Many of our friends know that I'm the scrooge of the holidays. I don't enjoy giving gifts (I prefer simply gifting cash) and I don't particularly enjoy receiving them. It probably makes me a horrible person. The inefficiency of gift giving, particularly around Christmas, irritates me.
Apparently at least one other person on the planet shares my feelings. He's a professor of economics at University of Minnesota and has written a book and a journal article in the most popular economics journal on the subject.
His thoughts mirror my own: People tend to understand their preferences better than everyone else. The result: huge inefficiency. People value gifts they receive for much less than the cash value of the gifts (not to mention the additional anguish on the part of the purchaser, which isn't even accounted for, or the anguish of the receiver for trying to graciously receive a bad gift). This loss is what Joel Waldfogel calls the deadweight loss of Christmas. He implemented a survey in a class that he taught, and estimated a deadweight loss of 10-33%. That is, if a person in the class received a $100 item, they would have preferred simply to have received $67-90 cash instead of the item. For me, I think the average deadweight loss is closer to 50%. Why? Because I have everything that I need or want. Anything else is just clutter.
At this point, I will point out that thoughtful gifts, such as those that are hand-made or whatever, are great. I have no qualms with this. I think there is value here. But I think this is the exception in our culture, not the norm.
My beef is the American way. Most of us are wealthy. And by wealthy, I mean we can provide for the necessities of life for our families and can easily satisfy many of our wants. Most of us have savings. The accumulation of savings in and of itself is proof that an individual prefers consumption tomorrow (say groceries, rent, a cruise to Hawaii) to consumption today (say a sweater, video game, whatever).
So the approach many of us take is to ask our friends/family what gift they want. If we're lucky, they tell us. This reduces the deadweight loss. However, what's the point of gift giving if it is a mechanical exchange of goods? If I tell my friend Bob that I want product XYZ and he tells me that he wants product ABC, why do we go through this silliness of exchanging gifts in the first place? Why not just declare holidays a time of guilt-free spending on one's self, since this is essentially the scenario described in the previous sentence? I feel that much of our gift giving is precisely the above scenario.
But the fact that people have savings means that they'd prefer not to partake in this guilt-free spending. Because they have already chosen to defer consumption today to some future date.
So why exchange gifts?
I do acknowledge, however, that gift giving (in moderation) to kids makes sense. I actually believe that parents can understand their young children's preferences pretty darn well. However, I think that giving cash to kids and letting them go buck wild at Walmart is better. I think letting kids go buck wild with cash in a thrift shop (or Amazon) is even better.
Books are tough gifts, because a book recommendation and libraries are just as effective as gifting a book. DVDs are tough gifts due to the same logic: a movie recommendation and a $1 redbox rental (or library rental) is just as effective as gifting a DVD.
So what do I want for Christmas? A personally tailored list of recommendations on books, products, DVDs, travel destinations, or family activities. That would be a phenomenal gift! Perhaps this is the gift that I will give this year!
To all of our friends and family out there: I highly recommend a trip to Columbus, OH. It's a beautiful vacation destination!
- The Scrooge
* Update a few days later *
Let me clarify things. To clarify that I'm not a horrible cash-obsessed monger, let me append my comments. I would much prefer the equivalent cash spent on bad gifts be given to charity in lieu of the bad gift. With so much need in the world, why waste precious resources on the proverbial fruitcake or ugly sweater?
* Update 2 *
Another observation is this: It's tacky in our society to gift others the option of current or future consumption (i.e. cash) or to simply desire more future consumption for one's self (i.e. ask for cash). The prospect that an individual is satiated...that is she has everything that she needs/wants....is mind-boggling and unacceptable.
Friday, December 14, 2012
Tuesday, December 4, 2012
Tuesday, November 27, 2012
Monday, November 19, 2012
Sunday, November 18, 2012
Tuesday, November 13, 2012
Update of Our Phone Strategy (Version 2012)
Like most Americans, Tiffany and I blindly paid $60/month or so for our cell phones when we were newlyweds. Then my good buddy Spencer Grange told me about prepaid phones. He had access to free phones on campus through his campus office, so when his wife needed to get a hold of him and he wasn't at his desk, she would call the cell phone. Then he would walk to the office phone and call. So he used the phone as a free pager. I thought it was brilliant. So we switched to prepaid almost immediately.
That was 6 years ago. Since then, Tiff and I have paid $50/year each for our minimal use cell phones. So we've paid $600 over the past 6 years total. I'm venturing to guess that most families pay on the order of $100/month (easily) on cell phones. 6 years of cell phone bills at that rate amounts to $7200.
We've supplemented with cheap VOIP, which is basically free. We started with Viatalk. Then we moved to MagicJack. Then we almost went to Ooma, but we did Google Voice instead.
I focus so much personally on our recurring expenses because these are the expenses that can kill us. They deplete you of your resources without you consciously deciding to purchase something. That's why they are so dangerous. They're also dangerous because poor choices are amplified. If I make a bad purchase on a pair of jeans, I'm out $20 once. If I make a bad decision on a cell phone plan (or car insurance, or life insurance, or TV cable plan, etc), and fail to realize my failure over the course of 10 years, I'm out > $10k.
So a lot has changed with technology since I made the switch to prepaid. In summary, the prepaid argument has never been stronger nor more functional. Technology, particularly high speed internet, wifi, google voice, and smart phones, make paying for cell phones and data plans completely unnecessary for most of us.
Google voice is a new innovation since I made the switch to prepaid. Before, I used to be the annoying person who would pick up my cell phone and say "let me call you back from my landline." Now, when my google voice number is called and I'm home, I pick up my VOIP line directly. Perfectly seamless. Not to mention the voicemail capabilities and integration with gmail. I love it.
Setting up this VOIP stuff in years past was a little technical and challenging. Now it has never been easier. Log in with your google credentials and your'e good to go.
Here's the diagram of how we use google voice's service:
Inbound calls are routed to whatever phones you have linked up. The OBI device that I refer to is this one: http://www.amazon.com/OBi100-Telephone-Adapter-Service-Bridge/dp/B004LO098O/. We love it. I have google voice routed to my cell phone too, and my work phone.
The thing is, smartphones + wifi + (GrooveIP for android or Talkatone for iphones) = free wifi calling (inbound and outbound). It takes all of 2 minutes to set this up. OBI is just as intuitive.
The one slight annoyance with our setup is that the outbound caller ID for cell phones is different from our google voice numbers. With the exception of that slight nuisance, the system works flawlessly.
In this setup, smartphones can save you cash by facilitating this wifi calling. Google released their new state of the art unlocked, no contract Nexus 4 today for $300: http://www.google.com/nexus/4/.
Other recent developments. Need data on the road? Trick question. Of course you don't need data on the road you compulsive email checker! But if you wanted data on the road, supplement the above strategy by turning your car (or pocket) into a wifi hotspot with the FreedomPop Photon: http://www.freedompop.com/. It offers 500MB data/month for free with the hopes of upselling you later. Oh yeah, the device requires a $90 deposit refundable if you return the device within 12 months of purchase. Check the coverage map before you buy.
Calling through gmail (which is what OBI and the smart phone apps technically do) / Google voice is currently free. Surely this will end in the near future and be replaced by a trivial fractional penny per minute calling rate. This doesn't change the goodness of the strategy at all.
So that's all I've got. Technology makes cell phone plans obsolete, though you have to carefully tread through the marketing lie to figure out that nugget of truth. The behavioral adjustment required to spend less is the simple act of calling while at home or in wifi hotspots. If copious amounts of communication is needed outside of home / wifi hotspots, then this strategy would of course not make any sense.
One last thing: I've had this discussion with dozens of people before. And the response is usually something like this "but I love my smart phone, so I must keep my data plan." What brainwashed individuals like this don't realize is that they love the functionality of their smart phones. I agree! I love my smart phone functionality. Compulsively checking email, blogs, news, etc. I get that. What they don't realize is that 100% of these activities can be accomplished just fine within a wifi hotspot (i.e. work, home, school, church, etc) without a data plan. What they also don't realize is that smartphones are pretty cool even without the internet. I can still pull up the contacts, send emails (which won't sync until I get back to wifi), take pictures, play games if I were into that sort of thing, etc.
So that's it. 95% of the benefit of a traditional cell phone plan for less than 10% the cost of a full blown plan sounds like a winning proposition to me.
And that's in part how our family of 6 saves > $10k/year (which will fund our annual Roth IRA contributions) while making a modest grad school stipend. And that's in part how we intend to be financially independent within the next 12-15 years. The other part, which of course is way more important, is avoiding rampant consumerism by living differently than 95% of Americans, but that's a topic handled quite nicely by other blogs such as www.mrmoneymustache.com (be forewarned of occasional profanity).
That was 6 years ago. Since then, Tiff and I have paid $50/year each for our minimal use cell phones. So we've paid $600 over the past 6 years total. I'm venturing to guess that most families pay on the order of $100/month (easily) on cell phones. 6 years of cell phone bills at that rate amounts to $7200.
We've supplemented with cheap VOIP, which is basically free. We started with Viatalk. Then we moved to MagicJack. Then we almost went to Ooma, but we did Google Voice instead.
I focus so much personally on our recurring expenses because these are the expenses that can kill us. They deplete you of your resources without you consciously deciding to purchase something. That's why they are so dangerous. They're also dangerous because poor choices are amplified. If I make a bad purchase on a pair of jeans, I'm out $20 once. If I make a bad decision on a cell phone plan (or car insurance, or life insurance, or TV cable plan, etc), and fail to realize my failure over the course of 10 years, I'm out > $10k.
So a lot has changed with technology since I made the switch to prepaid. In summary, the prepaid argument has never been stronger nor more functional. Technology, particularly high speed internet, wifi, google voice, and smart phones, make paying for cell phones and data plans completely unnecessary for most of us.
Google voice is a new innovation since I made the switch to prepaid. Before, I used to be the annoying person who would pick up my cell phone and say "let me call you back from my landline." Now, when my google voice number is called and I'm home, I pick up my VOIP line directly. Perfectly seamless. Not to mention the voicemail capabilities and integration with gmail. I love it.
Setting up this VOIP stuff in years past was a little technical and challenging. Now it has never been easier. Log in with your google credentials and your'e good to go.
Here's the diagram of how we use google voice's service:
Inbound calls are routed to whatever phones you have linked up. The OBI device that I refer to is this one: http://www.amazon.com/OBi100-Telephone-Adapter-Service-Bridge/dp/B004LO098O/. We love it. I have google voice routed to my cell phone too, and my work phone.
The thing is, smartphones + wifi + (GrooveIP for android or Talkatone for iphones) = free wifi calling (inbound and outbound). It takes all of 2 minutes to set this up. OBI is just as intuitive.
The one slight annoyance with our setup is that the outbound caller ID for cell phones is different from our google voice numbers. With the exception of that slight nuisance, the system works flawlessly.
In this setup, smartphones can save you cash by facilitating this wifi calling. Google released their new state of the art unlocked, no contract Nexus 4 today for $300: http://www.google.com/nexus/4/.
Other recent developments. Need data on the road? Trick question. Of course you don't need data on the road you compulsive email checker! But if you wanted data on the road, supplement the above strategy by turning your car (or pocket) into a wifi hotspot with the FreedomPop Photon: http://www.freedompop.com/. It offers 500MB data/month for free with the hopes of upselling you later. Oh yeah, the device requires a $90 deposit refundable if you return the device within 12 months of purchase. Check the coverage map before you buy.
Calling through gmail (which is what OBI and the smart phone apps technically do) / Google voice is currently free. Surely this will end in the near future and be replaced by a trivial fractional penny per minute calling rate. This doesn't change the goodness of the strategy at all.
So that's all I've got. Technology makes cell phone plans obsolete, though you have to carefully tread through the marketing lie to figure out that nugget of truth. The behavioral adjustment required to spend less is the simple act of calling while at home or in wifi hotspots. If copious amounts of communication is needed outside of home / wifi hotspots, then this strategy would of course not make any sense.
One last thing: I've had this discussion with dozens of people before. And the response is usually something like this "but I love my smart phone, so I must keep my data plan." What brainwashed individuals like this don't realize is that they love the functionality of their smart phones. I agree! I love my smart phone functionality. Compulsively checking email, blogs, news, etc. I get that. What they don't realize is that 100% of these activities can be accomplished just fine within a wifi hotspot (i.e. work, home, school, church, etc) without a data plan. What they also don't realize is that smartphones are pretty cool even without the internet. I can still pull up the contacts, send emails (which won't sync until I get back to wifi), take pictures, play games if I were into that sort of thing, etc.
So that's it. 95% of the benefit of a traditional cell phone plan for less than 10% the cost of a full blown plan sounds like a winning proposition to me.
And that's in part how our family of 6 saves > $10k/year (which will fund our annual Roth IRA contributions) while making a modest grad school stipend. And that's in part how we intend to be financially independent within the next 12-15 years. The other part, which of course is way more important, is avoiding rampant consumerism by living differently than 95% of Americans, but that's a topic handled quite nicely by other blogs such as www.mrmoneymustache.com (be forewarned of occasional profanity).
Monday, November 12, 2012
A new blog I like
So I like blogs.
I came across a new one a few months back. The dude is an english major from Duke university. He realized midway through his undergraduate degree that his student loans were out of control, so he decided to live in a van to save cash. If I remember correctly, he did so for over a year and managed to graduate school with few or no loans. Here's his article describing it: http://www.salon.com/2009/12/07/living_in_a_van/
He's a really talented writer. In the past few years he has had some interesting jobs as he has come to discover himself. He spent some time in Alaska...not sure if he helped out at a fishery or what, but he met some interesting people up there and developed an interest in the outdoors.
His latest venture: Walking 1700 miles along the keystone pipeline route to document the area before construction. He's a tree hugger without much of a purpose as he embarks on this walk. He's 60 days into his walk, and as he admits, was hilariously under prepared for the task. For example, he started out his journey without a tent; just a tarp. He didn't plan for snow even though he started so late in the season, etc. He almost got charged by a moose the other day. That was fun to read about.
Here's the link to his blog for those who think they might enjoy it. I get a chuckle when reading updates of ill-fated plights. http://www.kenilgunas.com/
I came across a new one a few months back. The dude is an english major from Duke university. He realized midway through his undergraduate degree that his student loans were out of control, so he decided to live in a van to save cash. If I remember correctly, he did so for over a year and managed to graduate school with few or no loans. Here's his article describing it: http://www.salon.com/2009/12/07/living_in_a_van/
He's a really talented writer. In the past few years he has had some interesting jobs as he has come to discover himself. He spent some time in Alaska...not sure if he helped out at a fishery or what, but he met some interesting people up there and developed an interest in the outdoors.
His latest venture: Walking 1700 miles along the keystone pipeline route to document the area before construction. He's a tree hugger without much of a purpose as he embarks on this walk. He's 60 days into his walk, and as he admits, was hilariously under prepared for the task. For example, he started out his journey without a tent; just a tarp. He didn't plan for snow even though he started so late in the season, etc. He almost got charged by a moose the other day. That was fun to read about.
Here's the link to his blog for those who think they might enjoy it. I get a chuckle when reading updates of ill-fated plights. http://www.kenilgunas.com/
Wednesday, November 7, 2012
$25 free per AMEX through Costco/Facebook/Amex thing
If you register your Amex card through your facebook account and buy a $100 gift card from Costco.com, you'll get a $25 credit within days.
Not a bad return on a minute or two of your time. We just got our gift card in the mail and the credit on our statement yesterday.
http://www.mymoneyblog.com/american-express-facebook-promotions.html
Not a bad return on a minute or two of your time. We just got our gift card in the mail and the credit on our statement yesterday.
http://www.mymoneyblog.com/american-express-facebook-promotions.html
Sunday, November 4, 2012
Thursday, October 25, 2012
Wednesday, October 24, 2012
Tuesday, October 16, 2012
Sunday, October 14, 2012
Saturday, October 13, 2012
Wednesday, October 10, 2012
Saturday, October 6, 2012
Wednesday, October 3, 2012
Monday, September 24, 2012
Friday, September 21, 2012
Sunday, September 16, 2012
Friday, September 14, 2012
Wednesday, September 12, 2012
Tuesday, September 4, 2012
Friday, August 24, 2012
Tuesday, August 7, 2012
Saturday, August 4, 2012
Wednesday, August 1, 2012
Monday, July 30, 2012
Sunday, July 22, 2012
Saturday, July 21, 2012
Tuesday, June 26, 2012
Sunday, June 24, 2012
Saturday, June 23, 2012
Saturday, June 16, 2012
Monday, June 4, 2012
Sunday, June 3, 2012
Friday, May 25, 2012
Monday, May 14, 2012
Saturday, May 5, 2012
Friday, May 4, 2012
Wednesday, May 2, 2012
The case (for and) against frugality
Here is a mathematical proof for frugality:
- Diminishing marginal utility of wealth. Simply, each additional dollar you spend provides you less value than the previous dollar you spent.
- Compound interest. Deferring gratification now will enable you to exploit compound interest and enjoy more consumption in the future. I like to think of 4% as a reasonable approximation of what the real (inflation adjusted) return on risky investments ought to be over my lifetime.
- Progressivity of the US tax system. Progressive is a fancy term which indicates that the more income you make, the higher RATE at which you are taxed on each incremental dollar. Because we have a progressive tax system in the US, different chunks of income are taxed at different rates. For example, in the US, for a married filing jointly return in 2012:
- For simplicity, a rough approximation of taxable income = gross income - (10.6k + 3.7k*#of_people_in_household) for a family filing jointly).
- The first 17k in (taxable) income is taxed at 10%
- From 17k-71k in (taxable) income is taxed at 15%
- From 71k-142k in (taxable) income is taxed at 28%
- ...
- Over 388k in (taxable) income is taxed at 35%
- http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2012-Tax-Year.htm
- The US government hopes that you and I don't understand this stuff. They think we are too stupid to understand the complexities of the US tax code and the association between gross income and net income. For example, society would break down if all people realized and exploited this little loophole (with the assumption that everyone could live happily on 40k): http://gregmankiw.blogspot.com/2009/11/poverty-trap.html. A family of 4 can make 0 dollars/year or 40k/year and be just as well off after accounting for government transfers, and bring home a net income of 40k/year. Incentives to work are completely destroyed if a family of 4 learns to live well on 40k/year.
- Democrats (and some republicans) will have you believe that you can raise marginal tax rates to 70% without significantly affecting behavior (http://en.wikipedia.org/wiki/Laffer_curve#Research_on_revenue_maximising_tax_rate). If the world were full of more people like me, this clearly wouldn't be the case. But perhaps democrats are right and very few people think about this stuff...I certainly don't blame them. It's somewhat convoluted.
- Generally, people prefer leisure (not being at work) to work. There is a certain amount of intrinsic value to working. I agree with that. But I think that most people would stop going to work if they were not paid for it.
- If this assumption is invalid, then the argument for frugality breaks down.
I bring up taxes here because they distort incentives. In economics, we say that leisure, or sitting at home and watching TV is costly because we forgo wages in opportunity cost. How taxes effect us is that it lowers our net wages, and thus lowers our opportunity cost. Raise taxes high enough, and leisure becomes pretty darn cheap.
The only compelling argument that I have ever encountered in opposition to a frugal lifestyle is found here: http://dmarron.com/2012/04/30/investing-in-memories-ocelot-edition/ and http://www.theatlantic.com/business/archive/2012/04/memory-as-a-consumer-durable/256327/. This is consistent with the research which shows that happiness is not correlated with accumulation of shiny trinkets, but rather using money to create good and lasting memories.
The only compelling argument that I have ever encountered in opposition to a frugal lifestyle is found here: http://dmarron.com/2012/04/30/investing-in-memories-ocelot-edition/ and http://www.theatlantic.com/business/archive/2012/04/memory-as-a-consumer-durable/256327/. This is consistent with the research which shows that happiness is not correlated with accumulation of shiny trinkets, but rather using money to create good and lasting memories.
The authors describe memories as an investment that pays dividends over the course of your life. The earlier you invest in these memories, the longer you can reap the benefits of dividends.
If I defer consumption (say a cruise to Hawaii) today, and let the magic of compound interest do it's thing, I should be able to consume more in the future (say two cruises to Hawaii). Using the "rule of 72", and assuming a real return of 4%/year, deferring my trip to Hawaii today would grow to 2 trips to Hawaii in 72/4 = 18 years. However, I will have missed out on 18 years of memory dividends along the way.
You can use the same analysis to evaluate whether going into debt to justify a vacation is warranted. If your real interest rate on an outstanding loan is 8% (say on outstanding student loans, for example), and you plan a cruise to Hawaii, you will have to justify that 1 trip to Hawaii today is better than 2 trips to Hawaii in 72/8=9 years.
So there you go. A mathematical proof for a frugal lifestyle followed by the most valid argument that I can think of against it. Personal takeaway: take the best of both worlds....live frugally and find ways of producing fun/impactful memories in an economical manner, like those described here: http://www.mrmoneymustache.com/2012/04/06/get-rich-with-nature/. Some of my most vivid and lasting memories from my childhood were trouncing around the Sierra Nevadas with $50 of trail mix in my backpack at a cost of $100/week.
Sunday, April 29, 2012
Tuesday, April 24, 2012
Sunday, April 22, 2012
Blogs Brian Likes
I love blogs. I love RSS readers, such as google reader. It's like subscribing to my personalized daily newspaper compiled from only my favorite authors. Over the past few days, I have been asked by a few people which blogs I like. Here they are (in no particular order), with the associated RSS address that you would input into an RSS reader.
- Dilbert.com http://dilbert.com/blog/entry.feed/
- This isn't an RSS of cartoons. It's an RSS of the author of Dilbert, Scott Adams. I think he's brilliantly insightful on how we ought to be leveraging technology to better improve our lives. He is often very sarcastic and pretty outlandish, but there is an eerie amount of truth to most everything he says.
- mankiw: http://gregmankiw.blogspot.com/feeds/posts/default
- Head of Harvard's econ department. Advisor to Mitt Romney. Brilliant guy. Frequently authors and links to very insightful articles regarding timely economic issues in our lives.
- fama french: http://www.dimensional.com/famafrench/atom.xml
- The fathers of modern finance (Fama is at Chicago, French is at Dartmoth), the most prolific publishers in the field. The post very infrequently, but I love what they have to say. Mostly obliterating the idea that practically anyone can beat the stock market over the long run, and completely obliterating fad investing trends.
- valuation blog from NYU professor: http://aswathdamodaran.blogspot.com/feeds/posts/default
- The most famous valuation professor that I know of, at one of the best finance departments in the world. Discusses various behaviors of firms and how they can add/destroy value.
- good blog on us policy: http://dmarron.com/feed/
- phd grad in economics from MIT. Former U Chicago professor. Former member of President’s Council of Economic Advisers (CEA), former director of the Congressional Budget Office. Talks about very relevant US policy stuff: tax policy, health care mandates, etc.
- Mr Money Mustache http://feeds.feedburner.com/MrMoneyMustache
- Probably my favorite blog (though I'm still a newbie here...time will tell if I bore from it). A well articulated guy whose mind is a clone image of mine in how he views the world of personal finance. Retired at the age of 30 after 8 years or so as an engineer. Lives a simple life in Boulder, CO and spends lots of time with his family, the outdoors, learning, and investing for fun. He throws in an occasional profanity for dramatic effect. Sorry about that.
- freakonomics: http://freakonomics.blogs.nytimes.com/feed/
- Not my favorite blog, but several economists post interesting insights here. They are more "cute" than substantive issues, just like the book. Unfortunately, the authors of the book are only infrequent contributors to the blog...with other prominent economists picking up most of the slack.
- mymoneyblog blog: http://www.mymoneyblog.com/feed/
- Probably the first blog that I ever read consistently. Helped me to gradually sort through the financial maze which is before us and understand basics such as what is a Roth IRA, basic principles of passive investing, etc. Since there is not much to say on the subject (it's pretty timeless), new articles can be a bit stale. He often posts promotions (such as brokerage account opening bonuses) which have earned us over 3k over the past several years. One promotion alone pocketed us 1k. A few days ago we got $400 through another promotion. Now that I think of it...I'm pretty sure that I'm understating the financial benefit I've received from his blog. My life has been greatly enriched from his plain insights. He's an engineer who loves personal finance. His posts are very thorough and insightful.
- The Becker-Posner Blog http://uchicagolaw.typepad.com/beckerposner/atom.xml
- Becker is a Chicago econ professor who won the Nobel Prize in 1992. Posner is also at U Chicago. They write weekly opinions on interesting subjects. This week's topic: Should we be concerned about the decline of US manufacturing? They are short opinions, but very well articulated.
- Erik The Black's Backpacking Blog http://feeds.feedburner.com/EriktheBlack
- This guy, from what I gather, is a professional backpacker. He does what are known as thru-hikes, which is basically a fancy name for an insanely long backpacking trip. He writes guides and books on the subject. I basically want my retirement to consist of me backpacking the world, so his blog reminds me of my end goal. Practical weight savings/gear advice from a master.
- Digital Photography School http://feeds.feedburner.com/DigitalPhotographySchool
- I'd love to be a professional landscape/nature photographer some day. I'm not exactly sure what that means, but I think it means to get paid to take cool pictures of nature. I guess I'm not hoping to ever make money on it, but rather to really improve upon my landscape photography...by mainly going beautiful places. The blog isn't really landscape-heavy in particular, but it's a good resource for techniques, ideas, gear, etc.
- Joe Hoyle: Teaching - Getting the Most from Your Students http://joehoyle-teaching.blogspot.com/feeds/posts/default
- This guy is an accounting professor on the east coast. His dedication to teaching inspires me, given my 8 year track record experiencing frequently apathetic professors while in college (with some few obvious exceptions). And I can't fault professors for being apathetic towards teaching....they are paid and promoted 99% on research productivity, so it is a completely logical consequence of the compensation structure. This blog gives me hope that someday the profession will change.
- KeithHennessey.com http://keithhennessey.com/feed/
- Another econ blog. Keith Hennessey is the former Assistant to the U.S. President for Economic Policy and Director of the U.S. National Economic Council. I don't remember many specifics from his blog, but I haven't unsubscribed from it yet so I probably like it.
- Seattle Bubble http://feeds.feedburner.com/SeattleBubble
- The best real estate blog that I've ever found. Founded pre-bubble and made a bubble-believer out of me in no time. He has excelent visuals. Started off as a hobby. Then he recently got scooped up by Redfin, which I view is the future of real estate....customercentric with low real estate agent commission. After patiently and methodically waiting for the bubble to burst, he bought a home about 8 months ago. A recent post that caught my eye was the implication of future interest rate hikes on real estate prices. I think that it will obviously hurt the housing market since it directly affects affordability. He largely disagrees. We'll see in the next 10 years who is right. Seattle-centric, but I still read the blog. He posts very frequently, often for trivial "ask the readers" polls, but I still subscribe because I love the visuals.
So that covers most of the blogs that I subscribe to. I love blogs!!!!! Where would I be without them?
Friday, April 20, 2012
Saturday, March 31, 2012
Friday, March 30, 2012
Thursday, March 29, 2012
Thoughts (Rant) on the Financial Services Industry
It's time for my once-every-couple-years financial rant. For those looking for Baugh family updates, please disregard this message. For those interested in saving hundreds of thousands of dollars of unecessary financial management expenses (and hence 5-10 years of your life sitting in a cubicle) over the next 5 decades of your lives, read on.
I have good friend looking for work. When he told me that he had a possible opportunity working for Fidelity as an investment adviser, I said "it'll be a pay check, but I predict you'll grow tired over time of giving shoddy advice to clients." When my friend asked why he couldn't give good financial advice to clients, I responded "because the entire industry is based on swindling customers." After a few minutes of discussion and disbelief on his part, I proposed calling Fidelity to see what financial advice they would give me if I played dumb.
Here's the scenario that I conveyed to the Fidelity representative: I received an inheritance of 100k and it was currently sitting in a taxable savings account. I wanted it to keep up with inflation at a minimum, but I also wanted it to grow. I could tolerate risk if it provided long term growth. I wanted a "hands off" approach to investing.
My friend, who was on mute during this conference call, said that the "hands off" approach to investing was too much of a trap. I disagree, because 95% of the public would give this same response.
In any regard, this is the advice that the financial advisor gave me. Have Fidelity actively manage my portfolio for a base fee of 1% per year. Since they invest in actively managed mutual funds, there would be an additional 1% of mutual fund expenses passed on to me. In total, I would expect about 2% in fees per year.
I predict that the stock market will return about 6-7%/year over my lifetime, with inflation running about 2-3%. The difference, or 4ish%, is what I predict the "real return" on the stock market to be.
Countless academic studies have shown that mutual funds, in aggregate, produce gross (before fee) returns what the market does. This makes sense. These same studies show that mutual funds produce inferior returns after accounting for management expenses. The best and brightest finance professors that I have come in contact with advocate index funds as a low-cost way of guaranteeing yourself a market return.
So this financial advisor was essentially advising me to forfeit half (2%) of my real return (4%) for the rest of my life in fees. His answer included references to how all of the "rebalancing" would be taken care of for me. This was his attempt to maintain the facade of the industry. I explain what "rebalancing" really is down in the bullets below.
I find this to be an entirely unacceptable business model. Financial advisers should, and are obligated by law, to act as fiduciaries, which is a fancy word for someone who acts n your best financial interest. Inherent in their compensation structure is a direct conflict to your financial success: a 1% drag on your returns for financial managment fees and an additional 1% drag on your returns if they invest your funds in mutual funds for the rest of your life.. I ended the conversation with a confirmed disgust for the industry.
The stock market seems like a scary place to be. The financial services continued livelihood depends on the perpetuation of the myth that no lay person would understand how to possibly navigate the complexities of the market. That is a bunch of BS.
In the following bullets, I'll give you all of the financial advice that you'll need to know for life. And I'm giving it to you for free, because I like you. Please share it with your friends:
I have good friend looking for work. When he told me that he had a possible opportunity working for Fidelity as an investment adviser, I said "it'll be a pay check, but I predict you'll grow tired over time of giving shoddy advice to clients." When my friend asked why he couldn't give good financial advice to clients, I responded "because the entire industry is based on swindling customers." After a few minutes of discussion and disbelief on his part, I proposed calling Fidelity to see what financial advice they would give me if I played dumb.
Here's the scenario that I conveyed to the Fidelity representative: I received an inheritance of 100k and it was currently sitting in a taxable savings account. I wanted it to keep up with inflation at a minimum, but I also wanted it to grow. I could tolerate risk if it provided long term growth. I wanted a "hands off" approach to investing.
My friend, who was on mute during this conference call, said that the "hands off" approach to investing was too much of a trap. I disagree, because 95% of the public would give this same response.
In any regard, this is the advice that the financial advisor gave me. Have Fidelity actively manage my portfolio for a base fee of 1% per year. Since they invest in actively managed mutual funds, there would be an additional 1% of mutual fund expenses passed on to me. In total, I would expect about 2% in fees per year.
I predict that the stock market will return about 6-7%/year over my lifetime, with inflation running about 2-3%. The difference, or 4ish%, is what I predict the "real return" on the stock market to be.
Countless academic studies have shown that mutual funds, in aggregate, produce gross (before fee) returns what the market does. This makes sense. These same studies show that mutual funds produce inferior returns after accounting for management expenses. The best and brightest finance professors that I have come in contact with advocate index funds as a low-cost way of guaranteeing yourself a market return.
So this financial advisor was essentially advising me to forfeit half (2%) of my real return (4%) for the rest of my life in fees. His answer included references to how all of the "rebalancing" would be taken care of for me. This was his attempt to maintain the facade of the industry. I explain what "rebalancing" really is down in the bullets below.
I find this to be an entirely unacceptable business model. Financial advisers should, and are obligated by law, to act as fiduciaries, which is a fancy word for someone who acts n your best financial interest. Inherent in their compensation structure is a direct conflict to your financial success: a 1% drag on your returns for financial managment fees and an additional 1% drag on your returns if they invest your funds in mutual funds for the rest of your life.. I ended the conversation with a confirmed disgust for the industry.
The stock market seems like a scary place to be. The financial services continued livelihood depends on the perpetuation of the myth that no lay person would understand how to possibly navigate the complexities of the market. That is a bunch of BS.
In the following bullets, I'll give you all of the financial advice that you'll need to know for life. And I'm giving it to you for free, because I like you. Please share it with your friends:
- My generation is of the first to deal with the diminishing prevalence of pensions. As a result, the onus is on us to figure out the financial maze that is in front of us. We need to figure out how much we need to save and where to invest it.
- As a general rule of thumb, you can retire when you have stockpiled enough investments such that your expenses are less than 4% of your stockpile. A less clumsy way of saying this is that you can retire when you have accumulated 25 times your annual expenses in investments. Thus, if it takes you 30k/year to live on, you can retire when you accumulate 750k (30k/.04 or 30k*25) in investments. Of course, taxes factor into this as well, so this would only increase that number.
- The most important skill to develop in reaching financial independence is to learn to live happily on less than you make. This produces "savings." Intelligent consumption will get you there, as will the ability to be easily satiated. Those two attributes working in harmony will create a savings symphony.
- These savings should generate returns for you....hopefully real returns which exceed the rate of inflation.
- Financial markets have historically provided good returns, and should continue to do so in the future.
- The best way of maximizing your after-fee returns, and thus your savings, is to invest passively in index funds, which are like mutual funds except for they don't try to beat the market, nor do they charge some hot shot manager a huge salary for failing to do so on an after-fee basis.
- The simplest way to decide your mix of bonds/stocks and domestic/international is to invest in a lifecycle fund, which automatically decides this for you and changes allocations over time. For example, the Vanguard Target Retirement 2050 fund (or its equivalent if you plan to retire in another year) is the only fund that you'd need to own for your entire life. It invests in many thousands of companies, so you need not worry about lack of diversification because you are invested in a single fund. It will invest in both bonds (loans) and stocks (ownership).
- Another way to maximize your returns is to legally minimize the amount of taxes owed on returns. This is accomplished through tax-favored accounts, such as 401k's, IRAs, and 529s for college.
- If a lifecycle fund isn't available to you at a reasonable cost (i.e. <0.25%/year), then reconstruct your own portfolio with low-cost index funds and rebalance annually. Rebalancing is a fancy word for making sure your allocation remains what you want it to over time. A good baseline is to look at the composition of the Vanguard Target Retirement 2050 (or equivalent) fund as shown here (Note that this Target Retirement fund consists of only 3 funds: total bond, total domestic stock, total international stock....this isn't rocket science and buying 3 funds is something that anyone can do, which is what the financial services industry doesn't want you to know). Rebalancing takes about 2 minutes per year and can be accomplished with a few mouse clicks at home.
- Exploit 401k matching.
- Exploit Roth IRA contributions every year. Currently the limit is 10k/year per couple.
- If you distrust the above advice or want a second opinion, seek out a "fee only" financial planner. They receive an hourly rate for giving advice to you. This is a great, honest, and sustainable business model. Hopefully you find a good one.
Of course retirement and financial independence should not be our only goal in life. Enjoying each and every day is the whole point rather than longing for a distant, perfect, tomorrow. Enjoying your employment will have profound effects on your happiness given the amount of time spent there. I would argue quality time away from work has profound effects on happiness as well....which is precisely my objective. I want to maximize the amount of quality time that I have away from work and eventually get to the point where I can go to work when/where I want because I have that financial freedom. Learning to be happy living on next-to-nothing (well below the poverty line) is the most important skill that we've developed that has allowed us to put the corporate rat race on hold for a few years to expand our education and converge closer to our goals. It's a pretty empowering feeling.
For those I haven't formally introduced the blog to: I highly recommend reading: http://www.mrmoneymustache.com/ to get a hilarious and well articulated glimpse into the mind of someone that I have a in lot common with.
* Update * The advice that I received was actually worse than I thought. For one, they didn't tell me that I should use this money to fund an IRA. Additionally, fully knowing that I would be in a taxable account, they mentioned that each time they transact I will be hit with a taxable event. These two factors combined amount to a huge oversight on their part, which conveniently aligns with their financial interests.
** Update2 ** Dilbert author hits the nail on the head with his commentaries:
http://www.mymoneyblog.com/dilberts-one-page-guide-to-everything-financial.html
* Update * The advice that I received was actually worse than I thought. For one, they didn't tell me that I should use this money to fund an IRA. Additionally, fully knowing that I would be in a taxable account, they mentioned that each time they transact I will be hit with a taxable event. These two factors combined amount to a huge oversight on their part, which conveniently aligns with their financial interests.
** Update2 ** Dilbert author hits the nail on the head with his commentaries:
http://www.mymoneyblog.com/dilberts-one-page-guide-to-everything-financial.html
Wednesday, March 28, 2012
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Wednesday, February 29, 2012
Wednesday, February 22, 2012
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Tuesday, February 7, 2012
Thursday, February 2, 2012
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Tuesday, January 24, 2012
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