financial well being was kind of an awakening. I graduated college without debt, thanks to my parents who helped pay the tuition and to some college jobs that earned me some income along the way. I even had a credit card since I was 18 and paid it off every month on time.

    Then, after graduation, I moved to CA and lived the bachelor lifestyle. I earned money at a career job (mid-$30k salary in the late 90′s), but that wasn’t much living in SoCal. I kept my routine expenses low (rent, car payments, etc), but had no discipline to care about the 5+ nights per week I spent after work and on weekends at bars eating and drinking to my heart’s content.

    Wasn’t until my late-20′s that I took a look and said, “dang, I’m $4000 in credit card debt and it’s mostly because of one or two blocks of bars and clubs”. Then I got married and had a kid all in the same year. Due to some early complications with my kid’s birth, the costs (even with good insurance) were pretty eye-opening. After that, I quickly educated myself on making ends meet and began practicing the habit of living below my means.

    Eventually, those habits stuck, and as typical with many Americans, my salary has increased pretty regularly in small increments over the past few years since then. We’re still living below our means, but now we are fortunate to have a higher % of my cash flow to put towards savings and debt reduction.

    I see personal finance kinda like maturity. Some of us figure it out before others. Some of us never get there at all.

    What burns me is when all taxpayers feel the pinch from the folks in DC because certain greedy people “need” bailouts. I’m patiently waiting to buy a home when these people go belly up, and the gov’t is slowing the natural progression of things. Let the markets take care of themselves!

  48. Did I ever tell you you’re my hero, Kimberly?

    :-D

  49. To Robert’s question: – “Sligthly off-topic, but here’s one aspect of this whole topic I still don’t understand: who is buying all these terrible loans and why?” I covered this whole mess as a real estate and mortgage reporter. What predicated the credit crunch was an extreme run-up in subprime mortgage lending in early 2000s. We’re talking about a market that barely existed in the late ’90s skyrocketing to a substantial chunk of mortgage lending by 2004 and 2005. Wall St. figured out that investors could bank high returns on subprime loans because the interest people pay on these loans is so high and the underlying asset – homes – were seeing values rise at jaw-dropping rates (10-20% increases in some cases). This all worked as long as real estate values were rising. But then came a point when appreciation had to stagnate because prices were way out of reach for entry-level buyers. When that happens, the real estate market begins to slow down and suddenly those surefire assets aren’t able to give a defaulting borrower a quick way out. It was some time in late 2006, early 2007 when Wall St. investors started seeing loans go bad. Banks had to buy them back in some cases. As investors started losing their appetite for buying these loans in the securitized debt market, liquidity started to slow for the banks and lenders who’d been writing the loans and selling them off. Enter credit crunch.

    It’s complicated so I hope I did it some justice. For me, it was fascinating to watch because I remember thinking the same thing: why would a lender write a loan to such a risky borrower? The mortgage banking industry always answered these questions by saying “the risk is underwritten into the loan so there’s really no problem.” Yeah, we see how that worked out.

  50. Dear jsweez, et al;

    Regarding the lender appetite: “The low level which commercial morality has reached in America is deplorable. We have humble God-fearing Christian men (and women) among us who will stoop to do things for a million dollars that they ought not to be willing to do for less than 2 millions.”
    More Maxims of Mark, by Mark Twain

    Regarding the lendee appetite: You may be interested to see how this does / does not alter the financial education of children (at home or in school). As per Mike, “…kinda like maturity. Some of us figure it out before others. Some of us never get there at all.”

  51. The woman in the video,Ms. Mcleod, hit the nail on the head when she stated that she should’ve learned to deal with her emotions rather than shop. Emotions are at the root of self destruction. I know because I’ve been down that road and have made the choice to deal with my emotions rather than continuing to deny them. Before I got to this point, however, my financial impulses were uncontrollable and had already led me to bankruptcy.

  52. I’ll add another book recommendation: Not Buying It: My Year Without Shopping by Judith Levine.

    http://www.amazon.com/Not-Buying-Year-Without-Shopping/dp/0743269357

    I read it a year ago and I have been much more mindful about where my money goes ever since.

  53. Let me toss this in because it’s something to watch out for if you have student loans. I graduated college in 2005 and promptly started making payments on my loans. Recently, I took some courses at a local community college and paid cash for them. I noticed that my auto-payments for my loans stopped. I went to my account website and there it was- next payment due: 2012. WTF? I called the loan company and they told me since I was back in school I didn’t need to pay any more. I asked if I had enabled that somewhere and she told me that loan payments are automatically deferred when you are in school. Then she went on trying to sell me that I was crazy for making payments when I didn’t have to. Of course those next four years the interest would still be accruing. I made sure this was corrected and that it would never happen again. Just a reminder to watch out.

  54. I read nickel and dimed. The woman in that book never stuck with one job for very long. She never actually tried to see if her hard work would allow her to move up the corporate ladder. She never attempted to take college classes while she was working, to see if that was possible. The only thing I learned from that book is that being poor sucks.

    Her attitude about everything also annoyed me. For example, she repeatably said she was surprised that no one could tell how educated she was. She often got angry at costumers, and she made a huge deal out of the drug tests. I don’t understand why she insisted on only working with poor white people, purposefully avoiding the other races.

    Overall I felt the book was patronizing and looking down on me. As if I don’t already know poor people exist, and the best way for me to learn that they exist is for some journalist to move into their habitat and study them like animals.

  55. Whats up, Im 47 yrs old not young, and saddly enough this hits home with a resounding thud! I have a laptop that I otherwise wouldnt have if not for the giving of a thoughtful mom and dad. I am sober for over a year and desperately trying to come back. As long as I have a pulse I wont give up, but there are times I want to. I read and study hopeing I will catch up. I think I can but it really doesnt look too good. Makes you wonder why you even want to stay in the game at all. I guess its better to die trying than to die with people thinking you didnt.

  56. HA! I love responding to old posts! :)

    I am self-un-employed, and save every penny i make! of couse i have 20k savings, own my house, and have old cars. of course they are porsches and an audi, but they are neat, cheap, and paid for.

    kill your tv,
    stop collecting junk, even if its new.
    if its new, its junk.
    if you didnt need if last year, you dont need it this year, so dont buy it.
    oh.
    and eat paste

  57. [...] don’t think most people intentionally sabotages their finances. It’s more likely that they spend and not keep track of income and bills. I had a problem [...]