More Ideas To Deal With Money Issues In The Family
June 24, 2012 9 Comments
Here are a few more tips for dealing with money issues in the family.You can find more in an older post here: https://wealthymatters.com/2011/04/12/dealing-with-savers-and-spenders/#more-1285
1)Set a limit on how much each person can spend without checking in with the others.While may be restrictive, in reality it is a display of respect towards other family members.
2)Before taking on any new debt, such as a larger mortgage or a new car loan, save the amount of the future payment into a savings account for at least six months. If you can consistently save that much for six months, you can realistically afford the purchase. Better to know in advance the sacrifices you will need to make than have buyer’s remorse after the fact.
3)Build and keep an emergency fund for unseen expenses or events such as a job loss. The last thing you need when going through a difficult transition is the stress of worrying about money.
About Keerthika Singaravel
wealthymatters 
Firstly, I’d just like to check: your name is Keerthika, right?
Anyway, thanks for that detailed reply, Keerthika. I get the feeling that my reply will be quite detailed as well…
Just two points here at the start: Everything I say here will apply to a normal economy operated by sane people and will be focused on the richest billion world citizens (with whom my blog is concerned).
The focus on a normal economy assumes no bubbles. The sad truth is that we live in the “bubble of bubbles”. We had the dot-com bubble, the housing bubble and now we have the sovereign debt bubble, the student loan bubble and possibly the social security bubble. All of these bubbles make discussions like this one very difficult because normal rules don’t apply anymore and you continually have to address all kinds of special circumstances and exceptions. I will therefore assume a bubble-free economy for the sake of simplicity in this discussion.
The focus on only the richest billion is definitely not because I don’t care about the remaining 6 billion. It is just because the richest billion (who consume close to 70% of global resources and own about 85% of global wealth) determine the direction in which our global society goes (which strongly affects the poorest 6 billion). And at the moment, all of us rich guys are driving our global society to very dangerous places indeed.
So, now to the discussion… Firstly, I have to adjust the incomplete definition of a consumer loan a consumer loan I gave above. I see a consumer loan as any loan that does not have the ability to pay for itself over its lifetime. The good guys, investment loans, can do this through capital gains, by increasing your income or by decreasing your expenses. Unfortunately, most consumer loans taken out by the richest billion are on things that rapidly depreciate in value and actually serve only to greatly increase expenditures or decrease income. They are therefore as far from an investment loan as at all possible. For example: the average car adds about $8000 per year to your expenses and all of the electronic gadgets the rich world continuously buys on credit only turn them into greater couch potatoes and decrease their productivity (and therefore their earning power).
The point about home loans on which I disagree with Robert Kiyosaki is that, even though they do not increase your income (as his definition of an asset is supposed to do), they do decrease your expenses relative to the alternative (renting). I bought the flat I live in now about 18 months ago because my interest payments, my utilities and my insurance are currently about 30% lower than that which I would have to pay to rent this particular flat (and this gap will only increase in the future). In a normal, bubble-free economy, this will always be the case simply because you cut out the middleman (the landlord). I therefore see my home as an asset because it decreases my expenses.
Similarly, I see things like a home renewable energy generation system as an asset because, even though it does not increase your income, it reduces your expenses. In my book, taking out a loan to buy some solar panels is therefore 100% OK. They pay for themselves in 5-10 years and, just as an added bonus, they help save the planet.
Student loans are an investment in human capital which is certainly a very good thing. But just like with normal capital, wise people (and banks) will only invest in high quality. Sub-prime student loans to mediocre students are therefore quite simply a bad investment (just like sub-prime mortgages) which will give negative returns to society as a whole and lead to a student loan bubble.
In the case of poorer world citizens, I fully agree with you that taking out a loan to buy a consumable like a washing machine can free up more time which can be used for productive enterprise, but when it comes to the richest billion, this is very rarely the case. As you point out, the culture of “status through consumption” has conditioned the vast majority towards wasteful consumerism through debt. And it is this wasteful consumption (facilitated by consumer credit) that I am extremely concerned about.
And yes, the saddest thing is that studies show that these tremendous increases in per capita consumption has not made the developed world even the tiniest little bit happier…
Yes I am Keerthika.Am I right in believing Schalk is your name?If not I’m sorry for addressing you as such so many times.Could you also tell me how to pronounce it?First time I am coming across the name.
Schalk why do you assume that there is something as a normal economy operated by sane people outside of economic textbooks?Bubbles are quite common,booms and busts are pretty normal.They are also pretty necessary.The reason that they seem so important to the wealthy today is that they have so much of their money in “financial assets”. Remember the High Beta Rich I spoke about?Most people today can’t distinguish between real and paper wealth.And that is the crux of the problem.The reason behind all our bubbles.And the bubbles become bigger and bigger simply because governments intervene to stave off busts.
About 85% of global wealth you speak about?How much of it is paper?And how much is real wealth?How much would the rest of the world pay for it?Or is the market to be restricted to just the top 1 billion?How long before there are no buyers at the stated price?Your internet connection and mine must cost the same in a world with similar internet penetration/access?But do they cost the same?
Schalk I believe that how a person chooses to live their life is their personal business even if their choice is to consume all that they ever make.At worst they are a problem to themselves and their families and to their society to the extent it chooses to provide for them. However borrowing/lending beyond a person’s ability or willingness to to pay is an issue.If you get a chance, read Niall Ferguson on how loan sharks became bankers.The real problem with today’s loans is that due to credit swaps and deposit guarantees and insurance many people forget that there is an element of risk in all banking transactions.Many countries don’t have decent enough prudential norms in place and their financial institutions create excessive credit.
The point about the house not being an asset: that’s why I too said I don’t fully with Kiyosaki.Shelter is a necessity and owning one is not such a bad idea.After all it saves on rent.And the savings parked here can be recovered to some extent on sale.But do see things from Kiyosaki’s view point.Most Americans do not live in apartments.They prefer what they call single family homes.Every time I visit one of these homes my engineer’s eye notes the design and materials used.Americans have some great design ideas but a lot of the materials they use today is cheap Chinese crap.Not meant to last at all.So there are bound to be large maintenance and repair charges.American furniture and furnishing too are meant to be replaced frequently.So their style of living leads to many avoidable expenses.So in America many mortgages are consumer loans as you define them.And sub-prime to boot.
Personally I am not so much in favour of student loans.Freeships,scholarships and paid apprenticeships/assistance ships/internships or training in return for a period of work are all fine by me.When loans become the norm parents and families stop saving for college and many students start life with the heavy weight of debt and never manage to get out of it.Building human capital is good but it need not be done through loans.Often the availability of loans or insurance merely leads to an escalation of costs—think the education system and healthcare system in the US.When the majority of student body can’t or wont pay more, the education system is forced to practice economies and cut the faff.Schalk I am also not very much in favour of labeling students as deserving, mediocre etc.I think it is a system with its own tyrannies and leads to a pretty unimaginative society where creativity is crushed.And there can’t be a bigger social cost than stifling genius.
Schalk and about consumer debt?I think the problem will sort itself out.One fine day banks will find that their loans have gone bad.And that the secured assets if any are not worth what they were believed to be.Many banks will go under and governments wont be able to save them.Soon the bubble will bust and everyone in these societies will seem poorer.You can see a version of this in America.The Western world will see a bit of stagnation.(more about this here https://wealthymatters.com/?s=bill+gross) There will be difficult times and adjustments.But nothing horrific need happen so long as governments face up to the inevitable.However attempts to re-inflate bubbles will lead to greater pain lasting many many decades.
And to get people to consume more carefully why not get people farming or at least gardening in cities?Today the richest billion doesn’t have to grow a tree and harvest fruit once a year before eating it.I think the further a person gets from the actual production of something the more carless they are about its use.
Thanks Keerthika, I’m learning a lot from these discussions. Admittedly, my understanding of certain macro-economic concepts is still incomplete since I only started studying this when I began working on the One in a Billion project at the start of this year.
But from what I understand, there is a difference between a natural market cycle and a bubble. Natural market cycles are kept in check by negative feedback mechanisms. For instance; disproportionate lending causes bank capital to diminish and interest rates rise to encourage saving to build up capital again. These high interest rates therefore prevent the buildup of a bubble where things become overvalued by 100% or more.
A bubble occurs when positive feedbacks (i.e. the mania phase in a bubble buildup) totally overwhelm the negative feedback mechanisms (which might be suppressed by government intervention). As I see it such disproportionate bubbles are (1) not necessary and (2) totally preventable. Responsible economists and government officials should be able to protect the public against the ill-effects of such massive bubbles. The “normal economy operated by sane people” I referred to above would be one in which normal market cycles occur, but disproportionate bubbles are prevented.
Regarding the 85% of wealth, about half of that is in real assets (primarily real estate) and the remainder I would think to be in stocks, bonds and savings. For the USA, however, this ratio is 32/68 in favor of financial assets. This information comes from the Credit Suisse wealth report which you might find interesting (https://infocus.credit-suisse.com/data/_product_documents/_shop/323525/2011_global_wealth_report.pdf). The total global wealth accounted for in that report sums to $231 trillion and does not include the ridiculous $1.5 quadrillion in derivatives.
I agree with you that a person must have the freedom to determine his/her own spending habits. If someone chooses to consistently max out his credit cards and live from paycheck to paycheck, that is his problem. However, if he does this to maintain a carbon footprint of 20 tons CO2/year and an ecological footprint of 10 global hectares, and destroy his own health and financial resilience to the extent that he regularly becomes a massive liability to his society, his financial irresponsibility becomes my and your problem and things become a little more complicated.
About the other things I completely agree with you, although I would like to ask you to expand a bit on not labeling students as mediocre/deserving. From my experience, you first have to work hard to develop your skill set and extend your knowledge before you can really set your creativity free. Rewarding excellence is a good way of stimulating the work needed to get to this stage.
Oh, and my name is Schalk, yes. It is pronounced like the English word “skulk” which does not have the most positive connotation, but does sound exactly like my name 🙂
Schalk despite the different wordings we used,I believe we are on the same page when we talk of booms and bubbles.
Thanks for the Credit Suisse Report I plan on reading it tonight while I drift off to sleep.
Can you point out some basic reading material on carbon accounting?I’d like to learn.
Schalk I speak from my experience with my education in India.We have altogether too much interest in pushing students into science and math,onward to medicine or engineering and probably further into management studies.So some knowledge is stressed to the exclusion of others.And good test takers in math and science are labeled as meritorious students and the rest as mediocre.Now innovators and original thinkers need not be the best test takers in a rigid system and I think too many students with potential are weeded out of the system or made to conform even if it means mediocrity.As you probably know we have the IITs but no Nobel Laureates to come from them.We have the IIMs but no billionaires to come out of them.At best we produce well trained skilled labour in these institutions.Our celebrated engineers and scientists come from less well regarded institutions.And our billionaires are often non-graduates,dropouts or foreign graduates, sometimes with mickey mouse degrees.
Hehe… I hope the wealth report gave you some sweet dreams 🙂
Regarding the carbon accounting, I think that we can pretty much trust the work that has been incorporated into the web-based calculators available for the public to use. I use http://www.carbonfootprint.com/calculator.aspx for calculating my carbon footprint and http://www.footprintnetwork.org/en/index.php/GFN/page/calculators/ for calculating my ecological footprint. I’ve found that the best way of learning about the impacts that certain actions have on our environment is just to play around with these calculators and see how the choices you enter in the calculator affect the final result. Both of these calculators also have more detailed information on their sites for interested readers.
Yes, creativity is a very abstract thing which our current education system arguably fails to develop. It would be really interesting to see some real world correlations between education and billionaire status or between education and poverty. Has their been any official studies done documenting the information that you site? That would be an interesting read. In the end, the proof is in the pudding and one needs to use the stats as a guide. I know that the correlation between education and income is very high in the USA, but that might just be because of our cultural values and not because their educational systems foster creativity.
Here’s something to start work with
1.A list of India’s billionaires http://en.wikipedia.org/wiki/Forbes_list_of_Indian_billionaires click on their names to know their educational qualifications.No IIT or IIM alumni here.
Please excuse me from searching for info on education and poverty.I don’t wish to spend the time on it.
2.Income is different from wealth and a person might save ones way to millionairedom and small businesses might even make us multi millionaires but becoming a billionaire and staying one is an entirely different ball game.And its impossible to become a billionaire on a salary.
3.Thid article has no stats but it is published in a well respected newspaper http://www.thehindu.com/opinion/lead/article2967567.ece
One more question on the topic of debt… What are your thoughts on the whole idea of consumer credit? Personally, I view anything that does not have the potential to grow in value over time as a consumable (implying that a car loan is also a consumer loan). If I were president of the world, I’d immediately ban all forms of consumer credit and only give private loans to creditworthy homeowners, business people and promising students.
Does consumer credit have any long term benefits to the economy that I am not aware of?
Schalk as I read through your comment wave upon wave of thoughts raced through my mind.I will attempt to set them down in some logical order.
If we must live we must consume.And material comforts provide a measure of happiness.So I am all for the comforts of the modern world including consumer credit.But safe to say I dislike excessive or wasteful consumption ie consumerism.
Consider home appliances like your oven, microwave and refrigerator.They save so much of your time.In the western world these appliances are par for the course and found in almost all homes.This is not so in a place like India.And many people here will purchase such items on credit,These items will never gain in value but definitely they will save time and effort
.
We may today produce a large part of the world’s cars but most vehicles in India are bank financed.Personally I take the public transport and feel no shame in it.But a lot of people will not be caught dead doing so as they feel it is below their dignity.I find the attitude silly but I can’t find myself condemning car loans.Where public transport is not convenient, cars are something of a necessity and the only way many people can afford a car is by paying in installments.
BTW why do you feel home loans and student loans are always productive?
If you get a chance read Niall Ferguson’s The Ascent of Money-specifically where he talks about Home Owning Democracy,
Also read Robert Kiyosaki on why your home is not an asset.While I will not go so far as he does,I don’t consider a home an asset unless the numbers will support the conclusion.
Student loans are marketed as virtuous consumption,But think what are the rates of interest on student loans from commercial banks?You will find that they are sub prime rates,Why?Banks see them as risky assets on their books.
Have you read about the ills Americans are facing due to the burden of student loans?
Credit tends to raise the price of goods.
Loans are instruments that can multiply effects.Hence the term leverage or gearing.So if a person buys clothes, appliances, cars, homes, education,business assets etc,with borrowed funds and puts them to a productive use and is able to generate a surplus to payback the loans,consumer credit is fine.They help people do more than they can otherwise.On the other hand, credit in the hands of the ignorant leads to problems for self and others,
Consumption becomes consumerism when people become unaware of the real cost of things and indulge in waste.So salmon for lunch is fine-one or 2 or as many pieces as are necessary to satisfy one’s appetite,Consumerism comes in when a person eats a piece and trashes the rest.Wasting the food was a waste of the time it took to raise the fish,harvest it etc.Taking out the car to the grocery round the corner is being unaware of the true cost of petrol -the time it took to form in nature,the time to develop the technology and drill it,the wars and/or ecological damage to secure it.
Consumerism is supported and encouraged by the norms of society.If a person is respected on the basis of what or how much they consume or waste then consumerism is to be expected.
All loans, no matter the type, are merely ways to transfer future purchasing power to the present.The purchasing power might come from one’s future earnings or the future earnings of a business or the earnings of future generations in the case of national debts.
Debts,used wisely allow us to do more than we could do otherwise today and secure a better future.Even debts for consumption can be good.Consider this hypothetical example:Country A is facing famine.It borrows from country B to import food.Its people are saved.A few years later their labour pays off the consumer debt.Would the alternative of massive starvation deaths and loss of manpower have been the better alternative?
Excellent post!
Thank you.