Unfair Comparisons on Cost of Living

I’m livid after reading Marketwatch’s recent article on cost of living differences, in which it tries to make a blanket comparison between Asian cities and American/European ones.

The key part is in how they designed the study:

The study rated the cities according to how expensive it is to buy basic items there at supermarkets, mid-priced stores and specialty outlets, using the price of food, drinks, clothing, recreation and entertainment and the cost of buying and running a car (including the cost of gasoline).

It also includes recurring expenses, including the cost of renting a home, utility bills, private schools and domestic help.

I understand why they’re doing this – to create an apples to apples comparison. However, there’s a reason the government changed the index of inflation to account for substitutions. Essentially, to have the same or better lifestyle in an Asian city vs an American one, you can go without certain things. The cost of owning and operating a car in Tokyo, Singapore, or Hong Kong is exorbitant because of incentives/taxes against congestion. Plus you don’t need a car to get around anywhere. It’s actually probably faster to take the metro/subway to avoid the surface congestion. Whereas in an American city you absolutely need a car to live.

Another aspect is private schools. I understand why they’d want to keep that in the comparison – the article is geared at high powered corporate expats who want to replicate a western lifestyle in Asia (note that they include domestic help in the calculations). However, again in the US you need to send your kids to a private school to get any kind of decent education. Not so in Asia. There, the locals hardly ever do so because public schools are so good (extremely competitive by world standards). This is anther example of a cost that’s not experienced evenly between Asia and America.

Finally, I’m not sure how they calculate food, but in my experience food in Japan (assuming you eat Japanese style meals) is much cheaper, tastier, and of better quality than the equivalent American ones. Restaurants are also cheaper, mostly due to not having to pay tip.

My gripes about this article are similar to my wife’s experience moving back to the US from Asia.

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How Not to Support Spending

What’s one way that you can stretch your spending beyond your means? By financing it. What used to be bought entirely with cash has turned into longer and longer payment schemes. From 10 to 30 and even longer mortgages, and ever increasing auto loan durations, it’s one more way for cash strapped modern families whose wages haven’t grown to keep up with their neighbours.

I can understand doing it for housing – it’s generally a productive asset that will increase in value or at least hold its own. Many may say cars are a necessity for modern life, so that’s fine, but do try to be frugal with how luxurious a car you get. What’s inexcusable though is financing every aspect of your life including luxury spending and consumption. That’s just asking for debt trouble. Live by the old mantra that if you have to go into debt to buy a depreciating asset, it’s probably not a good decision.

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Get Out of a High Cost Area

You probably know that coastal cities are expensive. Actually, if  you’re reading this blog, chances are better than not you’re an educated person living in an urban area. It’s also not surprising that the high cost of living serves as a wall that prevents the migration of poor workers from e.g. Ohio or West Virginia. Interstate mobility in the US has decreased, and part of that can undoubtedly be explained by pull (family ties) and push (cost of living) factors. This has contributed to political polarization, overall wage stagnation, class-based segregation, and increased resentment all over the board.

The key tenet in my book is that wages are not going up, at least not as fast as cost of living. This article makes it abundantly clear that it’s driven by housing:

Housing costs have grown much faster in high-income places than low-income ones since 1960. Housing has always been more expensive in high-income places, but the difference is getting more extreme. In 1960, on average, US states with 10% higher incomes had housing costs that were 10% higher. In 2010, states with 10% higher incomes had 20% higher housing costs.

I would also add labour to that mix. As part of overall price pressures, you have to pay more for help, since they need to be able to afford to live there or otherwise be compensated for a long commute in from the exurbs.

So if you’re living in an expensive city, carefully examine your own life and entertain the notion that you may have more disposable net income after moving to the sticks. (Note: this doesn’t factor in the potential for career advancement and networking opportunities in the big city)

Better yet, take advantage of geographic arbitrage using techniques from my book.

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How to Buy a Car (From an Expert)

I somehow got subscribed to the daily Quora mailing list with interesting questions and answers. The one for today was about how to get a good deal when buying a car. Pasted here is the entirety of the response:

Let me make your life easy (I own a few dealerships). It takes 5 minutes. Once you know exactly what kind of car you want, simply go to the dealer, a salesmen will greet you. Tell him you’d like to go inside and talk about the car your interested in. Go inside, tell him you’re comparing with two other brands but you like this one the best. Tell him, I’d like to buy this car now if you can match the other dealers’ offers which is $100 over invoice. Tell him kindly, “Please let your manager know my offer is $100 over invoice, which is what the other dealers offered me, and if he accepts, I’d like to see a copy of the invoice (which they must do legally – you’re welcome), and then we can wrap this up now and I’ll buy you lunch for your great service.” That’s it. Unless it’s a specialty car, it will go down just like that. If you’re paying cash, it’s a done deal 99.9%. If that doesn’t work, call the next town over, tell them you were offered $100 over invoice but you don’t like how they do business so want to go to the competitor. If they agree (which they will because the car biz is super competitive) ask them to email a copy of the invoice. Once they do, call them and tell them you’re on your way. Side note- best time to buy a car is New Years Eve, 2 hours before closing using this method….just tell them “Come on guys, let’s wrap this up quickly so we can all go spend time with our families.” It’s not as hard as people think. Believe me, the salesman just wants to sell a car, he cares more about closing the deals than anything else because if he doesn’t, he doesn’t get paid. Another note, the faster the deal, the better. And be POLITE, good salesman ARE expert salespeople and they’ll rip your head off without you knowing if you’re an ass. Oh, and all your friends who think they’re experts…are not! Even if you buy the car for 50 cents they’ll tell you that you’ve been screwed, lol. Buy a decent car for $100 over invoice and go home happy. And don’t over spend on cars, they all have four wheels….just get a good running car. The more you spend, the more they depreciate and they’re all worth $2500 in 10–15 years. This is advice for new cars. Used cars….offer 3k less than the asking price OR 500 over wholesale book whichever is less (use blue book online between trade-in & private party value)(pay cash)…also 5 minutes. But only do these if you’re ready to buy in that moment. Test drive all first. If you don’t have cash, get pre-approved at a credit union and take the letter to the dealer to solidify your seriousness. If you have bad credit….it’s the bank that will screw you, not the dealer. Also with bad credit, the dealer had to pay bank fees so they can’t come down as much on the price. Bank fees range from $500–$3000! depending on how bad your credit is. My thumb is tired now…good luck!

All I can say is that these recommendations make sense. I usually go through Costco Auto which gives a pre-fixed price, but direct bargaining with a dealer can work as well. Go in with a no nonsense attitude, have an anchoring price, and come prepared with a preapproved loan (or cash). That takes away the multiple possible ways that the dealer can screw you over. Be prepared to walk away if the dealer can’t meet your pre-established price though.

It also helps to go in at certain times of the year (4th of July sale, Christmas sale) at the end of the season when sales reps are trying to meet quotas. Also what can help is buying a model that is not that popular that the dealer is trying to move off the lot. Sedans right now are losing ground relative to SUVs and light trucks, so it’s a good time to scoop up one and go against the grain.

Of course, going for a slightly used car instead of a new one can save you money, as this post shows.

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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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