Got Orthonomics in your Email Box?

Monday, August 17, 2009

Bad Financial Advice Is Everywhere

Don't worry readers, the Parade Magazine that comes with the Sunday newspaper isn't my normal reading material, but sometimes a story catches my eye. After reading what I was interested in, I turned the page to a story "How to Bounce Back from Bankruptcy" which is choke full of terrible advice.

The first piece of advice was to re-establish a credit history with just one credit card, perhaps a low fee card with a low spending limit. I'm sure the author would think a doctor giving advice to a recovering alcoholic to start drinking again with a low alcohol beer was off his rocker. Well, those who have a bad history with credit shouldn't be touching credit, certainly not from the get go because for some, credit (and spending) is a drug and an addiction. Debtors anonymous is the place to be, not filling out a Mastercard application.

I watched an interesting documentary on credit and the credit industry and it is a fact that one of the number of targets of credit card companies are those who have bankrupted. Yes, a good credit history is helpful. But someone who has found credit has been their downfall should steer clear and rest easy because, a credit history is not going to be of immediate need, and the need is overblown anyways. Yes, you can qualify for even a home mortgage without an extensive credit history. I did so many years ago showing a history of utility bills paid and rent.

Piece of advice number 5 is "View a car loan as the next big step."

While car dealers typically want to see at least a year of good payment history before financing a post-bankruptcy buyer, some dealers aren't picky these days. Initial rates can be as high as 22%, but reliable payers can refinance at better terms later on. Opting for a used car can keep costs down.

Amazing that even finance writers continue to propagate the myth that a car loan is a must. And a car loan at 22%? Is the writer out of his mind? The interest you will pay alone on such a loan can easily pay for my last car purchase. And, regarding that refinance: don't count on it after you take out the credit card that the author reminds you to monitor and keep low limits on!

I know I'm going back to advice I've given over and over again: save, put money in an interest bearing account, save some more, and pay cash for a quality used car. There are plenty of them out there. We plan to buy another used car within the next year.

The last piece of advice (7) is to plan for a mortgage. My advice: save, save, save and stop thinking about taking on more debt until you have plenty of cash in hand. I heard an interesting report from an economist that much of the present crisis could have been avoided if people had put the traditional down payments on their homes. I know it old fashioned, but "grandma's finance" was full of wisdom.

Advice like: get a credit card, take out a car loan (at up to 22%), and buy a home is a great way to . . . . . . . . . . .bounce back from bankruptcy or end up back in bankruptcy?

Along with "Ask Orthonomics" I foresee plenty of installments of "Bad Financial Advice."

72 comments:

Anonymous said...

I agree that the advice is bad, but just to play devil's advocate for a minute, suppose someone lives in an area with no public transportation and the only way to get to work, buy groceries, take your kid to the dr's etc. is to own a car. Why is it so crazy for that person to take out a loan to buy a used car if that is their only for transportation and they have no money. Without a car they can't save money because they won't be able to go to work.

SephardiLady said...

I grew up in an area like that and my neighbor would rebuild cars he bought for nothing and sell them for $3000 and less at times. I'm more than certain he would have "financed" a car for a short period of time so long as he had the rights to reposses.

Taking out a loan, especially one with massive interest, is a quick way back down the same path. Debtors have to treat the symptom.

SephardiLady said...

P.S. My basic message is that one should avoid credit as much as possible. One certainly should not look to credit as the default position, but seek alternatives through all measures possible. Kol V'Chomer if you have beeen through bankruptcy already.

Anonymous said...

Sorry SL, but I don't think you answered the question. Sometimes in dire situations some debt is inescapable. It's easy for nice middle class people like you and I to sit at our computers and say debt is bad, don't do it.

BTW - Most personal bankruptcies are due to medical care debt and losing jobs due to illness/disabiity or layoffs, not from freewheeling with credit cards.

Ariella said...

SL, you could probably put together a whole book on the bad financial advice often given in the frum community. It would include such things as paying for wedding expenses you can't afford with a credit card, leasing a car so you could have a new model every 2 years, buying a house with no money down and arranging an interest only mortgage, and, of course, never saying no to children's requests for clothes, gadgets, and sleepaway camp.

Mike S. said...

Depends on the reason for the bankruptcy. If one overused credit cards, sure, don't do that again. But if one had a sound history but went bankrupt when a family member's hospital bill went $100K above his insurance?

On the other hand paying 22% interest is pretty nutty. I did do it once, for one month, when I needed a car for commuting and an asset sale I was counting on to pay for it had a closing delayed. I found it painful.

On the other hand, since fat, middle-aged, asthmatic old me manages to bike 35 miles a day to and from work, don't be too quick to say you need a car to commute.

Anonymous said...

Yes, biking is an option for some, but many people have commutes that are too long (I have 25 miles each way), roads that are too dangerous for biking, have to bring a child to day care on the way, can't bike when it's snowy, sleety, etc., have to commute at least one way in the dark or in areas where it is too dangerous.

Anonymous said...

Anon - BTW - Most personal bankruptcies are due to medical care debt and losing jobs due to illness/disabiity or layoffs, not from freewheeling with credit cards.

NOT TRUE, regardless of what the media is feeding you. Most personal bankruptcies are due to years of "freewheeling" living without saving money for those inevitable emergencies that crop up in everyone's lives at one time or another. Some bankruptcies are due to unfortunate events.

Mark

Lion of Zion said...

SL:

"put money in an interest bearing account"

אומר דרשני

Charlie Hall said...

"Sometimes in dire situations some debt is inescapable"

And we love to rationalize that our own situation is particularly dire!



"But if one had a sound history but went bankrupt when a family member's hospital bill went $100K above his insurance? "

Not having good health insurance is irresponsible. If your employer doesn't offer good health insurance, get another job -- and tell the employer why you are changing jobs!



My wife and I were just approved for a loan to buy a house :). As part of the disclosures I got to see my credit scores for the first time in many years. The lowest of the three scores was 797, despite the fact that I haven't used a credit card in 21 years and haven't had any unsecured debts at all since about 1994. The idea that one must "establish a credit history" is a massive lie. And I suspect that the reason for the lie may be that once one declares bankruptcy, he/she can't declare bankruptcy again for seven years, meaning the person is stuck with the new debt. (Incredibly, I once met someone who was going through bankruptcy #4.)

Charlie Hall said...

"reliable payers can refinance at better terms later on"

But often with a substantial prepayment penalty that more than makes up for the lower interest rate.

Zach Kessin said...

"reliable payers can refinance at better terms later on"

You Hope.

Signing up to 22% interest just seems dumb in my book.

Mike S. said...

Charlie,

Even good health insurance with high limits can be over run by a long hospital stay. And if you are a small business you will likely find that you cannot get an unlimited policy at any price (at least that is true in the two states I have been in.)

conservative scifi said...

If you take a quick look at car websites, you can find Carmax has used cars starting at about $6500 (with the transfer fee). Ebay motors has a supposedly "good" condition BMW for about $4000.

For those with even less resources, Cars.com had an 89 Acura Legend for $999 with 172,000 miles. There is no necessary reason to finance a car.

LeahGG said...

the vast majority of situations are not caused by a major medical situation.

I'm sorry - it just isn't true. If your situation is caused by that, then apply for a free loan from a free loan gemach to buy a used car in half-decent shape.

The vast majority of situations are caused by irresponsible use of resources. Moreover, if you have a major medical situation, you should be asking for help from tzedaka before you go into bankruptcy! THAT is the purpose of tzedaka - not to help kids go to camp or parents buy a new bugaboo for their third child (heaven forfend they should have to use the old Peg Perego!)- to help people who are trying their best and get thrown curves by life.

Charlie Hall said...

Mike S,

You are correct about the high cost of health insurance for small businesses in much of the US. However, that does not excuse us from having to be adequately insured ourselves. I have never had health insurance that didn't have at least a million dollar lifetime maximum. If my employer didn't have that I'd either (1) change jobs, or (2) get myself a catastrophic insurance policy.


FWIW, some states have now mandated community rating for small groups and that at least allows such groups to all pay about the same (high) rate. New York and Maryland are among them. But in New York the costs are high in part because of the high cost of living and in part because the Orthodox Jewish community has successfully lobbied the legislature to mandate coverage for assisted reproductive technologies. There is a couple in my neighborhood that had twins a few years ago after 3 rounds of ART. The total cost of the ART, seven weeks of hospitalization for the mom prior to delivery, the delivery itself, and a few weeks for each twin in the neonatal intensive care unit ran to around $200,000. The out of pocket cost to the couple was $500. (And only the government mandated community rating will keep the father's employer able to continue offering health insurance. Those who rant and rave about government intervention in the market might reflect on the fact that those two frum kids would not exist but for such intervention.)

Charlie Hall said...

"you should be asking for help from tzedaka before you go into bankruptcy"

Declaring bankruptcy because of high medical bills is simply a way of forcing those of us who have been responsible in maintaining good health insurance to pay for your irresponsibility. Is this mutar?

Anonymous said...

Wow. I'm surprised how judgmental some people are about others who don't have health insurance or don't have good health insurance. In many states there are no limits on excluding people with pre-existing conditions or charging extra fees for people with pre-existing conditions. I have a friend with high blood pressure. The only policy she could find was $30,000 for two people. A plan for two people in the state where I live is now $25,000/year, it's more if there are children. How many families have $25 or 30K to pay for health insurance after paying for even modest housing, food and other basics.

Dave said...

A million dollar cap on health insurance can be eaten up by one significant disease.

And bankrupcty in the United States seems to be caused roughly half the time by major medical issues.

Reference: http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.63/DC1

Anonymous said...

SL: There are situations where a credit card is necessary. If your car breaks down, no one is going to tow it or let you pick your car up from the lot without a credit card. Many tow and repair places don't even take checks.

I sometimes have to travel for work. My company doesn't give out credit cards. Instead, you have to put the expense (i.e. plane ticket, rental car, etc.) on your own charge and then get reimbursed. You can't rent a car or book a flight without a charge card.

Yes, you need to not put everyday items on plastic and you need to pay off the balance each month, but telling someone not to have a charge card in this day and age is not always realistic.

Zach Kessin said...

SL: There are situations where a credit card is necessary. If your car breaks down, no one is going to tow it or let you pick your car up from the lot without a credit card. Many tow and repair places don't even take checks.

You could use a debit card for that, you can do everything with a debit card that you can do with a credit card, except get into debt.

Dave said...

There are lots of things I would not use a debit card for.

Any purchases online.

Anything where there is a large hold being placed.

Also, some businesses will not accept a debit card (for example, car rentals).

Lion of Zion said...

""put money in an interest bearing account"

what does this mean? please elaborate.

SephardiLady said...

Sorry SL, but I don't think you answered the question.

Plenty of (unnecessary) debt is incurred under the premise that there is little choice. Am I going to say that one should never, ever incur debt?. . . no.

But, if I was advising someone, especially a person that went bankrupt (!!), I'd explore ever darn option under the sun before taking on more debt, especially large interest bearing debt.

There are so many options and combinations of options to explore. Depending on the type of job a person has, perhaps they can telecommute, hotel, or transfer to a closer location. Perhaps a person can take a second job for a short while. Perhaps a person can borrow a little used car from a family member for a short period of time. Perhaps a person can trade something of value for a cheap can (Craigslist has an entire section for bartering. I once saw someone looking to exchange some new technology for a really cheap car). Perhaps a person can make a garage sale or work out a favorable payment plan with a neighbor selling a car. If a person is in a service business, perhaps he can buy a car from a client (taxable, yes, but the cash outlay will just be the value of the car). Perhaps the spouse with a car but lesser need could walk/bike/carpool/bus to work for the time being.

The article is part of a feature called "How America Saves" yet there was NO mention of saving, frugality, emergency funds, and just plain and simple doing to undo years of bad habits.

SephardiLady said...

Sorry LOZ-I'm just getting back to my blog today.

I realize interest rates are miniscule. But, I recommend always saving for the next car. You can take the money out of your checking every month or quarter, put it in a savings account, and let the interest build. Some years are better than others for the interest making a dent. But even small amounts of interest earned are amounts I don't have to save.

SephardiLady said...

Thank you Mark for debunking another myth. Yes, many have hit bankruptcy because of divorce, job loss, or medical emergencies, but plenty of people are also pushed over the edge because they had some bad habits to start with. They have little to no savings, debt they are already contending with, and their assets are leveraged.

Dave said...

I'm not sure how Mark debunked it, because he's wrong.

Roughly half are caused by major medical issues. Interestingly, of those, three quarters had insurance before the issues hit. See the paper I referenced above.

Now this does mean that half are not caused by major medical issues, but even that doesn't mean that the people were spending improperly. Many of those surely were, but that can't ever constitute "the overwhelming majority".

Jeffrey said...

I once heard a wise comment: only use debt to buy an asset which should appreciate such as a home or student loans. Don’t use debt for a car or other disposable assets. However God forbid we should ever be in the circumstance where a hospital tells you it needs $100,000+ or you can’t get an organ transplant. In such a case I think it might be a prudent idea to borrow the money.

I don’t know where the commentators who said that most personal bankruptcies are caused by free spending get their information. Why don’t you look at http://download.journals.elsevierhealth.com/pdfs/journals/0002-9343/PIIS0002934309004045.pdf. There’s a logical reason why medical bills are a leading cause of bankruptcy: this debt is fully discharged in bankruptcy unlike student loans or taxes or child support. The notion that some have suggested that individuals are at fault if they don’t have good health insurance is absurd. Even with good health insurance, you can very easily get caught up with loads of bills. Also its close to impossible for a middle income family to purchase health insurance on their own if they aren’t covered by a group plan. I just went to insure.com. The cheapest family plan in NY is about $1200 per month.

Mike S. said...

Charlie,

Everyone should have adequate insurance. But even if you have a $1M policy, there are $1.2M diseases. And cases that where the only hope is an experimental treatment; every policy I have ever read excludes them.

Also, when I said that in some states a small business (or individual) can get an unlimited policy at any price I meant exactly what I said. No one will write such a policy

Anonymous said...

Mike: You are correct. If you have guacher's disease for example, the medicine is about 200,00/year for life. If your child, g-d forbid, has CF your out-of pockets and co-pays will bury you. We shouldn't be picking on the people who don't have health insurance or don't have good health insurance, we should be picking on the people who have $50,000 weddings instead of using the money for a rainy day fund, the people who think sleep away camp and summers in the country are a necessity and the people who think that their first house should have 4 bedrooms and all new furniture. Those people are much more fun to pick on.

Mike S. said...

I will happily criticize those who do not believe that health insurance, disability insurance, and life insurance for anyone with dependents are necessities that come before the luxuries mentioned in the previous post. Any time I will think it might do some good. But it is folly to imagine that one cannot exhaust any semi-reasonable insurance policy.

Alexis said...

Having been through this recently (my husband and I moved to the USA and he had no credit here), I will say that if you are starting from scratch, today, it is extremely difficult to build credit without getting a credit card. My husband did not appear on the rating agencies' records until he got a credit card. Paying bills, having a bank account--none of it counted. It would have counted against him had he not paid, but there were no positives to be gained.

Maybe you can rebuild credit without getting back into cards--but if you are truly starting from zero, you can't. You need to get some kind of debt and pay it back.

Anonymous said...

Dave - I'm not sure how Mark debunked it, because he's wrong.

Nope. There are some cases in which it was solely medical issues that caused the financial issues. But the large majority is caused by irresponsibility followed by medical issues.

Roughly half are caused by major medical issues.

Nonsense. Most of those are caused by not having an emergency fund to cover such unexpected expenses.

If you don't include the 2 SUV's in the driveway for 10 years before that at $550 a month each and new ones every 3-4 years ($132,000), and the flat screen TVs, and the 10 years of vacation, and playstation 1, 2, and 3. What needs to be done is to FIRST fund the emergencyfund, then buy toys, TVs, vacations, and SUVs.

Just because the last expense, the unexpected one, was a medical expense DOES NOT MEAN that it caused the bankruptcy!

Now that all sounds a little harsh, and it is. But a nation that has a near zero savings rate for 10+ years has only itself to blame when emergencies pop up without funds to handle them.

That said, there are plenty of truly unfortunate folks that just are unlucky and got hit with something they could not handle. My heart goes out to such folks, and they deserve as much assistance as we can give them.

Mark

LeahGG said...

i would argue that for those who suddenly got hit with a million plus in medical bills, getting a credit card to build a credit rating is not necessarily as evil as it is for people who got to bankruptcy through other means.

It's fair to argue that few people can sustain a situation where a member of the couple is out of work for over a year and needs medical treatment significantly beyond what the insurance covers. People are under-insured for a variety of reasons, not all of their own making.

Again, if getting back on one's feet REQUIRES a car, this would be a time to reach out to the community and tzedaka organizations and say "couple following medical crisis needs clunker to get to & from work while they try to get back on their feet." Maybe members of the community could help them out. If not, then tzedaka is really being used in the wrong way.

Commenter Abbi said...

Mark, you're really not taking into account the astronomical cost of medical care in America. No "emergency fund" could possibly cover a severely catastrophic illness. ICU costs $10,000 per day. Let's say someone's been really frugal and actually has $60,000 in emergency savings. Great- they have six days, but no one waltzes out of the ICU in perfect health, ready to get back to work.

Read the comments in the healthcare articles in the NY times and the stories of trips to the ER in Europe and getting a bill for $200 for 5-6 hours of med care, including specialists.

Sorry, unless you bring hard evidence of your toys-before savings-theory, it doesn't wash. There's been no savings for 10+ years because real wages haven't kept up with inflation for the past 50 years. Why do you think it requires 2+ jobs to keep up a middle class household? Even with those jobs, most middle class families were barely holding on, even before the recession. I think the truth is that most people use credit cards to make ends meet for the basics.

Commenter Abbi said...

Mark here's are some examples of insurance horror stories- ie: the responsible ones that actually had insurance and then still got stuck with astronomical bills: http://www.salon.com/news/feature/2009/08/11/denial_of_care/index.html

tesyaa said...

Mark, would you say that a couple who has been paying $35,000+ annually in tuition for a decade, has been irresponsible by not building up an emergency fund for medical expenses? Different use of funds, but the same end result. Should we send our kids to public school to fund future expenses that will hopefully never happen?

I mean, money is fungible. We could have an emergency fund even with our tuition bills if we lived in a cave. Perhaps we have been profligate in choosing to live in an actual dwelling?

Anonymous said...

On the subject of financial advice, see http://thejewishstar.wordpress.com/2009/08/18/tuition-or-mortgage-choosing-public-school-over-homelessness/.

Do you risk homelessness to pay tuition? Do you take out a home equity loan to pay tuition? Do you take out a home equity loan to pay for tuition for someone else's child as one generous man did accoring to this article?

rosie said...

I also sent the article to SL. I commented on vosizneias as "tuition paying grandparent" that I feel that we need to close the leaks somewhere else. The generous man who took out a home equity loan to pay someone's tuition is a tzadik and deserves every brocha possible but not everyone can or should do that. And what about those who are already paying for grandchildren or nieces and nephews to attend day school?
Besides stressing the giving of tzedukah, why are the rabbonim not pushing for a more frugal and modest lifestyle? Why are they not putting a stop to sending young women away to high priced sems? Why are they not putting takanos on simchas? Why are they still allowing overnight camp to be the norm? Why don't rabbis require that each chosson gets his GED before the chassunah if he graduated from a yeshiva that did not teach secular studies? Why don't the kollelim require part time work after the first year?

mlevin said...

I am with Mark. Yes, ICU costs $10,000 per day. But insurance covers a large portion of it. Yes, there are medical bills after ICU, but they are covered by insurance, too. Yes, the sick person is not working but insurance covers 60% for disability. So, if there is a nest egg for emergencies and proper insurance, majority of those who went into bankruptsy wouldn't be in that position.

Those who posted links to sob stories must understand that these stories are exceptions and not the norm.

It's like a liberal fighting for abortion rights and talks about rape pregnancies. If abortions were needed for rape victims only... there wouldn't be an abortion debate.

If majority of people led fiscally responsible lives there wouldn't be a bankruptsy problem.

Dave said...

Those who posted links to sob stories must understand that these stories are exceptions and not the norm.

This tells me you didn't even bother to read the articles linked.

I posted a rigorous academic study of bankruptcy in America and its relationship to medical causes.

Let me quote from the conclusions:

Our data highlight four deficiencies in the financial safety net for American families confronting illness. First, even brief lapses in insurance coverage may be ruinous and should not be viewed as benign. While forty-five million Americans are uninsured at any point in time, many more experience spells without coverage. We found little evidence that such gaps were voluntary. Only a handful of medical debtors with a gap in coverage had chosen to forgo insurance because they had not perceived a need for it; the overwhelming majority had found coverage unaffordable or effectively unavailable. The privations suffered by many debtors—going without food, telephone service, electricity, and health care—lend credence to claims that coverage was unaffordable and belie the common perception that bankruptcy is an “easy way out.”

Second, many health insurance policies prove to be too skimpy in the face of serious illness. We doubt that such underinsurance reflects families’ preference for risk; few Americans have more than one or two health insurance options. Many insured families are bankrupted by medical expenses well below the “catastrophic” thresholds of high-deductible plans that are increasingly popular with employers. Indeed, even the most comprehensive plan available to us through Harvard University leaves faculty at risk for out-of-pocket expenses as large as those reported by our medical debtors.

Third, even good employment-based coverage sometimes fails to protect families, because illness may lead to job loss and the consequent loss of coverage. Lost jobs, of course, also leave families without health coverage when they are at their financially most vulnerable.


And now, for an ancedote.

A few years ago, I fell on the ice, and severed the tendon in my right arm.

Surgery must be done within about 10 days to have the maximum chance for recovery, and the arm is largely useless for 3-4 months after surgery.

I am quite fortunate. I have some of the best insurance you can get, through my employer, and my employer neither fired me nor made me take unpaid leave despite the fact that I was not able to do significant parts of my job during the recovery period.

Had that not been the case, I would have had the choice of spending money I did not have (and even with my savings, the cost of uninsured surgery would have more than depleted it unless I raided my retirement funds or took out a loan) and possibly having no income for a quarter year, or living with a permanent loss of function in my dominant arm.

I was quite lucky. I am not, however, under the delusion that I am entitled to that luck, or that it is somehow something I earned.

Dave said...

I am with Mark. Yes, ICU costs $10,000 per day. But insurance covers a large portion of it. Yes, there are medical bills after ICU, but they are covered by insurance, too. Yes, the sick person is not working but insurance covers 60% for disability. So, if there is a nest egg for emergencies and proper insurance, majority of those who went into bankruptsy wouldn't be in that position.

No. That depends entirely on the insurance. You are making enormous assumptions that simply aren't true.

There are lots of insurance plans out there that are capped (I daresay that most that can be bought by individuals are capped), almost all have limits on what they cover, and deductibles also vary wildly.

Also, short term disability insurance (which you just described) is anything but universal.

SephardiLady said...

There's been no savings for 10+ years because real wages haven't kept up with inflation for the past 50 years. Why do you think it requires 2+ jobs to keep up a middle class household?

Commentor Abbi-I'm not sure how long you have been out of the US, but a comparision between the advertisements of the 1980's, 1990's, and the current would reveal growing consumerism and affluenza. The frum community suffers an acute case of affluenza, perhaps, but it is everywhere. Seems the first step of many college grads is the new car. Next comes furnishing the apartment (heck, today every college bound student seems to be decorating their dorm with all sorts of 'stuff' none of which I remember advertised in my day).

Today everything is slicker and people really have increased their spending. Marketing is far more developed than back in the day. We've discussed cleaning help. In my day, were few people had help. Today, there is Merry Maids and other commerical industries that didn't exist to such an extend only 15-20 years ago.

I deal with some clients who complain they can't save. In the case of one client in serious debt, I believe that if he would have taken frugal steps for the past 5 years in every category, he could easily have $200K in the bank, fully funded his 401(k) which had an extremely generous matching plan, paid for his car, and have made significant progress on paying down a mortgage.

A medical emergency would be an absolute disaster! But the real disaster has been brewing for at least 10 years. There are the big mistakes (overbuying a gas guzzling vehicle and eating the depreciation on trade-in, constant re-financing). There is the buying into myths ("my home is my best investment" and therefore I need to re-do a lot of stuff). There is the out of control spending from food to cell phone bills. And then there is promising the kids to pitch in for all the things they "need."

Aaaaakkkkkk, I will stop before my blood pressure hits the roof because I run into this with people I work with/for.

SephardiLady said...

tesyaa-Hope Mark with answer, but it might make sense for a family needing a financial recovery to find an alternative to yeshiva for a year. I'm sure others will disagree, but financial collapse is a terrible prediciment too.

Anonymous-Thanks for the link. This is already in cue for a post. Please be patient!

Rosie-There were wedding takanot years ago, which were largely ignored (by Rebbeim too!). Change has to come from the individual. Just this summer the Yated had an article on just how important camp is. Mechanchim have bought into camp whole hog. If people don't take some personal responsibility to invest alternatives or do without, the marketing will continue.

mlevin said...

Dave - no one said that these numbers are universal and etc. What Mark is saying, and I'm agreeing with him, that although people blame illness, it's being ill prepared (or not insured) that is at fault. Basically lack of personal responsibility.

One doesn't need short term disability insurance coverage, if one has sufficient sum put away for that type of a situation.

The number of 45 million uninsured has long been thrown around, but this number mostly includes poor (who would qualify for medicaid, but just never got around to registering for it), young and illegals.

People who are too poor to qualify for medicaid will not get bankrupt by a sudden illness. They will simply start getting goverment programs for the poor/sick.

Those who are young, rarely get sick, so getting hit by a sudden sickness wouldn't significantly affect the bankruptsy numbers.

Illegals can not go bankrupt. They shouldn't even be counted into 45 million...

Another thing to consider is that if 45 mil are uninsured, that would mean 15%. That number is way too high to be real.

Your story about your disability shows that had it not been for your boss, you would have gone bankrupt due to your own lack of nest egg. I am currently been unemployed for 7 months. Had we been living from paycheck to paycheck and in debt... but we weren't so, now we are doing ok until market recovers and I could get another job.

Dave said...

Dave - no one said that these numbers are universal and etc. What Mark is saying, and I'm agreeing with him, that although people blame illness, it's being ill prepared (or not insured) that is at fault. Basically lack of personal responsibility.

And what I am saying is that the numbers indicate that roughly half of all bankruptcies are due to major medical expenses.

That means that half aren't.

So stop overstating your case.

In the other active thread, SL pointed out that she couldn't take an extra $12k out of her cash flow. And yet if you look at the paper I linked, the average out-of-pocket expense in the bankruptcies given was right around that. That is including people with insurance, often people with what is considered "good" insurance.

Your story about your disability shows that had it not been for your boss, you would have gone bankrupt due to your own lack of nest egg. I am currently been unemployed for 7 months. Had we been living from paycheck to paycheck and in debt... but we weren't so, now we are doing ok until market recovers and I could get another job.

Actually, my story shows that despite having a nest egg, it wouldn't have been able to take $15-$20k in medical expenses and prolonged unemployment.

Anonymous said...

I think personal responsibility is important, and agree that there are lots of middle and upper middle class people who have gotten themselves into problems by overspending and not saving for a rainy day. I also think that there are a lot of working poor who barely manage to pay rent, utilities, food and transportation and probably make just a little too much to get any government aid, who, through no fault of their own, run into serious problems in the event of an illness of job loss (and their jobs don't come with disability insurance and they may not have jobs with health insurance) . I think that some of the comments (and lets admit it, most of us on this board are middle class or upper middle class) and had some head starts in life, whether a good education or brains, and don't really know what its like to be a member of the working poor. Please show some compassion. After you try supporting a family for few years on the wages of a walmart cashier, a nursing home aid or an office cleaner, then come back and tell us how it's their fault for not saving enough. I was blessed to have parents who were able to pay for my college and have been blessed to have a good, 6 figure job. Everytime I go to the grocery store I can't imagine how I would be able to feed a family if my circumstances were different.

Jeffrey said...

Why does everyone keep picking on Dave? Dave is on the ball!!! Take a look at the link Iposted yesterday from Elizabeth Warren, and expert on bankruptcy at Harvard Law School..."using a conservative definition, 62.1% of all bankruptcies in 2007 were medical..."
(http://download.journals.elsevierhealth.com/pdfs/journals/0002-9343/PIIS0002934309004045.pdf)

There's no question that we live in a society where we love immediate gratification. However, we do live in a society with a very, very fragile safety net. This just means that we need to be extra, extra careful with what we have.

SephardiLady said...

Dave-
" the other active thread, SL pointed out that she couldn't take an extra $12k out of her cash flow. "

Just a note: current cash flow budget (i.e. take home pay less expenses-doesn't include investment interest earned--that is how I budget) which is both after a year that included unusually high medical expenses and tuition. If we had a medical emergency and didn't want to liquidate savings or sell our home, I could dip into savings and create more cash flow by taking my kids out of school and taking on more work.

Jeffery-Of course those of us who are middle class have a hard time imagining the challenges of low income workers. I tend to gear my blog towards professionals, although my money saving tips for food could just as well be used by food stamp receipients looking to cover their food expenses without dipping into cash).

Of course there are bankruptcies caused by unfortunate circumstances. There are many that are caused by lack of personal responsibility and a can-do attitude.

I actually have some comments on the Elizabeth Warren's book. Maybe sometime later. It is a mixed review.

SephardiLady said...

Oops, second comment is for Anonymous with a small part in response to Jeffrey. Hard to keep up with the comments today.

Probably will be more difficult after the post that just went up.

Commenter Abbi said...

Sephardi Lady

I left 9 years ago and I'm sure the frum community does have a bad case of affluenza. But the frum community is a tiny percentage of a rather small minority of the US. And yes, I'm sure there many pockets of such communities on the East and West coasts. And yes, I'm sure there are many plasma TVs to be found in the living rooms of families living between those coasts. But at the end of the day, you can't fight macroeconomics and I don't think it's $200 plasma tvs that are putting people into bankruptcy. It's simply that the GDP hasn't had significant growth since 1945 (there is a great chart in this article: http://seekingalpha.com/article/118349-real-gdp-since-1930?source=email).

I agree, much of America has been coasting on credit. But that has been due to a conflation of "financial innovations" that created enormous wealth for the banking and insurance industry and a complete loss of the manufacturing sector and a significant loss of service jobs to outsourcing. Why do you think healthcare is one of the largest growth industries in the US? It's pretty much the only sector that can't be sent overseas! Seriously, could you imagine any other ending ending to the constant onslaught of credit cards and mortgage ads on TV combined with bleeding jobs then last year's crash? It was the makings of a perfect storm and I'm sure it will be studied for years to come.

In short, you're basing your theory on your own personal experiences and my point is that it's much more complicated than that.

I agree I don't know why people are picking on Dave without actually reading his links. Mlevin, where is your link backing up your contention that Dave is "overstating [his]case"?


I will add that, living in a society where credit in the American sense doesn't exist, it didn't have to be this way. People here get into debt, but not nearly to the extent they do in America because a) we have UHC. b) we don't have unending credit lines, no one sends "PREAPPROVED CREDIT!" cards to your mailbox c) the banks continued being conservative in their lending practices even at the height of the worldwide housing boom.

Basically, we're like the U.S. in the 1950's.

mlevin said...

Abbi - Plasma TV don't cost $200, they are $2,000 and up. And yes, if you go to a TV store before the Super Bowl Sunday you will see many men buying that giant, high definition TV with all the latest features splurging thousands of dollars. And TVs are not the only things people splurge on. They are buying expensive cars and expensive cell phones and expensive computers and video games and that doesn't include things like designer clothes. Read papers about all the people going into debt over Christmas shopping, and then there is Halloween, and summer vacations and skiing (very expensive sport). Then there is getting the newest toy for your children (tamagachis used to sell for over $30 each when they just came out. Half a year later they were $5) Frummies are not the only ones going into debt to catch up with their neighbors they just overspend on different things.

"It's simply that the GDP hasn't had significant growth since 1945"
I have a big problem with that statement. Just because US is no longer a top seller in cars does not mean that our GDP hadn't grown. Let me list a few (among many others) US accomplishments/inventions since 1945 that we are dominating a market in and are still cashing in on.
Internet (it is still owned by the US)
Medicine (each step forward in medicine means people must pay for patents to use it)
Computers - there are software companies such as Microsoft and there are hardware companies such as IBM and APPLE, with lots of other smaller ones in between. Yes, many hardware pieces are manufactured in the third world companies, but the main brainwork is the US.
Education - did you know that foreign students automatically pay double in tuition in American Universities, yet there are thousands of new foreign students entering us every year. Each paying an arm and a leg for an education plus spending money here on living expenses.
Planes - Boeing is an American company, they make planes for customers all over the world.
McDonalds/Burger King can be found all over the world, who do you think receives royalties for their profits.

So, yes, we exported many jobs overseas. Mainly because we are not into manual labor anymore. Other jobs are just no longer necessary, they got eliminated due to progress in technology. Let me give you an example. 30 years ago most managers and executives needed a secretary, now it is no longer needed. We have e-mail and cell phones and answering service and spell check and printers; these are all secretarial functions which are no longer needed. Something like horse breeders were replaced by cars.

"Why do you think healthcare is one of the largest growth industries in the US"
Because babyboomers are getting older and losing their health and are in need of medical attention, compared to 20 years ago when they were in the prime of their lives and didn't need to see doctors on regular basis. It's a simple economics of supply and demand. We are seeing a greater demand for doctors and medicine so the prices are going up because we don't have enough supply to satisfy this new demand.

"Mlevin, where is your link backing up your contention that Dave is "overstating [his]case"?"
I don't need a link, his link implied that we have 45 million uninsured in America. Once I see that exaggerated figure I know longer I no longer believe anything else written in the the same piece. If the premise is wrong then a conclusion that 50% of bankruptcies are due to medicine cannot possibly be correct. Let me repeat myself. 45 million uninsured would mean 15% of Americans without insurance. Too high to take seriously.

It reminds me of a statistic of an exaggerated number of homeless people in America, but when you looked into it, you realized that by homeless they counted all college students who still lived with parents and/or dorms.

Dave said...

I don't need a link, his link implied that we have 45 million uninsured in America. Once I see that exaggerated figure I know longer I no longer believe anything else written in the the same piece. If the premise is wrong then a conclusion that 50% of bankruptcies are due to medicine cannot possibly be correct. Let me repeat myself. 45 million uninsured would mean 15% of Americans without insurance. Too high to take seriously.

You realize that that number comes from the US Census Bureau, right?

Here is a reference: http://www.cbpp.org/cms/index.cfm?fa=view&id=628

mlevin said...

Yes, I am aware where that number came from. They included illegals as uninsured Americans. Illegals = not living in US legally = not americans. Got the message. The same people that proclaimed college students living with parents as being homeless.

Dave said...

They include non-citizen immigrants. That may or may not include illegal immigrants, it certainly includes those who are legally in this country but do not have citizenship.

And the un-insured rate for native-born citizens is 13.4 percent in the 2006 time frame.

Anonymous said...

tesyaa - Mark, would you say that a couple who has been paying $35,000+ annually in tuition for a decade, has been irresponsible by not building up an emergency fund for medical expenses?

Yes. The emergency fund isn't only for medical expenses, it's for all emergencies. And throughout ones lifetime, there will always be emergencies.

Insurance

In today's world, it is the height of irresponsibility to go without insurance. At the minimum, a high deductible catastrophic policy is a MUST. They are generally quite reasonable in price.

GDP, growth, real income, etc

Entirely irrelevant to this conversation. If you make less, you spend less. But you still have to prepare for emergencies by savings funds for them. If you want a general statement, probably 80+% of bankruptcies are due to living on a solely smooth cash-flow basis, even though expenses don't appear on a smooth basis, especially expenses related to emergencies.

Imagine if a farmer didn't save for next seasons seed? He would be bankrupt and off his land after a single growing season!

On a personal note, my income this year will be less than half of what it was last year and my wife and I are on the cusp of removing our kids from the local yeshiva. We have registered them in a new Hebrew Charter school instead. I refuse to sign a contract for something that I am not likely to be able to pay, or that will be very difficult for me to pay and lead me to irresponsible living (i.e. no savings, limited emergency funds, etc). It is a very difficult step for us, but we don't see many reasonable alternatives right now. I sort of feel bad for the school because we did pay full tuition and they desperately need the money, but ...

Mark

Dave said...

In today's world, it is the height of irresponsibility to go without insurance. At the minimum, a high deductible catastrophic policy is a MUST. They are generally quite reasonable in price.

While catastrophic health insurance is certainly better than nothing, it is not the panacea you are implying.

The combination of a high deductible and a relatively low lifetime cap limits the cases it covers.

Moreover, if you read the paper I provided, you would have seen that 75% of thsoe whose bankruptcies were due to major medical expenses had had insurance at the time of the causative medical event.

If you want a general statement, probably 80+% of bankruptcies are due to living on a solely smooth cash-flow basis, even though expenses don't appear on a smooth basis, especially expenses related to emergencies.

And your evidence for this claim (complete with number) is?

Anonymous said...

Dave - Moreover, if you read the paper I provided, you would have seen that 75% of thsoe whose bankruptcies were due to major medical expenses had had insurance at the time of the causative medical event.

I don't disagree that the event that caused the cash flow problem just before the bankruptcy was medical in nature. All I am saying is that the last event isn't the only thing that contributes to that kind of bankruptcy. The [average profligate]* behavior over the previous 5, 10, 20 years also contributes.

Mark - If you want a general statement, probably 80+% of bankruptcies are due to living on a solely smooth cash-flow basis, even though expenses don't appear on a smooth basis, especially expenses related to emergencies.

Dave - And your evidence for this claim (complete with number) is?


No evidence, but it's almost a tautology. Most people live on a cash-flow basis (witness all those articles decrying our lack of savings, and the fear of little retirement income outside social security, etc), so if something (like a medical problem) causes an unexpected large expense (medical bills) and at the same time disrupts ones cash flow (i.e. fewer hours worked or loss of ones job), then bankruptcy could ensue.

The remedy to this is to maintain a healthy sized emergency fund that grows as you age and as your income grows. If you are lucky, you don't experience too many costly emergencies and you can use the excess savings for retirement (HSA's work pretty much in this manner).

Mark


* based on average savings recently. I am taking liberties and defining "profligate" as spending money you earn before saving for emergencies.

Dave said...

No evidence, but it's almost a tautology. Most people live on a cash-flow basis (witness all those articles decrying our lack of savings, and the fear of little retirement income outside social security, etc), so if something (like a medical problem) causes an unexpected large expense (medical bills) and at the same time disrupts ones cash flow (i.e. fewer hours worked or loss of ones job), then bankruptcy could ensue.

This is only the case if the causative event would be within "best practices" for people living within their means.

Median Household income is around $50k. After taxes, let's call that $35k.

General best practice is to tell people to have at least six months living expenses in the bank, ideally a full year.

Therefore any event whose impact is less than $17.5k (for the minimum state) or $35k (for the "best practice") state that causes bankruptcy could be attributed at least partially to poor spending habits.

The flip side is that if the financial impact is greater than $35k, their saving habits were not to blame.

Therefore, I don't think you can justify the claim you are making (of 80%+) without bringing some evidence as to the size of the financial impacts relative to the household income.

tesyaa said...

Mark -- what do you mean by the "cusp" of removing them? Are you expecting your situation th change in the next 2 weeks?

SephardiLady said...

Try this blog post:
http://lawprofessors.typepad.com/bankruptcyprof_blog/2008/09/over-spending-i.html

which points to this paper on the subject at hand:
Household Consumption and Personal Bankruptcy
http://www.gsm.ucdavis.edu/uploadedFiles/Faculty/Directory_and_Profiles/personal_bank.pdf

I still need to read the paper. I've only had a chance to skim.

glowing_flower said...

Just two anecdotes on the healthcare/bankruptcy issue. Before DH and I were married, he had a very serious illness. B"H he was still on his parents' insurance policy. My in-laws are middle class and have always lived well under their means, while fully funding health-care insurance, life insurance, etc. But despite having good insurance, my FIL told me much later that there were weeks and weeks when the co-pays on his treatment were $10,000. They used saving and also worked out payment plans with the hospital to make incremental payments until the debt was paid off. Years of living frugally also meant they had the skills to tighten their belts to weather the storm.

I contrast that to a family I know. Neither parent has health insurance. (I know from experience you can buy a reasonably priced personal policy in our state, as I was recently in a position where that was necessary, and yes, I have pre-existing medical conditions.)

Because both parents work in situations where they are able to under-report their income, they qualify for free healthcare for their three children. I also know they vacation frequently, spend more to clothe their family for a season than I do for my family (same size) for five years, have plenty of non-essentials in the house (cable subscription, expensive nosh, etc.) If, chas v'shalom, a medical emergency hit, they would lose everything. And they would be counted in the statistic of bankruptcies for medical reasons. But that's hardly the real story.

glowing_flower said...

Here's one piece of good advice on medical bills that applies no matter what your insurance situation is, or your financial situation: If you are facing mounting medical bills: CALL THE BILLING OFFICE. You can be pleasantly surprised at how kind they are at working out payment arrangements.

I actually call for any bill over a what I can pay in a month without denting my checking account cushion or touching savings. While I don't ask for a discount (that might be appropriate for some people), I do ask that the payments be spread over a set number of months. Virtually every time this has come up, there is no problem and they are happy to arrange something. For someone with no reserves, this could be a life-saver. For me, this means I can leave my checking account cushion at my comfort level and avoid going into my emergency savings, which continue to earn a little interest and are in waiting for an emergency in which a payment plan is not an option.

Anonymous said...

tesyaa - Mark -- what do you mean by the "cusp" of removing them? Are you expecting your situation th change in the next 2 weeks?

2 weeks? School here starts on Monday morning. I am using weasel words because the whole thing makes me very sad. I attended Yeshivot from age 3 through 12th grade, and sure my father worked very hard to be able to send all his children to Yeshivot, but somehow it's become impossible for us to do that anymore. To me, that's sad. I can't give my kids what I got as a child.

Mark

SephardiLady said...

glowing flower-Thank you for your comments. I have called many medical billing offices for a client that could use a huge amount of belt tightening and they don't ask many questions and are very willing to cooperate.

Mark-I really feel for you and wish you hatzlacha. Please do keep us informed of how things turn out.

tesyaa said...

Mark & SL: we all feel Mark's pain. However, if even we see this step as a big loss for one's children or family, can't you see how making big changes in one's children's Jewish education is going to be very hard for the community? I say "even we" because we are people who are open-minded enough to consider the alternatives, we are cognizant of financial realities, and we probably are less concerned about other people's perceptions. If we all feel that this is a difficult step, then the community as a whole is not ready for it, that's for sure.

SephardiLady said...

Agreed. Ready or not, I think it is time to deal with reality. But it certainly isn't easy. I tried to recognize that with my question, what in the world will these parents do because they have probably never, ever considered any alternative. And, if you have educators in your family, even the mention of something different can ruin a family dinner. In a way, we are all subject to pressures even if we ourselves are open minded.

One thing is certainly: the community isn't ready to make changes even if the economy is demanding it.

Just another Daily Rant said...

First time commenter here, long time reader. I wanted to send you a email directly but couldn't find your contact info.

I wanted to share a quick story with you. I work for a credit car company in risk management. I attended a town hall with the Chief risk officer this week - a senior executive responsible for ensuring the profitabiltity of the firm. He was commenting about cardmembers who go on national television claiming the credit card company wronged them by pulling their lines of credit. He says that he always ask for permission to counter their arguments with the media but never receives permission (from the cardmember). He says in every case, their is a valid reason why we pulled their lines - usually having to do with the fact the individual persons situation has changed since the line was originally extended i.e. job loss etc. He concluded by saying that he recognizes that these individuals might be going through hard times and by pulling their lines he is causing them additional stress. However, he said, as a compassionate person he is doing them a DISSERVICE by extending them additional credit. I realize that he has the firms bottom line in mind but I do believe he thinks that planning and responsible spending is best for everyone. Anyways, thought i'd share.

SephardiLady said...

Thanks for sharing! I know someone whose credit line was pulled for the very reason of changed circumstances and it certainly is to his benefit even if can't see it yet.

SephardiLady said...

Thanks for commenting. Hope you will take the time to add your thoughts in the future.

LeahGG said...

we've gone SO far off topic.
The point of the original post is that those who've been unwise financially in the past shouldn't be told to grab a credit card and start over...

Anonymous said...

>Besides stressing the giving of tzedukah, why are the rabbonim not pushing for a more frugal and modest lifestyle? Why are they not putting a stop to sending young women away to high priced sems? Why are they not putting takanos on simchas? Why are they still allowing overnight camp to be the norm? Why don't rabbis require that each chosson gets his GED before the chassunah if he graduated from a yeshiva that did not teach secular studies? Why don<

BECAUSE THEY DON'T CARE!!