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The economics here seem wrong.
Poor people do not benefit less from debt than rich people do - they benefit vastly more, because they have major cashflow and liquidity issues. (I wouldn't go so far as to claim interest rates are the least important things about debt, but they are discussed disproportionately compared to aspects like credit availability.) They do not shun debt, but use it in countless highly complex forms to deal with the challenges of routinely running out of money before the next pay period, or the 'feast or famine' variance in payments that to a richer (ie. middle-class) person would barely register as a blip on their bank account balance. Arbitraging 2% vs 5% ROI is trivial compared to arbitraging 'not getting evicted' or 'not getting fired'. (Borrowing $20 for gas in the next half hour can be life-changing; getting 40 cents extra on your Vanguard ETF retirement account 50 years later is not.)
A useful reference for me for understanding this was reading Portfolios of the Poor.
Incidentally, I would note that Polonius is an aristocrat speaking to an aristocrat (and about to be killed through his own foolishness), and his advice should not be taken on finance, or perhaps anything else either.
1I like to encourage my friends to become part of The System.
What is The System? It's the system of small debts owed among friends where no one knows exactly how much is owed to whom, so everyone is forever tied together by their small debts.
Out at the bar? Buy a round, then someone else buys the next round, and so on, taking turns. Don't go enough rounds for everyone to buy a round? No problem. You just owe the group a round next time.
Going on a trip? One person pays for the hotel, another for the flights, another for the car, another for some meals, etc.
This also enables a feeling of equality among friends by the wealthy friends paying for more stuff and the less wealthy friends paying for less stuff. The wealthier friends track this in their head and pay careful attention to how much their less wealthy friends are being asked to spend, and politely cover the difference without ever making a big deal of it so that everyone is included.
Many people are afraid of being part of The System. It's like they have avoidant attachment style for friendship. That's okay, they just have to be coaxed into it and shown that it's safe to be part of The System. Take the first step with no expectation that they return the favor, do this a couple times, and many will start to get that there really is no formal debt to be repaid and they'll relax and contribute.
Obviously freeriders are a strain on The System. The people who totally avoid paying their fair share in proportion to their wealth. These are bad friends and you stop inviting them to things. Thankfully, it usually doesn't come to that. Mostly people want to be part of The System once they see the benefits it provides.
If you're not already in it, you should join The System!
I think you've got a lot of the right ideas, but may find in practice that the specifics are much more culture-bound and hard-to-shift than this implies. Debt in social contexts has a lot of symbolism and meaning associated with it. Some random examples:
In high school, my friends lent each other money or covered for each other all the time, and there were one or two people who 'owed' the rest hundreds of dollars by the end of senior year, and no one cared or kept track.
In college my friends did the same, but less unidirectionally. One time we all went out to dinner, and as we paid, we ended up passing money around in a circle until most of the debts all canceled out.
I've read stories about communities where people would go out of their way to lend each other things, and keep track, specifically in order to keep everyone in debt, and therefore symbolically tied, to everyone else.
I read a story once about someone whose dad demanded repayment for the cost of raising him, and when he paid it back he cut off all contact, since settling the financial debt in essence severed a bond.
My grandpa used to get genuinely angry if any of his kids or grandkids tried to pay for anything for him, because (in his mind) that's not the direction things were supposed to flow. He would literally sneak off at restaurants to talk to the staff and make sure the bill never made it to the table.
I don't really have a point with all that except, don't expect to find broad agreement about how these kinds of considerations should work.
Yeah, I agree this is more "thing to try on the margin" than "universally correct solution." Part of why I have the whole (controversial) preamble is that I'm trying to gesture at a state of mind that, if you can get it in a group, seems pretty sweet.
I don’t actually think that scrupulous debt-settlers see things that way. In fact, I’m sure they don’t. Expediently settling debts is a deep instinct in many people, and I think the most common motivation for splitting small checks isn’t miserliness, but rather a desire to keep money out of the social equation. I respect that. But, paradoxically, it feels like leaving money on the table. We could be establishing trust and dispensing with mental friction, and all it would cost is $7!
So, next time you’re eating with friends and you can afford it, consider just paying for the whole thing. And if some bigshot buddy of yours offers the same to you, take them up on it! A dense lattice of debt is a cheap way to bond, and sometimes a rehearsal for greater opportunities.
The “you can afford it” part is doing most of the work in this advice. This whole sort of approach works if you’re rich. If you’re not rich, it doesn’t. And if you’re not rich, your buddies are probably also not rich, so the other part of the advice also doesn’t work. (EDIT: And your buddy is rich and you aren’t, that’s actually even worse! Now if he pays for the whole meal, he introduces an explicit power and status disparity into what should be a relationship between equals. Very not cool.)
Do you think occasionally buying a meal for a small group requires being rich? I don't think I'm rich, but I can manage it without much strain. At least occasionally!
Do you think occasionally buying a meal for a small group requires being rich?
Yeah. At least, doing so without genuinely feeling it in your budget, certainly requires being rich. (Heck, dining out with your friends on a regular basis, even paying only for yourself, is not exactly budget-strain-free… unless you’re rich.)
Here’s the thing (and this is a concern that, if you’re rich, you might not be familiar with, but I assure you that it’s real): one of the worst things about not having very much money is that many fun group activities cost money. If your friends invite you out for [whatever], and you have to think about whether you can afford to accept the invitation, that’s painful and depressing. Actually having to turn it down is even worse.
Your proposal creates a scenario where not only do you have to think about whether you can afford to join your friends for a meal at a restaurant, but you now also have to think about whether you should pick up the whole check (after all, you haven’t done that in a long while, and it would really suck to end up looking like the one poor or miserly person in the group), or, if not, whether you’ll end up in a situation where your rich friend pays for your meal again, thus underscoring, once again, that he’s richer than you are.
I do not find any of those prospects pleasant. I like my friendships to be relationships of equals. That means, among other things, that (except in certain rare and unusual circumstances) everyone pays for their own meals. It’s not because I’m comparing the cost of the meal to the value of the friendship (indeed, it would never even occur to me to think like that); it’s because I want group activities to not be a source of anxiety and shame, rather than being pleasant and fun.
Ah, we may just have different definitions of rich, or perhaps I'm a bit of a spendthrift! Or, I suppose, I might just go to cheaper restaurants. I'm thinking of checks in the like, $150-$200 range for the party, which isn't nothing but as an occasional splurge doesn't really fuss me. I guess if you do it 5x per year on a 50k household income (about the local median in my city, I think) that'd be about 2% gross. Not cheap, but also not crazy, at least for my money intuitions.
As a toy example, if a bank will lend you money at a 2% interest rate, and the stock market will probably net you at least a 5% interest rate, you can borrow as much as the bank will allow, put in the stock market, and pocket the difference. ... In other words, the bank has to see you as a safe bet, for you to be able to borrow and profit.
If you are able to do this, the bank would put their money in the stock market themselves, and only lend out money at a rate higher than they could get from the stock market. The very fact that it works would prevent you from being able to do it.
You could only profit from borrowing if you actually have an advantage over the bank beyond just "I am rich".
You have a greater appetite for risk than the bank does. Depending on the jurisdiction, regulators force banks to put their assets into relatively safe loans (insured mortgages, Treasuries, high-grade bonds, etc.) rather than relatively risky equity. We do not want the banking system to collapse if the stock market goes down 15%!
And one reason an individual can have a greater appetite for risk than the bank does, is that the bank is risking other people's money. If you lose 15% of your savings, that sucks, but it only sucks for you. If the bank loses 15% of everyone's savings, that is a big problem.
(Yes, there's deposit insurance ... which goes along with regulations on risk.)
I think it is usually the case that banks have legal restrictions on what they can invest depositor funds in, though? This varies by country, and can change over time based on what laws the current government feels like enacting or repealing, but separation between the banking/loan-making and investing arms of financial institutions is standard in lots of places.
I have personally taken out a mortgage at ~1.6%, invested the money in a standard index fund, and made money, paying back the mortgage rather than renewing when the interest rate on offer was 6%. I imagine the same would be true of an investment loan, and know for a fact that investment loans are available, and the income tax code in my country makes their interest tax- deductible.
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