Ian On The Red Dot

New York Times has an article about Americans getting into debt.

What is smelly is this:

But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.

Guess who are buying those bad consumer debt in the form of securities?

Retail investors and indirectly, the people who save.

When the securities go bad, those who sell it owe you nothing. But they can come after you for your loans and interests.

Hmmm…

I just don’t get it. Say you have an insurance policy. You have been paying the premium for a good number of years. Say you suddenly need money. You have a few options, two of them:

1. Terminate the policy and get as much money out as possible.

2. Take a loan from the insurance company at 8% interest.

Now, the amount of money you take out is equal to the amount you have initially put in. I don’t get why I am paying interest to use my own money. Ok. I think I get the marketing spill - I’m still covered. The policy isn’t prematurely terminated so I still have the chance that when it matures, I make ‘obscene’ amount of gains.

But I don’t buy the argument that this is the same thing when you take a loan from the bank.

It isn’t.

Usually when you take a loan from the bank, the amount is significantly greater than the amount you have deposited with the bank. You are taking a loan for an amount of money you don’t have yet.

With taking the loan from the insurance company, what is happening is you are taking out the same amount of money you have already put into the policy in the hope for large amounts of money in the future. The future is never a guarantee.

I understand and appreciate the need for insurance. However, if you have more than 1 insurance policy, I think it might make sense to close one of them and take a one time penalty instead of a yearly recurring penalty in the form of interest.

Sometimes I wonder about the advice FAs dispense.

I finally got down to doing something I should have done for sometime - I opened another bank account to save a portion of my salary each month. Each month, once I get my pay, a chunk of it is going straight to this new account. I have been living on a combined savings and spending account for too long. In fact, usually only one thing is happening - spending. While I have managed to save, the amount each month fluctuates with an inverse relation to the amount of beer I drink. The new account forces me to save a fixed amount each month, and no longer do I need to try to save more the next month to offset this month’s spending.

The impetus for this action was the first personal finance book I have ever read finished - The Barefoot Investor.