How much to make you happy?

UPDATE: the video is here. If you skip forward to 17:15 or so the announcer walks on to the stage and he brings up the 60k number. Of course, the whole video is probably worth watching.

So I'm really looking forward to this TED talk from Daniel Kahneman.

The choice quote from the link:

Psychologist and Nobel Laureate Daniel Kahneman says millions of dollars won't buy you happiness, but a job that pays $60,000 a year might help. Happiness levels increase up to the $60K mark, but "above that it's a flat line," he said.

"Money does not buy you experiential happiness but lack of money certainly buys you misery," he said. But the real trick, Kahneman said, is to spend time with people you like.

So why $60k? My initial suspicion (having not seen the presentation yet, it's not up), is that this has to do with some 80/20 math. In particular, that above $60k / year puts you into the top 20% of income earners which is probably all it takes to make most people happy. It's enough.

The numbers from Wikipedia.

http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

A US job that pays $60k puts you almost exactly in the top 20% of US income earners. (assuming that you have a job and are over 25) In fact, it puts you in the top 40% of household incomes. So if you make $60k+ and your husband stays at home and watches the kids, you're still making more than the average family. And you probably have a University degree or better.

If you exclude some of the outlandish parts of the country (NY, LA), then $60k + health benefits provides you a very comfortable quality of life. And if you're like most earners in this category, there's a very good chance that your spouse also works which bumps you up even higher. If you make 60k and your spouse makes even $10 / hour (i.e.: 20k), that puts your family into the top 20% of US households.

So is that going to make you happy? Why don't we "imagine the life"?

You can probably afford to travel once / year, own a relatively new car, maintain a mortgage (at 2000 rates), kids a pet and a hobby or two (if you have time).

You go to a church with 100 families and you're in the top 20 for income. In fact, your top 20 group probably makes up 50 to 75% of the church funding b/c you have more disposable income. It sounds selfish, but living in such a peer group is very comfortable feeling.

Your kid is likely one of the richest 4 or 5 kids in their class. When the kids want to hang out, they want to hang out at your place b/c you have the good TV, the good games, the good snacks and the space. Your kid gets the coolest presents or at least nobody get toys that are significantly cooler. That tends to make a parent happy.

I know these are shallow definitions. But these things would probably make most people happy.

Is 90k better than 60k?

Again, I haven't seen the presentation, but I have some postulations as to why it isn't. Mathematically, the 90k is 50% "better", but it doesn't necessarily "give you more". Remember that at 60k, you're making more than 80% of the working population (let alone those out of work). At 90k you're making more than 85 or 90% of the population, but you've really only jumped a few "notches" in the "final rankings".

In most parts of the US you already have access to a very good and healthy life at 60k. You've pretty much covered everything commonly deemed as a necessity and you probably have some money left over for "entertainment". So the jump to 90k really just gives you a little more "entertainment" and maybe some bigger stuff, but that's it.

And if you're the type who's not happy with being in the top 20%, then how much further do you need to go? Top 10%? Top 5%?

Really, 60k for one job is far enough "ahead of the game" to keep happy those that can be kept happy. And that's probably why this is true.

Irrational Pessimism

This is in reply to a post on MillionDollarJourney.

@Ed:This recession is, of course, not over yet and may deepen, but none of these statistics are expected to get as bad as the prior recessions.

There are several logical flaws in the comparisons here:

#1: The interest rate on today's mortgages cannot reach the level of those previous recessions. There is already an excess of available homes and lots of people still on ARMs. Interest rates that high would absolutely destroy the economy.

#2: The interest number in 1981 was high b/c of inflation. Volcker, the Fed Chairman, wanted to wring out inflation by slowing the growth of money. He basically raised interest rates until the stagflation stopped.

#3: Your S&P 500 and TSX lines are both based on nominal differences. For a fair comparison you should calculate net change plus inflation. Either way, it's still pretty clear that the drops last year are in line with the drops in the other to recessions.

#4: Inflation, what models do we have stating that this isn't going to sky-rocket?

Clearly, the 0% inflation is due to the fact that the gvmt "printed" money approximately equal to the amount of money that was simply lost via bankruptcies. Of course, the 0.1% number dates back to January, but the most recent number that we have is from February.

Since the end of February, Obama has agreed to a trillion dollars.

The US is likely going to run a $2,000,000,000,000 deficit this year. That's two Canadian GDPs. Much of that money is going to come from Quantitative Easing, i.e: simply inventing money. In fact, that's the goal, the government wants to create inflation. From Paul Krugman of the NYT:

...having some inflationary effect — is what the policy is all about

So we're going to have inflation. We have to, but you haven't seen it yet b/c the money is being invented right now.

What's more, Obama has promised more trillion dollar deficits. Without a dramatic increase in US production, these deficits are going to cause significant inflation.

#5: The numbers are still getting worse.
An average of 55 forecasters in the January 15 Wall Street Journal survey expect real GDP to eventually reach only -2.1%

January 15 predates the enstatement of the Obama administration. Obama has likely seen the most active 100 first days of any president ever. He has produced several plans that simply did not exist in any way on January 15. You need to get more recent data than this.

Industrial production appears to have bottomed in September 2008.
Industrial production in 2009 has been down for 4 months.

The numbers I'm reading are even lower: From February 2008, industrial production has declined by 11.2%.

The news is full of stories of massive lay-offs, but unemployment is only expected to rise to 8.9%
Unemployment numbers are currently at 8.1% (from 7.6% the previous month). And across all sectors:
In February, job losses were large and widespread across nearly all major industry sectors.

The US national debt is into record highs outside of WWII.

The US is operating a tremendous trade deficit and has been for 25+ years. That number will not turn around.

The only politically feasible way out of the mess is (sadly) the printing of money combined with real economic growth. Of course, China's not really happy about the part where the government prints away its debt (and Canadians should be pretty peeved as well).

But the US has to find a way to convert their dollars into real assets and frankly they have some of the most expensive assets in the world, so they're not doing really well in that category.

#6: Everyone is wondering how low the stock market will get, while trillions of dollars sit in cash on the sidelines waiting for the right time to jump back in.

Where does this data come from?

From what I can see, the banks and insurance companies are tragically under-capitalized (i.e.: lacking in cash). The banks don't want to mark their assets to real market values b/c they're complaining that there is a lack of liquidity in the market. The current US plan with the "private/public partnership" is founded on the concept that these assets would be under-valued if sold at current market prices b/c of a lack of competition and liquidity. So the US government is betting a 500 to 1,000 billion bucks and providing massive leverage to private investors in an attempt to heal the banks. And while this is happening you're claiming that many trillions of dollars are sitting around just waiting to be invested.

If these trillions are waiting to be invested, why does the US government have to cook up plans with 12:1 leverage?

@ED, I don't think that you've made a very good case for yourself with one chart, old data and zero hyperlinks. It's obvious that your data doesn't add up. It's also clear that you're missing something really key about the US economy.

If they do not reverse the trade deficit, the economy will collapse. It's very key that we understand the size of the deficit. The US has been on a 25-year credit card spending spree and they don't have an easy way to even start paying back the money without dramatically "tightening their belts".

Even then a trillion dollars represents $33,000 for every US citizen. That's one median income here in Kansas City. That's a lot of debt, it's not going to be easy to pay off.

I'm going to posit that we're actually under-estimating the breadth of this financial crisis but that we'll have to wait until 2010 for it to widely understood.

The "Time" has yet to come

Last week Time Magazine ran a special on the US financial crisis.  The first article is House of Cards: The Faces Behind Foreclosures. The article is centered on two Kansas City homeowners both facing foreclosures. I think that a few choice quotes from the article really speak to the root of this US financial crisis.  People simply don't get "it".

The crisis is fundamentally about wanting too much at once.  But the face it has consistently shown is one of over-leverage. Over-leveraged people, over-leveraged companies and an over-leveraged government (ostensibly all the same thing).  

This article tries to paint a picture of those getting those getting the short end of the stick, but all I see are over-leveraged people out of time.

A few choice quotes:

We have entered the one-strike-and-you're-out era. One lost job. One medical emergency. One bad risk or misjudgment of the heart...

We're geared to believe that risk begets reward and our tomorrows are brighter than our todays. One-strike-and-you're-out is a neck-snapping reversal for a culture accustomed to assuming that fate is a welcome friend...

People like Paula Stevens and Joseph Zachery weren't flipping houses or lying on their loan applications. They didn't pile up mountains of credit-card debt. They worked hard for what they had and shared their modest portions with others...Their bitterness stems from a feeling that they've held up their end of the social contract, but now the terms of the deal have been rewritten by malign forces....

Not everyone who has fallen behind on a mortgage is a loser complicit in the housing collapse.

That last line is from the closing paragraph. (emphasis mine) So the big question here is "are these two people 'losers'?"  Are these two really innocent bystanders in the housing collapse? I think the answer is no and the reason should be clear simply by analyzing the risks under-taken by both parties.

Joseph Zachery

Occupation: Firefighter from 1986 to recent. Ended at $60k / year.  

House:  $100k house, needed renovations

Worked a second job: Like most firefighters, he always had a second job...he started his own business, demolishing houses condemned by the city.

He used the equity from his house to buy demolition equipment, resulting in a mortage where "he owed nearly twice the original purchase price."

Crisis: he gets into an accident on the job.

He's shuttled around between hospitals, he gets full disability from the fire department (plus some electroshock treatment?) and he's now living on pension. He get $50k / year. It costs him $800 / month for medical, leaving him with $2,400 for everything else.  But get this, his mortgage is $1,600! On a 100k loan that doesn't make any sense.  But the problem here is that he actually owes 190k which he's paying off at 9%.

So why did he end up here? Was it the work accident? What did he do wrong? What are the risks he took?

1. Leveraging non-existing home equity:
   He didn't pull out just the home equity he "actually had" from his down payment or his mortgage payment.  He pulled out "speculative" equity that the bank extended based on the prevalent housing prices at the time.  He wasn't borrowing "his own" equity, he was borrowing equity that he hoped the house would have.
   Rather than taking out a business loan for his small business, he took out a loan against his home meaning that a crisis in his life would likely cause his to lose his home.
   
2. Leveraging his ability to fix the home:
   As stated, the home was a fixer-upper. He was banking on his ability to fix the house in order to prop up the value of the house.  Of course if he wasn't able to fix the house for some reason, it's value would bleed from lack of maintenance.
3. Leveraging his second job:
   He knew his pension income and he knew his medical payments, he knew the money he had to work with. Based on the fact that he's losing his home, it's pretty obvious that he wasn't going to be able to keep his home on just his pension.  He needed that second job to keep him going.
4. Under-insuring:
   This is a really big point.
   There is no indication that he has disability insurance on his second job.  Here he has a second job that he needs to keep in order to remain solvent. He's dependent on his own mobility and capacities. But he's not insured if he loses them.
   Yes he had disability from the fire department, but that was only for his fire department salary.  Where's his insurance for his other business?
   He buys 100k in equipment, but doesn't buy 100k+ in disability to cover his potentially catastrophic liabilities.

So if you look at the risks, he was basically gambling that this wouldn't happen.  He's unmarried, he's supporting his mother, his kid is in college, he's has no "backup support". 

He's a firefighter, he runs into burning buildings for a living and he's gambling his livelihood and his home on the fact that he won't be injured.

So he got injured and lost his home.

Paula Stevens

Occupation: Gateway tech support. No college degree, serial "entry-level" worker. In her best year she grossed 42k  

House:  3,000 sq ft, purchased in 1994. Re-financed 3 times, now owes 159k (@ 9%!)

Crisis: lost her job at Gateway and can't find one that pays as much.

So the obvious risks:

1. Living without a buffer:
   "It takes $14 per hour for me to meet my bills...That's what I was making at Gateway when I was laid off. But no one wants to pay that much..."
   If you're making $14 / hour, you need to be living off $11 or $12. How else are you going to save up cash for retirement or even just emergency expenses like job losses?
2. No professional development:
   She made it to 56 and somehow doesn't have the skills that she can market for $14. There's no sign that she took college night courses or professional training.
3. Where did the equity go? the savings?:
   She's 14 years into a mortgage and she owes 159k. The median home price in Kansas City during the last recent peaks was just under 190k.
   But she bought in 1994, close to the bottom, 14 years ago.  She most likely owes more on the house than its original asking price. And she's paying 9% on it to the tune of $1,400 / month.
   And where are her savings? It doesn't seem like she had retirement plans of she would have money right now.
4. Family Obligations: 
   ...but her oldest daughter, Maggie, 28, has a new baby and is enrolled in nursing school. "I just have to get her through that," Stevens explained

To put #4 in context.  I am currently living in the heart of Kansas City in a luxury apartment in a premium location. I have 1100 square feet, 2 bedrooms and 2 full baths. In-suite washer/dryer/dishwasher and a few other luxuries.  You could very comfortably have two people and child here.

I pay less than $1,400 after utilities.  That's less than her mortgage and this is a luxury suite. You can get an older apartment or a townhouse down the street for $600 to $900.  That would make it a lot easier to balance the bills.

So where does that leave Paula?  She's obviously over-extended, but all of the signs are pointing to her basically not having savings.  Her telling quote is this defeatist line: "That's how it works. You just keep starting over."  Rather than spending her life accumulating, she just kept starting over.

My personal opinion (because it's my blog): neither of these people should be in their homes.  They should both be renting, either really close to family or really close to public transit.

Disagree? I'd love to hear other thoughts.

Getting Defensive About Spending Habits » My Money Blog

Jonathan at My Money Blog, just posted up a little piece about the flack that "frugal financial bloggers" have received lately.

Here's the link: Getting Defensive About Spending Habits » My Money Blog

And of course, the reply:

OK two points:

1. As an aside, the culture of people who save tons of money are benefiting from those who don't. Don't get me wrong, we could probably double the number of Jonathans in the world and still not notice. But when you buy stock or bonds, or rent real estate, you are benefiting from someone else's sweat. I'm OK with that.

2. We hit this vein when we talked about "frugal tips" and "lifestyle" a while back. At some point you have have to "do something" with the money that you're earning, and there are two sides to this.

Some people don't "get" that people do all of this saving b/c they don't have their own savings goals. But by the same measure, many people in the PF blogosphere are absolute horrible role models for showing off their savings achievements. They save all kinds of "retirement money" but then never talk about what they actually want to do in retirement.

How the heck can you be sure that you're saving enough for retirement if you haven't even defined what retirement means to you? Why are people saving all of this money when they don't have anything they want to do with the money? Most PF bloggers don't even list their interests anywhere in their Bios, it's like the only thing they do is "work and save money".

The typical PF blogger makes almost zero posts about the things they do buy, they just keep throwing out money savings tips and net worth updates, but they don't give us pics of the new rental property or the x-mas toys they bought the kids or the new car they bought in cash(!).

To the outside world, the average young PF blogger just looks like a freak. Like some money-saving hole with 100k in the bank and no dreams outside of owning a home. They post up these stupid "Net Worth IQ" plug-ins, but they don't actually have top-level links to the posts where they talk about their "dreams for the money".

Now, the two sites that are linked to? Yeah, they're probably taking some undeserved flak. But check out the "About me" pages on both of them. Not a word about what they do with their money, not a word about their financial goals, or their dreams or what they want to during retirement or where they want to be in the next 10 years.

That's horrible! That stuff should be front and center! Many bloggers actually do have them "sitting around", but that's not enough, that's not real, it need to be front and center.

David and Trent (the bloggers being linked to) are evangelists for the Frugal Lifestyle (tm), but they're not doing anything that makes me want to be like them. They've put frugality front and center as if saving money were some type of self-fulfilling cult. Check out Trent's post here. He puts like 1000 words into explaining his investment portfolio but at no point does he mention what he's actually planning to do with the money! He's just templating some "savings plan" and saying "this is good, it works", while completely ignoring the purpose of the money he's saving.

I'm sure that his aims are valiant, but "regular joes" simply can't buy into this concept. These uber-savers simply don't seem human, they don't have any desire connections (material or philosophical). They're not "saving money to buy their XBox 360" or "saving their money to help save the whales", they're just "saving money". And average people don't buy that b/c it's not really rational, you don't save money "just because", you save money "for something".

When you're writing a blog about frugal living you have to put the goals front and center. People have to see that you have something other than just numbers on a ledger. They have to see you saving money AND spending money. Otherwise you just look like some kind of freak.

American economics and the USD

This whole post started with the following post on MyMoneyBlog.
Hedging Against The Dollar: Opening A Foreign Currency Bank Account vs. Buying A Currency ETF » My Money Blog

Look guys, I've mentioned this before and there are some great links already posted. The US economy has some serious issues and barring a massive war to claim vast booty and slaves, the purchasing power of the dollar will decline.

What does this mean? It means that means that more Chinese people will be able to afford the 10th generation iPod and less American people will be able to afford the same iPod. Peter Schiff pretty much nails it: as the value of the USD goes down and goods become relatively more expensive, other buyers with stronger currencies will swoop in and buy those goods.

Why is this happening? That's very complex, but here's a very simple explanation: You are fat and in debt. (same thing) You import more goods than you export and you've been doing it for years. You bring in 10 bananas each worth a dime but you're only bringing 90 cents to the deal. You then give out an IOU for the other 10 cents.

This basically means that you owe people lots of money (40% of the US national debt is foreign-held), but people aren't going to just take cash, b/c the value of that cash keeps dropping. They want stuff. They want oil, gold, food, they want services (skilled american workers), etc.

Cash is just trust. The US handed out a bunch of IOUs for cash, but they're not worth anything if nobody can cash them in for stuff. Of course, the world has been accumulating these IOUs, but they haven't been able to cash in b/c all of the American stuff is so expensive. But that's part and parcel with the whole import/export thing. For USD $100 I can buy 2 Russian programmers for 3 days or I can buy one american programmer for one hour. I can buy one bottle of "American pharmaceutical" or 10 bottles of "Indian Pharmaceutical" (both made from the same stuff).

Nobody wants to buy American stuff b/c it's too expensive; but everyone has these American IOUs that they want to cash in. Of course, everyone's in on the deal now and nobody thinks that these American IOUs are any good. So the solution is simple: the American economy will suffer until they can start paying off the debts and letting people cash in their IOUs. Again, money is just trust. It's pieces of paper or computer bytes with promises attached. The world does not trust the American economy, it does not trust that the American IOUs are worth anything. Until the dollar drops to the point where other countries can "get their money's worth" when they cash in the IOUs, then the dollar will continue to drop.

Jonathan: you said: As long as I can still buy what I need with the dollar, I don’t care if it trade 3:1 with the Euro.

But this is what you're missing, if the Euro goes 3:1 you won't be able to buy what you need with your dollars. Your salary will be the same, but the cost of the iPod will double. Your food will be more expensive as foreign markets start buying your produce with the money you owe them.

Yeah, yeah, this is happening right now on a small scale, we call it inflation. But you've just seen minor inflation, almost a side effect of the reserve banking system. Underneath all of this, the citizens of the US (whose very birth certificates back the money that is printed) are in debt to the world and they continue to live beyond their means. The US consumes more energy and gas than it can produce, while hinging its entire economy on those very resources. US labour is too expensive for all but the western european countries and manufactured goods are likewise too expensive. The only thing the US can "afford" to export is the food, but nobody else really needs the food at American prices.

When the whole thing falls, then you'll see real inflation, gas & food will suddenly cost twice as much and you won't be making any more money. Once it's fallen, you won't be able to "buy what you need with your dollars", your purchasing power will be drastically reduced. This is the cost of globalization, the world is catching up and the US is at the top of the ladder, so the only place left to go is down.

The US is the richest country in the world living a lifestyle on credit. Take all of these "credit card debt ruined my life" stories and scale that out to a whole country. That's what going to happen to the US. We're already seeing record foreclosures which means that people are being forced to sell their biggest asset/investment, in some cases their only real investment. People are skipping vacations to make extra money, they have their kids working at 16, then 15, then 13 & 12 just to keep up the pace. Elderly people are coming back to work greeter jobs at Wal-Mart and the workforce continues to churn harder and harder to keep up.

These are not the signs of prosperity, prosperous people work less not more. These are the signs of a people stretched too thin and ready to pop.

Frugal Tips from the Farm?

Found a neat link from Rather-be-shopping.Com, where he talks about his father's "neat" frugal ideas.

http://www.rather-be-shopping.com/blog/2007/08/31/dad-frugal-living/
http://www.rather-be-shopping.com/blog/2007/09/16/more-frugal-tips/

FTA:
-He puts a brick in the back of the toilet tank...
- He puts a five gallon bucket in the shower and when it gets filled he uses the water in the bucket to water his garden..
- He has a wood burning stove and the furnace is NEVER to be turned on...

Our place has a metal farm gate which we open and close each time we leave and return home. I timed it and it takes about 30 seconds to get out of the car, close or open the gate, then return to the car. Since I leave home on the average of twice each day that is four opens/closes of the gate each day. That is 120 seconds or 2 minutes per day. Two times 350 days per year (I am not home every day) is 700 minutes or 11.7 hours that my car idles needlessly. I believe it would require 9 gallons of gas to idle that long. At $3 per gallon that is $27 per year I save by turning the the engine off when opening and closing the gate

The reply:
Wow, I don't know what to say man, I'm just kind of baffled from reading both. But maybe I have a strange sense of Frugality with a very big bent on "my time is important".

Why don't you just install a remote opener and save yourself 11.7 hours/year + part of the overall energy? You're worried about saving $27/year, I'd be worried about saving 11.7 hours/year.

Brick in the toilet? That's basically just saying "Hey my toilet uses too much water" and all things considered the brick is pretty imprecise. Why not just install a toilet that's built to use less water / flush? Then you'll save water and you'll get a correct flush every time. In fact, why not just find/build a toilet with 2 flush buttons (cleverly named #1 and #2) so that you can get a variable amount of water / flush?

The wood burning stove is only "cheaper" if he can chop the wood himself (and his time is worth very little) and he has the place to put the wood. Depending on location, electric heating may be more efficient (such as in Manitoba, Canada, land of Hydroelectric dams). Again, if he wanted to be really efficient he would move over to a high-efficiency pellet stove which is currently getting the most heat/$. A buddy of mine is involved in the manufacture of these (pellet, gas and wood stoves) and he says that the pellet ones are efficient enough that greenhouses have actually started buying them to maintain heat.

As to the "bucket in the shower", well I can't argue with that for utility. However (and this is a personal beef), I really wish that this wasn't actually efficient. I'd really like to see a day where homes had more efficient use of their own water, such as an in-home filtration unit. Right now we basically have "in" pipes and "out" pipes, so water that could be reused isn't being reused. By the same measure we could be capturing rain run-off into our own filters (if we had them) and then we wouldn't need to use as much "public water".

I mean, if you have a roof and a lawn that are about the same size, then every time it rains, you could actually "water" twice. However, right now we're just sending that extra water into the storm sewers. We already have eaves, if we could pipe the stuff into a reservoir, then we can water the lawn two days later using the water we were just going to send away. If we wanted to get fancy, we could run the bath water through the filters and send part down the sewers and part into the reservoir, so now it costs less to water the plants and the lawn.

Don't get me wrong, you and your father are definitely "frugal", but it's worth looking at the old "penny-wise / pound-foolish" deal. You spent 250 words talking about conserving $27 in gas; but didn't seem to care that you were "wasting" nearly 12 hours of your time. At what point do we start talking about the efficiency wonders of driving a manual transmission and when do we finally cave in and say "I was sick of trying to save small money, so I just bought a Toyota Prius (or other Toyota Hybrid) and decided to save big money for the rest of the life of the car". These are all neat ways to "squeak out" a little more efficiency, but the tips are actually just capitalizing on the poorly-designed inefficiencies of the existing systems.

Why not just make a better system?

Book Review: Rich Dad, Poor Dad

OK, so it's an old one, originally printed in 1997, but it's been popping up on lots of my blogs so I figured I would give it a read. Truth is, I wish I had read it in 1997, when it was new and I was 17, then it would've been news to me.

The book itself is basically the explanation of his life with two "dads" (the second dad is actually his best friend's dad, but we get the point). One dad is "highly educated" but never rich; the other dad is your prototypical "dropped out of school, got wealthy" type of guy. He typefies the behaviour of both fathers into a "Rich" and a "Poor" mentality. The book is a basically a compare and contrast of the two philosophies centered around his six lessons that his Rich father taught him. The lessons are:

1. The Rich don't work for money


2. Why teach financial literacy?


3. Mind your own business


4. The history of taxes the power of corporations


5. The rich invent money


6. Work to learn - don't work for money

OK, so they don't all sound like lessons, a bunch of them actually sound like chapter titles (hello #4?) and they are. But hey, the history of taxes? The power of corporations? Man sounds pretty complex, pretty powerful... yeah... it's 10 pages long, maybe like 4000 words, it reads like a short essay without the footnotes or references.

Still we can do justice to the history of taxation in America in 10 pages, right? Not really, not when half of it has to be tied in to your vision of the world. And that's the fundamental failing of this book, it's basically 200 padded pages of pump you up, go out and learn. He's basically all about eschewing the establishment and focusing your learning on how to make money. He's very focused on stating how the "old ways" of school, work (house, car, kids) and retire are all gone, without really mentioning that they were never there in the first place.

He talks about how schools don't teach what it takes for people to be independently wealthy as if schools actually had that purpose in mind. We don't build schools to teach the leaders of tomorrow, it's not really a secret, we run schools to build more efficient peons, but hey one visit to my high school would've made that evident. My family had dinner table discussions about this stuff in high school. The smart kids make it through despite the system not because of the system, we knew that, I knew that, I still went to University. Then again, we also talked about the general death of pensions and the "pointlessness" of retirement (see Die Broke). Yeah, so maybe he's right, the smartest kids learn stuff at home as well as at school, but then, my parents aren't Rich either.

Long story short (not that the book is very long), Kiyosaki has some potentially novel ideas. There are tons of people who have never thought in the ways that Kiyosaki is espousing. So I guess that's good for them, it's just terribly unfortunate that he's not really a good writer. His book is like fragments thrown together where the same stories are repeated and the same points belaboured. It's like a series of bad essays with no supporting documents and no footnotes and the same point to all of them: become more financially savvy and you will become "Rich" instead of "Poor". But he doesn't bother with history, he just gives you the short "Kiyosaki"-esque version, he mentions the gold standard in passing and never follows up. He talks about his Cashflow game in basically every chapter but doesn't bother to even provide an Appendix with details or rules of the game. Some of paragraphs read like rewrites of paragraphs from other sections (they probably were), he just repeats himself so much.

And maybe that's my big issue with the whole book. Kiyosaki is not trying to provide you with "information" so much as "inspiration". He wants you to read his 200 hundred pages and subscribe to his philosophy. Some call this their PF bible, but to me it is to personal finance what Rocky is to boxing training; it's all sizzle, no steak. Of course, great steak needs some sizzle, just like great boxers need heart, but reading this book won't make you rich, it'll just make you want to be rich.

If you want to actually be rich, then look elsewhere, he simply doesn't provide any more details: pay yourself first, make your money work for you, hire people smarter than you, blah, blah, blah. He doesn't list a book on hiring skilled people; or point you to specific books on where to start investing and where to finish investing; or send you to guides on being frugal; he doesn't give you the top 10 wealth ways of ordinary people. All of this important, actual information, is left as an exercise to the reader. He just wants you to agree that he is right about wealthy people. He simply doesn't provide any real direction on any of these things, he's not interested in teaching PF 101 he just wants you to agree that he's right and then he wants you go out and teach yourself.

Yes Mr. Kiyosaki, you are correct. There it's done, now go read something with information like Tom Hopkins: "How to Master the Art of Selling" or Stephen Covey's 7 (or 8) habits.

PS: If you want to know a lot more about the Gold Standard, look here, and check out the first two videos. They have propoganda issues, but it's a good run at understanding money and the banks and the actual history behind the whole deal.

Paying down the mortgage early?

OK, there have been a couple of posts on the blogs that I read discussing the benefits of an early mortgage paydown vs. an alternate investment.

And me, well I'm kind of a chump, so I ran the numbers quickly. For reference, this is a 200k fixed mortgage at 6% over 25 years. Here's what the monthly breakdown looks like for the standard mortgage. That Purple Stuff is the money the bank is taking for interest which, as you may know, is mostly taken first. And the Light Tan stuff is what you're actually paying down. For the last two, I've taken an equal size payment (~$4600), off the principal at different points in time. So that Blue Strip on the last two is the amount of interest that you save each month as time goes on.


When you pay down interest early on, things change like so:


Paying things down late gives you something like this:

Now, the original posters were talking about applying extra money against the principal and calculating the interest saved as a percentage of that principal. So if I paid down 10k on a 6% mortgage with 10 years left, I'd basically be saving $600/year or $6000 in interest.

However, the graphs would seem to imply that something terribly different is going on here, I mean, you can only save chunks of the purple stuff and if you're paying down the mortgage later rather than sooner, there's a lot less purple stuff to save on.

Imagine it this way: say you took out 100k @ 10% for 10 years and made your regular monthly payments ($1321) for a full year. Then, magically at the end of the year you win the lottery and pay down the house in one swoop, how much would you pay? A quick run to my information source, indicates that you still owe $93.8k, you were going to pay $58.5k in interest on that mortgage, but you paid $9.7k in interest in the first year alone, the bank took 16.6% of the money you owed them in the first year. In fact, in the next year, they would've taken $9.1k which was 15.5% of what you owed them, or 18.6% of what was left. By the end of two years, they have 32% of what we owed them, that's 32% in only 20% of the time.

So let's back off and go to our equation. Both posters are saying: if I drop 10k on a 10% mortgage I'll get a return of 10% times the number of years, and I'm saying that the calculations are flawed. So we'll use the 100k @ 10% for 10 years example to make life easy, if I put down 10k, it will "earn" 1k/year. Let's say that I get to my final year and decide to put down the 10k. With 12 months to go, we've paid 57.7k out of 58.5k in interest and we owe 15k on the place.

Wait, hold on right there! we're supposed to save 1k in interest, but we don't even have that much owing in interest. If I put down my 10k, I'll still owe 5k on the house, but I won't have saved 1k in interest, there's not even 1k in interest to save! What if I do it the previous year? At this point I owe 28.6k on the house and I have 3k left in interest to pay. So now the model is telling me that I can save 2k (or 2/3 or the remaining interest) by paying 10k of the 28.6k principal that I still owe (or more than 1/3)?

If the numbers seem weird, it's b/c they are, I mean, they're clearly wrong. You're not going to save 66% of the interest over 2 years by paying down 35% of the principal, that's pretty clear.

What's going on here is equally clear, if you're at the end of the 10% mortgage, you're not actually paying 10%. In the last 2 years of the 100/10/10 example, you will normally pay 31k into the mortgage and only 2.3k will go towards interest, i.e.: you only pay 2.3k/28.6k or about 7.5% interest. If you're in the last year, that number drops to like 5.5%. Here's the "effective interest" chart:


At the start of year 2, the 100/10/10 mortgage owes 93.8k, but will only pay 9.1k, which is actually just under 10%. So where did the original posters go wrong? Well, you can't "save" 10% interest if you're only paying 7.5%. The other problem is that the 6% is relatively small, so it's easy to gloss over the math. In the 200k @ 6% for 25 examples (the first graphs), you're actually paying between 5.15 & 5.95% "effective interest" for the first 22 years, so you can basically just gloss over the number (even if it's wrong) b/c you're still within a percentage point. If interest rates go to 10%, then suddenly you're losing whole percentage points and the bad math becomes evident.

So after a few hours of number crunching, what do I think? Well, the basic premise of both posts is actually still good: where am I going to get better returns? And the simple answer is that all things equal you'll get better returns from whatever is paying/charging the higher "effective interest rates". (where the "effective" part is key)

However, right now, things are pretty muddled b/c today's interest rates are yesterday's mortgage rates. This is complicated by tax law. You see, in Canada, we get tax breaks for RRSP investments and in the US you get tax breaks for mortgage interest. So in Canada if you have room to contribute to your RRSP (they do have caps), then you actually get an immediate 20-40% return on putting the money in the RRSP. In the States you'll only get a tax break for a certain period at the beginning of the mortgage, and then the interest will become too small. All in, the numbers could really "go either way" so there's no clear winner.

Personally, I'd rather have the money in something liquid and diversify. "Cash is King" and your home isn't bringing in any cash (unless you're renting rooms). Give the cash to someone who can make you more cash and if you're still itching to pay down the home then use the income from that cash to help with payments. At least this way you're making and spending money rather than just spending it. That way you can redirect the cash flow if you need to.

Slimming down (part 1)

So I've lived the typical North American lifestyle for just a little too long. Or rather, I was living. For those outside the phenomenon, that means that I was overweight and in debt.

The debt thing was annoying... but at least my net worth was definitely in the plus. My weight however was really over the top.

When I was 18 I weighed in at slender 140 lbs (63.5kg), 5'8" (1.73m). Now at the time I was really thin, so I've pretty much absolved myself of ever getting back to that weight. But since my slender high school days, I had ballooned up to 205 lbs (93kg) right around my 26th birthday! The electronic scale had me at about 30% body fat and, well heck here's a pic of me.



Now to be honest, balloon may be the incorrect word. My growth was more like incremental. I could still run long distances and I still had some muscle mass: solid abs, rock hard legs it was all just wrapped in a healthy layer of fat. The fat part just kind of snuck up on me over time.

Of course, this is a success story, I dropped a bunch of the weight right down 175 (80 kg). Obviously, I'm on the successful end of the journey, but I'm definitely not done. My body fat rates at 24% and I'd really like to be at 12% long term. (A little math reveals that 30% of 205 = 61.5 lbs of fat and 24% of 175 = 42 lbs of fat, which means that I went from 143 to 133 of "lean" mass, it also means that my target of 15% puts me at about 160lbs).



As it turns out, 160 was my original goal, so I'm not quite done yet. But I just recently moved cities and this whole weight loss thing involves some planning. It's not really tough to maintain, but losing takes some planning.

Here's me now, post laser-eye surgery and accompanied by my wonderful fiance.




So yeah, down to the whole point. I hit a couple of blogs today that talked about people losing weight and I came to two sober conclusions.

1. I've been talking for months about how loss of weight and recovering from debt are very similar (hence the generic slimming down title). Overweight and in debt seem to carry many of the same mental characteristics and the anecdotal evidence seems to support this.
2. Lots of people know very little about weight loss. This is why crap like South Beach and Zone and Atkins all become so popular. They basically prey on people not knowing enough to see that they could do this stuff without silly diets.

Point #1 needs exploration another time, but Point #2 needs some attention.

So here it is, the point of my article: How I lost my weight for free with minimal emotional stress and no following of some silly "diet".

So first, here's the most important link: The Hacker's Diet. This was my secret. It was assembled by John Walker after he'd made his millions and lost 90 lbs in one year. He's publishing this book for free and he's letting people download it for free! I want to say that again, the guy who wrote this book has NO vested interest in making money off it. He's a millionaire programmer, he's offering the book for free, so that should all tell you something, he's not lying to you!

Of course, he's a programmer and the book is written for people with an engineering mindset, so it can be tough to read. So thusly, I'm embarking on a big journey, I'm going to write this for everyone else :)

So check in soon... this should be good.

An opening on Finance and Investing

In reply to:
http://www.mymoneyblog.com/archives/2007/05/why-arent-money-managers-paid-purely-on-performance.html

Jonathan says:

"but I don't see any evidence that investing skill has the same permanence as
poker skill"

OK, clearly there are two issues at play here.

1. By pure stats, a certain percentage of people will end up on either end of the win/loss scale in a zero-sum game. Now, winning poker players are playing a game of "incomplete information" (not unlike the markets). These players are winning b/c they are making the "correct call" more often than the opponent(s). Now it could be argued that the "correct calls" are actually dictated by chance. I mean, somebody's got to make a decision and if you give enough people the opportunity to make the decision *someone* will make more correct decisions. Johnathan is saying that poker and investing are different b/c poker players demonstrate skill at making the right calls and investors don't. But he's not really backing that up.
2. "Permanence", Johnathan is trying to undermine the "zero-sum game theory" by inserting the term *permanence*. And this is where he wins (kind of). You see, "good poker strategy" is more or less static. So poker players can evolve their strategy by learning the basics (don't fold pocket Aces pre-flop) and then tweaking the details (tighter/looser, more or less aggressive, calling/reading specific players). But markets are not this simple, the "rules" and strategies are constantly evolving. Trying to find permanence in investing skill is inherently complex b/c "investment" is inherently complex. I mean, "investing" in/of itself is really a meta-game of games and the investment "game" spans lifetimes.

Point is poker and investment are variants on the same game. So if there can be "poker skill", there must be "investing skill". Just b/c the investment game has more layers doesn't mean that it's suddenly lucky, it just means that it's a lot harder to learn.

To understand permanence, take a look at the very vein of discussion in the link above. Lots of talk of mutual funds and how indexing is better. This is based on the "Random Walk Down Wall Street" concept, which basically found that the distribution of indexes vs mutual funds was the same, except that mutual funds performed worse by about a factor of their management fees. So if you just wanted to make money on stock (equity) trading, then you might as well index b/c the average money manager is costing you 1%.

Of course, this is only true b/c of the ubiquity of mutual funds. There was a time when investing in a mutual fund was actually an edge not a liability, but not today. Today, the investors on Johnathan's board are trying to find a 1-2% edge by indexing instead of using mutual funds. But if 60% of the market starts indexing, then this strategy stops working.

And so that's kind of my point, you can't have permanence in the markets, because the markets are not permanent. Yesterday's great move is just tomorrow's status quo.