Link Roundup: The Value of Hard Work

During times of plenty, when there are more interesting articles than I can do a feature review of, I will combine them into a single post called a link roundup. Here is one such event.

  1. The value of hard work. This reminds me of my time growing up in the crucible of competitiveness that is the Bay Area. Investments made in oneself through education and knowledge pays compound interest down the road, establishing a solid foundation for improved performance and confidence, that feed off each other in a virtuous cycle. Take for example a high school student taking summer classes to prepare for the next quarter’s math and reading classes. That person will get a leg up in results for the rest of his or her life, because of repeated exposure and increased familiarity, not to mention having an easier time in the class. Compared to someone like this, if you’re not working hard every day, you’re falling behind your peers. Just like in athletics, average is over. Every day you’re slacking or doing something else is a day falling behind your peer competitors.
  2. What do future jobs look like? The thinkers of yesterday and today have a vision for how the future looks, and it doesn’t bode well for some. Unskilled work will be replaced by robots. Technical and computer skills will become more valuable. Good future areas to specialize in include AI, robotics, and VR. At the same time, some jobs like in health care that deal with human emotions, where empathy is essential, will be relatively shielded from the effects of technology. But then again, you would know this from reading my book.
  3. As a corollary to the above, university students increasingly recognize the reality of a tough job market for graduates, and are tailoring their studies accordingly. This means fewer liberal arts graduates and more social science, business, engineering, and “trades” graduates. That’s probably a good thing for individual finances but a tragic loss for the country. After all, from their pen would have come art, literature, and poetry – the stuff that gives colour and meaning to life. That’s what separates us from somewhere like Singapore or India, which are
  4. If you have truly niche technical skills, you can make bank. Just look at blockchain developers. Btw, software is one of the fields where if you have the interest and the talent, you can teach yourself and get a great job without having a degree in the field. That’s the path my dad took.
  5. Here’s a great story of a self made web entrepreneur with the vision to establish a business reselling cheap Chinese toys from Alibaba to American consumers willing to pay more. Wait… why don’t Americans just buy directly from Alibaba? Doesn’t sound like a very sustainable business model but somehow it works.
  6. Concierge medicine is taking off, and whispers are that you can have a lucrative practice with low patient volume, if you cater to the rich and treat everyone like a VIP. It’s not my cup of tea, but I see disruptive potential in different delivery methods for health services. Target mini clinics are good, as is the underutilized format of telemedicine.
  7. I can’t harp on the concept of geographic arbitrage enough. By moving to a cheaper location, your dollars stretch so much further. Not only that, but your kids can grow up multicultural with foreign language skills, interesting life experiences, and a great prebuilt application essay for Ivy League schools telling them how unique you are.
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Broke at Half A Million

Marketwatch ran an article about how one can still be broke despite earning half a million a year. Preposterous, you say? They do show the breakdown of sample spending for the rich family compared to an average family with $80,000 in yearly income.

Let’s break this down in an itemized manner:

  1. 401k contributions: a good thing, especially given the tax bracket
  2. Taxes: unavoidable, but the rich family should be looking to diversify more into legal tax shelters like mortgage interest deductions and maximizing HSAs
  3. Child care: I can’t explain this discrepancy. Does the wealthy family choose to use a premium service as opposed to the McDonalds of child care? Does that really provide any benefit? Both families have the same number of kids, so there’s no reason for spending to be any different. And besides, those in the know opt for live in Hispanic au-pairs so their kids can get a head start in life
  4. Food: both families eat way too much. I spend $40 per week on groceries (that includes household items like detergent) for myself. Multiply that by 4 gives you $8480 for a whole year. Even if you spend a bit more on eating out, you will still may just top out at what the average family spends. What does the rich family get by spending more? More calories? Whole grain organic quinoa?
  5. Housing: this is a big opportunity to cut back by living in a smaller house for less. A bigger house just adds to the housework, not necessarily truly improving happiness. Likewise, this allows for a corresponding reduction in property tax and insurance
  6. Gas: no reason that this needs to be different between the two families
  7. Life insurance: just self-insure by saving more. This is one of the biggest cons out there
  8. Clothes: do you really need to wear better clothes than the average family? If anything, standing out more in this era of Occupy Wall Street just makes you more of a target
  9. Children’s lessons: I’ll admit, probably a good investment. If anything, Asian families in the Bay Area spend much more in this category
  10. Charity: cut back on this, especially if you’re living on the edge
  11. Debt repayment: probably unavoidable, but you can save on this by studying overseas or in state schools
  12. Miscellaneous: I don’t even know what this means

Notice how I didn’t include vacations on this list? Generally, I will allow one budget busting “splurge”, either in clothing, house, car, or vacations. Among those, the one that gives the most lasting happiness is vacations.

 

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Advice For Struggling Families

We all know that Americans don’t have much in savings, but it’s really more a problem with rising expenses than lack of savings. As this Marketwatch article shows, poor people do save, but they consume those savings in short order:

Robert understands the need to save for the long term, but he puts only $25 into his employer-provided retirement account each month. He knows that won’t be enough, but he also knows he’s supposed to save something and that’s what he can do. But his lack of retirement saving for later is hardly because he is overspending now.

Instead, he is contributing toward food and rent and saving for needs coming up soon — renting his own place. For that, he saved several thousand dollars, an impressive share of his annual income. That saving activity won’t show up in surveys about how much “emergency” or retirement savings people have. It won’t show up anywhere at all once Robert finds an apartment because he will hand the money he’s accumulated over to his landlord and his “balance” will go right back down. And then he’ll start saving all over again for a different need.

The strategies some people are using to save are similar to what I recommend in my book. In other words, they employ mental tricks to hide money away so that they are not tempted to consume. Hilariously, they also call these tricks “hacks”.

The financial services industry can help, too. Many families we met developed workarounds that made their savings strategies more effective. For Robert, it was giving his savings to his mom to hold. He said she was “like Fort Knox,” so he knew he would have to stick to his budget. Another Diaries participant stashed her savings in a credit union an hour away, and cut up her ATM card, so that she would only withdraw for “really, really needs.” A third preferred to save by stocking her pantry rather than filling her bank account. Financial providers can learn from these kinds of hacks. They can adjust their products to make it easier for people to save and harder for them to spend.

In reality, there’s not much for these families to do other than to increase income. Practically this can mean:

  1. Advancing up the ranks at one’s job
  2. Finding a second job (the gig economy is perfect for this)
  3. Maximizing resources through the sharing economy
  4. Going back to school for a degree that pays
  5. Starting a business (even low-capital tech entrepreneurism is possible)

At the same time, while they’ve already cut spending substantially, there’s more they can do to reduce everyday life expenses. Consider:

  1. Buying the old model of electronics rather than the latest and greatest
  2. Buying clothes from the consignment store
  3. Shacking up with extra roommates or living with family
  4. Going without a car, TV, and cable
  5. Cook at home instead of eating out
  6. Go for free or low cost entertainment (the article describes one person getting free concert tickets from giveaways and raffles). Especially with more time and less money, lining up for raffles and giveaways become viable.

Details of how to do this and much more are included in my book.

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Advice for a Young Investor

Warren Buffett says that today’s crop of babies are the luckiest ever. This may be true in some respects – technological advancements have certainly improved the quality of life. Today’s commoners live a life undreamed of by previous monarchs. However, in other respects, young people today have it harder than ever.

Take for instance public comments Morningstar’s advice to a young investor:

Check out the vesting options on your match in the 401K before you let that match influence what you do. My own Millennial daughter has worked at 3 places now with generous matches on paper. She has yet to get any of her matches to vest because they all have 3 year cliff vesting. She got laid off (in one case just before 3 years) before any of her matches vested.

and

That should be a wake-up call to today’s 20/30-somethings. Were those terminations part of some evil, greedy attempt to cut corporate costs? Just the fact there was a long “cliff” should say something: corporate America is desperate to wash its hands of any responsibility for their employees’ retirement.

That means: save, save, save your money. Retirement is in your hands, more than ever! Each dollar wasted on alcohol, pot, tattoos, new cell phones every year, data plans, new cars, bar tabs, trips to Mexico, music festivals, is actually ***two or three*** dollars you won’t have for retirement.

That’s the time value of money. Blowing money on toys and “experiences” early on in life, is what’s killing the retirements of many a baby-boomer today. Forcing older boomers to reverse-mortgage their homes for money to live on.
Don’t repeat your parents’ mistakes.

With how perilously insecure jobs are today, it’s more important than ever for young people to have multiple income streams. This means side gigs (e.g. Uber, independent tutoring, Etsy), monetizing resources (e.g. Airbnb), investment income (rental, stocks, bonds), and entrepreneurship (low cost digital startups). Without a diversified stream such as the above, we will fall prey to the whims of an unscrupulous employer who can can us at a moment’s notice in the name of cost savings.

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Follow Your [Profitable] Dreams, Redux

Short post here. In my last post, I mentioned that the best path that balances all factors contributing to happiness is to work hard in one’s 20s in a high paying job, then quit after becoming financially independent/self-sufficient to focus purely on one’s hobbies/passions without any financial constraints.

One of my favourite singers, Antje Duvekot, is doing this in her own life. She admittedly toured quite frequently when she was younger, only to tire of the road and long for a more settled existence. You can read her interview, which is quoted here:

You haven’t been touring as much lately.  Does that feel strange to you?  Or do you find that it’s helped bring some sense of normalcy to your life?

Well, I’m a lot poorer because of it. But a lot happier. I now live in Boston. I take Spanish classes, volunteer at an adult education center, lead the music program at the humanist hub, see friends, neighbors. My home is now not just another strange place I pass through on my way to another tour on my way to encounter more strangers (albeit with a better bed and no check-out time in the morning). It is now actually a place to me. There are no words for how important it is to human mental health to be able to build something in one place. Being perma-transient sucks balls. Plus the shows I play now feel wonderful. I am more present and playing for people feels more deliberate, like a true privilege, rather than a permanent state of refugee status. Not to be melodramatic or anything, lol. For melodrama see track 5 on the new record “Caffeinated Warriors,” about my growing hate-affair with the road. That being said, I am still touring a good amount, but I go out for a few days and come home, and I don’t do more than one away-tour a month with additional drivable shows sprinkled in. It’s been good for me and I think good for my art as well.

Later on in your career, making the tradeoff of sacrificing income for increased free time, hobbies, travel, and friends becomes worthwhile. It’s a lot easier if we’ve saved sufficiently ahead of time when young, to allow compounding to work its magic. This is precisely why I’m operating on a career taper, starting out at 1.3x full time and reducing my workload by one tenth every year until 0.5 (half time), and then working ad hoc at that point.

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Musings on Lucrative Traditional (and Untraditional) Jobs

Shifting gears now, I will now raise some recent examples of lucrative traditional jobs and how eye-popping their pay can be. Yes, I’ll be using some real world numbers here.

  1. Uber drivers: This article show the reality of how workers from all over rush to SF to earn the Bay Area premium (as a freelance taxi driver) which comes out to about $7 per 12 minutes, before expenses, which is much more than what someone unskilled can make in the Central Valley or Sacramento. What is striking is that they can make as much as $1500 per day, as the article states, though it’s work working hard and being opportunistic in monitoring for surge pricing. At the same time, they need to keep their expenses low by
  2. Temp workers: Don’t think of these guys as just lowly paid undocumented immigrants. Some of the most lucrative positions out there can be found by filling in as short-term workers, especially if you have specialized skills. But there are some out there that don’t neen need skills, just willingess to work in “undesirable” areas. Examples of this include a friend of a friend who went to Alaska to work in the canneries as a regular laborer. Hours were long and the environment was unforgiving (if pristine). He worked hard (16 hour days and a dangerous line of work) but took home $50,000 in 3 months. My book has other examples of geographic arbitrage opportunities like this. I’ll keep an eye out for more “gold rush boom” opportunities that arise and let you know on this blog.
  3. Nurses: You can get one of these degrees after just 2 years at a community college, so it’s an insanely accessible career path. You need to learn some protocols and get some practice, but at the end of the day it doesn’t involve deep cognitive processing. Things also get easier with practice and longevity, making life and work easier with time. There’s also great career stability and a nationwide shortage. Oh, and the schedule (3 shifts per week) can’t be beat. Just today I learned that the pay starts at about $60-70 per hour and you can get 2.5x base pay for working “unseasonable hours” like weekends, holidays, nights, and as emergency call up.
  4. Corrections officers: Thanks to unions, the prison system in California is generously funded. Despite a declining prison population, you can get a very generous pay and pension package in corrections. The promotional website boasts six figure salaries starting out (after accounting for overtime and vacation/night pay), with a monthly stipend during your cadet training years. There’s even a controversial article on WSJ about whether being a prison guard is better than getting a degree from Harvard. Sure, if you go to work right away and keep your job without getting laid off. My perspective is that a Harvard degree gives you more flexibility and opens doors to more types of jobs, including more interesting and cognitive based ones that are more resistant to automation and outsourcing.
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Your Personal Inflation Rate May Vary

Inflation? The official figures have total CPI for September (measured year over year) as 2.1%, roughly at the Fed’s preferred target. However, for individuals, each household’s perception of true inflation is different, thanks to a different mix of goods and services consumed. As Morningstar wrote: “If consumers rent, use a lot of medical care, and use a lot of energy, inflation could look pretty nasty, as much as 4% or 5%. If someone uses a lot of food, buys a lot of apparel, uses a lot of imported goods, and owns their own home, their inflation rate could be closer to 1%. So one-size inflation rates aren’t always very helpful or descriptive on an individual level.”

Here’s the accompanying graph:

As you can see, inflation rates on goods are generally low. To avoid being hit by high inflation, we should seek to limit our spending in the categories of energy, housing, medical care, and transportation (closely linked to energy).

My book on wealth has many tips on how to save in each of these areas. Some highlights include:

  • Live close to where you work to minimize the commute
  • Consider biking or walking to work
  • Stick to being a one car household, with that one car being a cheap used one
  • Bundle up with more layers instead of turning up the heat
  • Buy a house you can afford, move, or shack up with roommates
  • Stay healthy and practice good habits to minimize sudden unexpected medical bills

The last one can be hard to do, which is why I’m working on a book on health as a follow-up to my Evidence Based Approach to Wealth. Stay tuned.

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Millennials Just Hustling to Survive

One big theme in my book is how everyone, especially millennials, have found ways to compensate for the rise in living costs without a corresponding increase in wages. One big way to do this is unfortunately to work a side job. Traditionally, this was limited to low-wage service industry workers. I remember hearing stories from my patients waking up at 4 AM to drive to work in Los Angeles from the outer suburbs, only to return in the evening and work a second shift at a local restaurant. Mind you, all this is to just cover the bills – it isn’t even about making extra spending money.

This practice has now slowly but surely engulfed millennials, many of whom are recent graduates from university who can’t find any meaningful well-paying work in their fields. Many of them choose to monetize hobbies. As the article describes:

The 31-year-old Torontonian makes adult Sailor Moon outfits and sells them on Facebook, a gig she estimates brings in about $800 a month on top of what she earns in her full-time position at a mascot manufacturer.

(…)

Covering everything from teaching English over Skype to driving an Uber, the term has even found its way into Urban Dictionary, where it’s defined as “sideline that brings in cash.”

It’s a tough time out there. Regardless of whether extra money is a need or a bonus, you can monetize your talents in one of these ways. See more details on side gigs in my book on wealth, as well as ways to turn your hobbies into highly profitable businesses.

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Data: Recession Led to Shift Towards Minimalism

In my book on wealth, I espouse minimalism as the correct way to live life. It seems that many people around the world are starting to come around to that view. Take this article from the Guardian as evidence. The gist is that in the current environment with low interest rates and pent up demand from years of belt tightening, consumers should be flinging their wallets wide open.

On the face of it, the economic superpower that is the American consumer should be having a party. Low interest rates and unemployment rates, low oil prices, a high stock market, healthy property prices – nothing it would seem, to put off doing what comes most naturally to them – shopping.

Yet they’re stubbornly refusing to do it – or at least refusing to do it in predictable ways – leaving consumer experts to wonder, as fashion bible Women’s Wear Daily recently did, if the consumer psyche, “bombarded by digital messages, stressed financially and overwrought emotionally”, has “finally exploded”.

That’s the party line. Consumers, it is thought, have abandoned existing brands and are infatuated with the new, which retailers are failing to provide.

“The recession was the first step toward the complete shift in shopping,” says Yarrow. “Consumers are more wary and self-protective about finances, and they’ve never dominated the market the way they do today. They’re informed and wary, and determined to be in control.”

The unpredictability has caused chaos for retailers, which have seen their power over consumers begin to slip away. “Technology means they can shop however and whenever they want, or they can shop all over the world, and that’s why we see retailers collapsing and relying completely on price reductions,” Yarrow said.

“It’s taking retailers forever to realise that when people go shopping they want to see new things all the time. This is what technology has done to our brains. We want a lot more excitement and product turnover in our lives. If we don’t see new product, we won’t go there any more.”

But really, what’s happening is that consumers are finally realizing that buying all that stuff, whether it was spurred by advertising, impulse, or keeping up with the Joneses, didn’t really make them happier. Instead, they’re choosing to spend less, make existing products (which work fine, mind you) last longer. After all, there are so many other aspects of life (rent, medical bills, tuition) that are rising faster than incomes. There has to be a give from somewhere and discretionary purchases have taken the hit.

At the same time, people are spending more time and money on experiences, whether that’s a vacation, continued learning opportunity, sporting events, or dining out with friends. These are things that add lasting happiness.

But there are other factors feeding into consumers’ shattered psyches. For many consumers buying “stuff” just isn’t what it used to be. People are looking toward more “experiential” spending – holidays, concerts, plays – experiences that they can then share on social media.

Laurent Vernhes, co-founder and CEO of Tablethotels, a consumer website that specialises in high-end travel, told the Guardian “the more jaded you are the more you will seek experiential travel and beyond what you know.” And it’s not just holidaymakers – business people, too, want experiences.

This trend doesn’t seem to be abating. Instead, the children of the Great Recession who grow up may continue to live the frugal lives that were instilled in them during a time of scarcity.

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