Tuesday, October 17, 2006

Jewish Economics - Misconception #1

Somehow, my last post turned into politics. It was supposed to be about economics.

One of the most difficult issues with trying to 'fix' problems is that people don't relate to them the same way. This causes two problems: Those who are trying to think of solutions don't leave much room for error, where that room is needed, and younger couples - especially those from more comfortable families - run into problems when they get surprised.

Since that was incredibly confusing, here's an example: Most people have some money in the bank. If for whatever reason, someone spends a bit more money or writes out an extra check, there's no harm done - their bank account balance shrinks a bit, and that's it. They'll bring it back up at some point, and there's no harm done. Or, more common, someone forgets to enter a check into their register right away, and their balance is lower than they think - odds are, this won't cause a problem. Their extra money in the bank will keep the check from bouncing.

Now, take the same situation, but imagine it's a young couple. This young couple generally has to toe the line a bit on their bank account. Now, say they write out a check and forget to enter it right away. Or, maybe they have deposited a check, and it's been two days, and they assume it has cleared already - but for some reason it's held up and it hasn't. Now, they write a check, and it bounces. Or they buy something on their debit card, and it goes through - only their bank nails them with a fee for spending money that wasn't there. The latter is worse, because they don't even find out about it right away. Their bank account has been lowered without their knowledge, and they then write a check - which bounces. They get charged more fees. Maybe, they've written out checks to a bunch of places - and even though there's enough for all but one of them, the largest one gets deposited first, so all the other ones bounce.

If you're paying $27 for each bounced check, that adds up really fast (not to mention the embarrassment of having to send out a second check). Not only that, the person who deposited the bounced check may have gotten charged $10 or so as well, so you need to pay for that too. What may have been a $35 check is now costing you $72, or $37 extra. Say that happened to five checks at once, and you've just lost $160.

Now, here's the problem: Many people simply don't get it. They don't understand that putting $10 on your account doesn't just cost you $10. They don't understand that you don't have a buffer to keep you from going over your account balance. They don't understand that while you may be able to afford the $10 easily in a week when your next paycheck comes, right now you can't. Worse, some people still don't get it when it's *them* living on the edge like that - and they drive themselves into debt. Worse still, some of them have parents who bail them out - now wanting their child to be able to buy what they want - and they never learn. Meanwhile, the parents are now losing money, the child is losing money, and nobody is learning how to fix the problems.

So, misconception #1:
Stop living as if there's a buffer. Especially now, there is no buffer! There's no room for error, no room for buying 'just a little something special', no money for that extra shwarma from Massov, no matter how good it is.
And we haven't even touched credit cards yet. Or budgeting. Thank God for Orthonomics, or I'd be writing forever. :)