6. Should You Ever Go Into Debt? Flashcards
(28 cards)
What are the two categories of flowering plants in the desert?
Annuals and perennials
What is the behavior called when some desert annual seeds remain dormant?
Bet hedging
What is the primary reason desert annuals do not sprout all their seeds?
To cope with an uncertain future
What does the ‘credit card debt puzzle’ refer to?
The observation that some people hold credit card debt despite having the ability to pay it off from savings
According to researchers, why do ‘borrower-savers’ hold credit card debt?
They are worried about future access to money
Fill in the blank: Debt is a financial _______.
Tool
What are the two main reasons to consider taking out debt?
- To reduce risk
- To generate a return greater than the cost to borrow
How can debt provide additional liquidity?
By allowing individuals to have more cash on hand in emergencies
What is one way debt can decrease uncertainty?
By fixing a payment stream into the future
Why is taking out student loans often considered worthwhile?
The cost of borrowing can be lower than the return it generates
What was the median annual earnings for college graduates aged 25–29 according to a 2015 report?
$61,000
What is the lifetime earnings premium for a college graduate over a high school graduate?
$655,000 for men and $445,000 for women
What is the formula to estimate the value of a degree today?
Value of Degree Today = (Increased Lifetime Earnings/2) – Lost Earnings
What is the average amount borrowed by public university students in the U.S. for a bachelor’s degree?
$30,000
What are some non-financial costs of taking out debt?
- Stress
- Depression
- Physical health issues
True or False: Higher levels of credit card debt are associated with better psychological well-being.
False
What type of debt is reported to cause the most stress?
Non-mortgage financial debt
How may personality affect one’s attitude toward debt?
Some may have a strong aversion to debt regardless of their financial situation
What is the psychological benefit of paying off debt for some individuals?
Peace of mind
What do researchers suggest about those who benefit the most from using debt?
They can choose when to take it
What psychological aspect may lead individuals to avoid debt?
Peace of mind
Debt aversion can drive individuals to avoid debt despite potential financial benefits.
Who benefits the most from using debt?
Those who can choose when to take it
Strategic use of debt can reduce risk or increase return.
What was the average cost of unanticipated expenses for individuals in 2019?
$3,518
This significant cost affects lower income households’ need to take out debt.
What is the probability of experiencing at least one emergency expense over ten years?
96%
This is based on an annual probability of 28% for an emergency expense.
