Programming, Investing and FI

Worried About Consumer Debt?!

Today I spoke with a saleslady at a store near where I live and she was complaining that they didn’t offered financing for sewing machines yet. This while showing all the nice features a 3.5k $ sewing machine could do. I was seriously impressed by the machine, but not really by her reasoning on financing. Don’t get me wrong, I am not trying to say that her point of view is completely invalid. Still, for normal individual making an average salary like us, it’s toxic.

Get To The Point Please!

So what she was saying was that people should buy these things using financing because it helps them get what they want right now. That way they can keep their money in their bank account for other purchases. Then I asked her if I was the only one alarmed by the fact that people buy all this stuff on credit, that’s a great recipe for a system meltdown. She then answered that if the economic system crashes and none can pay, then there won’t even be money to worry about.

First Problem With The Reasoning

The first problem I see is that for just one or two purchases it might be easy to track but as things accumulate it will get completely out of hand, worst, you could still be paying for stuff you don’t even have anymore. Money will fly out of your bank account and it’s going to be way harder to dictate if you can buy something or cannot. People will effectively have more money at hand. But that’s probably money that they shouldn’t spend and god knows it’s easy to spend money when it appears on your account statement.

Completely Out of Control

So once you get all these payment coming out of your bank account each month, there might be errors or the like that happens, but the payer might not notice out of the couch, coffee machine, bench press, car, and so on. It’s rather complicated to follow up on all these things to make sure everyone of them is in order each month. It also makes it harder to follow a budget because you’re never completely up to date with your expenses.

Are You Insane?!

I must say that her second point is what I am even more worried about. If that’s how a lot of people think, no wonder the economic system is hard to maintain and crashes from time to time. That’s exactly the kind of mentality that helped blow up United States’ housing market in 2008.

All of this reminded me about a month ago while watching the news. A small part of the population would struggle a 0.25 % rate hike. What is that? How come you’re that close to not being able to pay your mortgage? Don’t you have an emergency fund? I think it illustrates how bad it might be. Hey I am not saying everyone is at this point but… I am just alarmed by this way of seeing things. For me it doesn’t make sense to be so close at the end of the month. Maybe we should reconsider the dream of owning a house that you never really own actually along with the bunch of useless stuff it requires. I admit that it’s always a question of priorities in life, but we shouldn’t go overboard either.

The main goal is to wake up when something is too expensive for you. If the guy besides you can afford a 700 000 $ mansion, then great, but what about you? Same thing goes for cars, boats and the like. It’s the addition of all these monthly payments that make a huge ball and chain around your ankle. Not a good idea if you want to become financial free!

The Banks and the Lenders

Banks - Banques

The banks and the lenders want you to borrow as much as possible so they can get your money but it’s not just that seriously. They want you to think you can afford stuff that you cannot by creating all these useless calculations that makes it very hard to know what the end price will be. Lenders need to find the way to make you accept the price by dividing a big number into smaller ones and by showing you a large sheet of numbers which ultimately come down to the simple total price. In any ways, it’s always better to see 417 $/month instead of 30 000 $ over 72 months. They will even divide it much smaller by offering biweekly and even weekly payments to make that number seem as small as possible. Hey, look at that bargain for only 10$/day, it gets ridiculous.

Plus, from my experience, constantly owing money to someone is a source of stress and you want to reduce the stress in your life as much as possible. It’s true that sometimes you have to borrow money. For example to start a new business, to buy one or to buy a house (within your means). Still, most of the time, you lose when you want to buy things now rather than later.

The Boat Might Not Sink

Contrary to what the person believed, the boat might not sink completely as it never did until now. In fact, the economic system recovered every crashes until this day, thinking in a way that it might be valued nothing at some point is rather pessimistic and unrealistic. I am not saying that it’s impossible but I would not base my argument about buying something on credit on it.

In my opinion, if you buy something on credit you:

  • can pay it in full but accept the risk of investing that money instead;
  • have a pretty damn low interest rate on your purchase;
  • have a tangible reason for needing the product right now rather than later.

If I am buying a car at 0.9 % interest on credit for 20k $, I am accepting the risk that my portfolio may or may not make more than 0.9 % over the same period. But as I have this amount in the bank, I am less at risk to lose all of this in case things really go bad than someone who doesn’t have it at all. We must remember that the lender is “guaranteed” your payment (since you bought the damn thing) but your invested money is not guaranteed to make better returns as the more your investment has potential, generally the riskier it is.

In the end, the saleslady or that car salesman, they want you to buy whatever you can’t afford and that’s the point of giving low interest rates and offering credit.

What do you guys think about this? Or am I just crazy!?

If you would like to read more about consumer debts and their impacts, you can refer to this great Mr. Money Mustache post.

This post is mostly based on my opinion and on readings.

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