I remember a study on general aviation plane crashes. They found that very few plane crashes came about because the pilot made a single, obvious mistake. Instead, the common pattern was a series of missteps, each so small that you couldn't properly call it a "mistake" in and of itself, the pilot was just cutting corners on the recommended safety margin. And then something happened that was out of the pilot's control, like bad weather or distraction or mechanical failure. Because the safety precautions that make it normally possible to recover from these events weren't followed, this resulted in a crash instead of merely a nerve-wracking landing.
I think the same thing happens with finance. If you look at the proximate cause of bankruptcy, it's almost always that somebody has a health emergency or a death in the family or loses their job. But many people have health emergencies, deaths in the family, and stints of unemployment without going into bankruptcy. And the reason why is the same thing Benjamin Graham and Warren Buffett have been espousing in investing for years: Margin of Safety.
If you always live on the edge, then it's a given that sometime you're going to fall off. Hold back 6-12 months reserve of salary, and suddenly unemployment doesn't look so scary. Health insurance makes a sudden medical emergency not quite so scary. Have $10-20K in the bank, and you don't need to worry that totaling your car is going to send you into crippling debt.
The irresponsible part is not that these people got sick or lost their job, it's that they didn't prepare for contingencies where they would get sick and lose their job. There's this culture in America where as soon as you start earning more money, you have to spend it on something, otherwise you're wasting it. But there's a tension between resiliency and efficiency, and if you're always being perfectly efficient, things tend to go very wrong when they go wrong. Make your bargains accordingly.
Man, you are clearly speaking from a position of privilege on that one. How the hell do you hold back 6-12 months salary when you can barely afford the rent, utility bills and the costs of raising some kids to begin with?
Haha, just hold back 6 months salary! You make it sound so easy!
It's not that they didn't prepare, it's that many of them have no means to prepare, and barely have the means to continue as is.
Many also believe that it is worth risking living on the edge to support a better school for their kids (ideally breaking the cycle), than moving to project housing and dangerous gang-controlled areas in order to enjoy their "margin of safety". I can't fault them for that.
And, if you're in such a position, and aren't fortunate enough to have your area of expertise and interest involving computers, good luck getting a job without a degree. So what do they do to pay for the outrageous tuition costs these days? Take a giant loan from Sallie Mae.
If you're willing to move, and live with roommates, it's fairly easy to live comfortably (assuming no children) on 12k/year total. Assuming you're making minimum wage-ish, that's 8k to put in the bank every year.
yeah, what? that's a lot of assumptions. people don't live with assumptions, they live with the realities of having a kid or a spouse or a family or even a girl they just can't get over.
I was responding to a post about 'holding back 6 months salary' as a safety measure, with a simple example of how to do so. Obviously, this is something to do before you go and start a family. My point was not that it's possible for everyone, but rather that it's not as unthinkably hard to do as one might think, even on minimum wage.
I think your point about having financial reserves is relevant, and I also think that having the motivation to have a reserve requires financial sense that, unfortunately, is not wide spread.
I am an attorney that does volunteer work by handling bankruptcies "pro bono" through a local non-profit. Every bankruptcy case has it's one unique set of circumstances but there is a consistent pattern. First, the debtors don't have a good understanding of money or personal finance. Usually that's a product of not having parental examples of good money handling. Second (and perhaps because of the lack of understanding) they don't pay attention to finances if there is a resource to pay for things (cash or credit). Third, there is a watershed event like a loss of a job or a major health crisis. Fourth and finally, they wait too long before getting help. If I were king for a day, I'd make sure that financial education was mandatory in high school and was spread out throughout the high school years rather than being taught in a single quarter or semester.
Health insurance makes a sudden medical emergency not quite so scary.
Until the insurer refuses to pay, and the "insured" lacks the resources to pursue a lawsuit. Maybe I'm the only one who's ever had that happen, but I rather doubt it. Reading further down, looks like someone else here has been through it too.
If it's a calculated risk, why is this a problem that needs a YC startup to fix, rather than simply a risk that didn't work out?
There're certainly people that take on debt as a calculated risk because they believe it'll pay off in the future. My parents did that to send me to college, and it did pay off. But when it fails, they usually just go "Well, shit," and fall back on their contingency plans for how to handle it if it fails. If it's a calculated risk, they've been making those plans, right?
But the fact that there's a startup out there to solve this problem (several, actually, but this one seems more above-board than the alternatives on the radio) indicates that this wasn't a calculated risk for many people. The essence of a calculated risk is that you go into it having done all the due diligence you need to weigh the possible consequences, and then make your calculations based on that. What's there for this startup to sell if people have already done that?
You're taking a calculated risk every time you get in your car, right? So, what's your backup plan in case someone T-bones you and you end up a paraplegic? You have one, I assume.
you're making the definition of calculated risk much more technical than it needs to be.
I ain't saying they did a formal cost-benefit analysis of the whole thing.
You seem to think that people can or ought to have an answer for every situation, should be prepared for every contingency; that there is a perfect understanding that one can just _follow_ and have everything turn out alright. That's great if it's how you can live your life, but 1) one day I bet you'll find that your preparation and contingencies were just an illusion, that luck has had its way with you--I mean, haven't you ever wondered what would have happened to you if your dad just died when you were 12? _That happens to people who were just like you_; and 2) most people don't have that and have to make choices without knowing what's behind the next door.
It's a YC startup because even if a person was willing to accept the cost of the contingency labeled "risk that didn't work out," there's still a valuable service in saying, surprise!, you will pay less for taking that risk by using our shiny software!
I think the same thing happens with finance. If you look at the proximate cause of bankruptcy, it's almost always that somebody has a health emergency or a death in the family or loses their job. But many people have health emergencies, deaths in the family, and stints of unemployment without going into bankruptcy. And the reason why is the same thing Benjamin Graham and Warren Buffett have been espousing in investing for years: Margin of Safety.
If you always live on the edge, then it's a given that sometime you're going to fall off. Hold back 6-12 months reserve of salary, and suddenly unemployment doesn't look so scary. Health insurance makes a sudden medical emergency not quite so scary. Have $10-20K in the bank, and you don't need to worry that totaling your car is going to send you into crippling debt.
The irresponsible part is not that these people got sick or lost their job, it's that they didn't prepare for contingencies where they would get sick and lose their job. There's this culture in America where as soon as you start earning more money, you have to spend it on something, otherwise you're wasting it. But there's a tension between resiliency and efficiency, and if you're always being perfectly efficient, things tend to go very wrong when they go wrong. Make your bargains accordingly.