Friday, August 12, 2016

Instant gratification is expensive

When my parents sat down and updated the family's cash flow accounts, which they did every few days, we kids were assigned tasks as well--from recalling the expenses to adding up the rupees and paise.  Thus, I grew up with no illusions of money stashed somewhere.  Knowing how my parents were cautious about every paisa, I knew that I had to be reasonable with my wishes.  I had to find happiness within those constraints, even though once in a while I did wonder what it would be like to travel to Delhi and Kashmir.

Even now, my parents sit down and do their accounting.  They no longer worry about the missing ten paisa though, unlike the old days.  It is not because they have lost any respect for the paisa, but I think it is because they are too old and tired to worry about the missing paisa.

In this age of instant gratification, I assume that most people do not think much about where their money comes from.  Further, when kids see parents using a small plastic card that gets them everything, I wonder how they might even learn about the age old idea of living within one's means.

At some point, the spending catches up with the reality.
Overall, U.S. households have $12.3 trillion in debt, according to another New York Fed report, released this week.
People who are worried about the federal debt, which is currently at $14 trillion (or $19 trillion, in another accounting) ought to be way more worried about the level of household debt.

When the accounting is done the honest way that my parents did, then it turns out that "one in seven Americans ends up in the red":
Even people with good jobs can owe so much on credit cards, student loans, or mortgages that, on paper, they’re worth less than zero.
In the old days, there was no concept of credit cards or mortgages.  Credit, in instant gratification, is perhaps like drugs to addicts.

We might be tempted to conclude that people like me, who have taken on too much of a mortgage loan, are the problem.  Nope.
Mortgages are a minor factor, the New York Fed found. Only 19 percent of people with negative net worth are homeowners, compared with 75 percent of those with positive net worth.
We might also be tempted to think that it is largely the uneducated who can't seem to understand cash flow.  Nope.
People with negative worth are a diverse group that defies stereotypes of the poor. One in eight has a graduate degree, and 43 percent have a college degree, only a few points lower than those with positive wealth.
Last June, one of the students I worked with graduated--with zero debt.  I strongly urged her, more than once, to write a commentary in the newspaper about how she achieved that.  She didn't buy fancy clothes, didn't own a car, didn't care to party hard, bought secondhand clothes, didn't travel abroad, focused on her school work, worked part-time, applied for scholarships, and yet had loads of fun and was my partner-in-crime with horrible groaners.  But then she, too, didn't listen to me--she didn't want to write about these.

I suppose it is not fashionable these days to live modest lives within one's means. Maybe I should go to the store and buy myself the latest gizmo and charge it to my card!  Nah; after all, I am Major Buzzkill ;)


Ramesh said...

Credit is a drug somewhat like nicotine, or better, like alcohol. In moderation its OK, but its not easy to hold in moderation.

Living within the means is simply an alien concept. To individuals, as well as to societies. There is a hardly a country on earth with a balanced budget. The crowd that's feeling the Bern is amongst the worst addicted. In the case of nations, this addiction is even worse than in the case of individuals - you pass the burden on to your children.

That student of yours deserves the Nobel Prize in economics.

I see that you are slowly metamorphosing into a wise man with sensible ideas. So I am happy to keep agreeing with you :)

Sriram Khé said...

I understand the role that loan/debts play. The debt by itself is not a bad thing ... but, people and governments seem to be over-leveraged like crazy :(

Will you agree with me on the next post too, and keep the trend going? ;)

Anne in Salem said...

Where did people learn this? Surely the children of the Depression didn't teach their children to be fiscally irresponsible. (My grandmother still saves rubberbands!) Were the hippies the first to exceed their incomes? Perhaps it was the "Greed is good" 80s? Credit, beyond a reasonable mortgage or car loan, can be so destructive.

Sriram Khé said...

Not the hippies--they were not into consumption, and definitely not consumption that was fueled by borrowing. In fact, if there were more hippies, then the credit card and the entire loan industry will be in trouble because very few would be borrowing and spending.

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