Tag: personal finance

Monte Carlo Mistakes

MIKELeave a comment

“I’m going to work until my next birthday,” a near retiree friend told me. We were having dinner and she’d already punted on retiring her previous birthday. But this next one would be it – unless she wanted to travel more. 

Alaska was last year, Galapagos is this year, Africa the year after.  “I met with a financial advisor who ran a Monte Carlo simulation,” she said, “if I save a little more and take vacations from my income rather than savings, it’s more likely I’ll be better off.” 

Monte Carlo simulations, I thought, that sounds like a task for an LLM. After entering some approximate figures and going back and forth, Gemini ended with this: The Median Outcome: Even with this safer spending, the median outcome is ending up with $10M+ at age 83. This highlights the “Saver’s Dilemma”—to guarantee you don’t run out of money in the worst 10% of scenarios, you usually end up with a massive surplus in the other 90%.

Humans are feeling creatures, and it was a good feeling to know the spending “floor”.  (See also: Maxims for Thinking Analytically, extremes). In almost all situations $X is your spending floor. 

Decisions are a constant tradeoff of: what kind of mistake are you willing to live with? 

When I returned to teaching the cheating whack-a-mole was a whole new level. Twenty years ago laptops were a minority, now Chromebooks are ubiquitous. 

Imagine you’re running a marathon against one other runner. You’re neck and neck through the first five miles. You pull ahead. But then you notice something. There’s another runner ahead. You misunderstood. You’re running a marathon against a relay team. 

That’s the whack-a-mole challenge. Pop one area, a fresh one arises. 

Teachers have the same choice as retirees running Monte Carlo simulations (and all of us!). What side do I error toward? There’s no bullseye because there’s no right answer, just blunders one way or another. 

In the classroom, I give grace. Punishing a kid who worked hard and had questionable (LLM?) answers is worse than catching the number of cheaters +1. Retirees aim for grace too, only from the market. 

It’s like an alarm system. Do you want it to go off at false alarms or miss real events? 

This is the same spirit at the heart of 4000 Weeks – mistakes are inherent, are we choosing which ones to make?

The Freedom to Buy Anything includes Shackles

MIKELeave a comment

From Jakob Lund Fisher, author of my favorite personal finance / philosophy book:

The freedom to buy anything you want is actually really limited because it’s proscribed by things that are for sale.

It’s a well kept secret that there is actually a lot more to life than what one can buy. 

For example, $10M gives you the freedom to buy seasonal tickets to any seat (including boxes) in the stadium. It might even buy a handshake from the players or a backstage pass. However, it does not buy the freedom to actually play a useful role in a game or as part of the coaching, even at amateur level. It does not buy the feeling of playing—deking an opposing player or dunking a basketball after jumping 2ft in the air—or the game knowledge to appreciate all the nuances of the game. Or even having an interesting conversation with a professional player. These are not bought with money but with (sometimes lots of) time and practice.

The Art of Frugal Hedonism (Book Review)

MIKE1 Comment

This is a fun book. Besides the charming Australian narrator, this book about personal finance was full of whimsy and fun. The chapters are short. The tips are good. The point is the same.

When I taught personal finance in school this year it was heavy on Morgan Housel’s ideas: there’s internal finance and external. The internal stuff is about how you view money. The external stuff is about what to do with money.

There are simple and straightforward answers to both these areas. The Art of Frugal Hedonism provides many ideas for both.

The book reminded me a lot of the joys of college. A thirty dollar paycheck was enough for a full weekend of fun: bars, pizza, games, being outside. It was all there. And the book wants us to get back to that point.

We can always shift our framing of the world and the authors of this book want us to think of that time. You don’t need money to have fun – we already know that – we lived that!

The Art of Frugal Hedonism is reminder of that. Find fun. Be around people. Embrace weirdness. Eat basic and delicious food.

Though a totally different financial scale, the suggestions in Frugal Hedonism align with the answer to: Should you buy a ski chalet?

Mental Accounting: Joy

MIKE2 Comments

When message board posters wondered about how much money Apple cofounder Steve Wozniak might have if he hadn’t sold his stock he told them.

But in his accounting:

“I gave all my Apple wealth away because wealth and power are not what I live for. I have a lot of fun and happiness. I funded a lot of important museums and arts groups in San Jose, the city of my birth, and they named a street after me for being good. I now speak publicly and have risen to the top. I have no idea how much I have but after speaking for 20 years it might be $10M plus a couple of homes. I never look for any type of tax dodge. I earn money from my labor and pay something like 55% combined tax on it. I am the happiest person ever. Life to me was never about accomplishment, but about Happiness, which is Smiles minus Frowns. I developed these philosophies when I was 18-20 years old and I never sold out.”

https://m.slashdot.org/story/445414

Framing “Life Energy”

MIKE2 Comments

From Your Money or Your Life

“Money is something you trade your life energy for. You sell your time for money. It doesn’t matter that Ned over there sells his time for a hundred dollars and you sell yours for twenty dollars an hour. Ned’s money is irrelevant to you. The only real asset you have is your time.”

Money is important and how someone thinks about money should be how you communicate about money.

  1. Money is something you trade your life energy for.
  2. Money makes progress in JTBD. How to talk with your rich friends about money.
  3. I live in the tribe, the tribe keeps me safe. Our tribe has a leader.
  4. Money is part of the system. ERE and Wheaton Scales.
  5. Money is about doing good things with good people and not too much friction. Should you buy a ski chalet?
  6. Money has external roles (saving, investing, spending, etc.) and internal roles (goals, FOMO, Jones’s, Always Buy Two New Cars). The Psychology of Money.

It’s wild the resources spent on money.

Did the internet need another post about money? Yet here we are.

But maybe what we’re really talking about is spirit. It’s philosophy. It’s spiritual. What am I supposed to do? What is a life well lived? Posing the easier question shifts the topic to money.

How to Talk About Money with Your Rich Friends

MIKE2 Comments

We all have rich friends. The richest person you know, knows someone richer.

I meant to go running one Sunday but as soon as leaving the driveway I saw Brian and Rachel – two neighbors I hadn’t seen recently. Instead, I walked with them.

Brian and Rachel are rich friends. Their house is bigger and in a nicer section of the neighborhood. They drive a Mercedes, I have a Toyota Sienna. They eat at restaurants I’ve never heard of. They take day trips – via plane – to see their son in Philadelphia. They donate enough to the Orlando arts their name is in the program and they get valet parking. They’re richer than me.

I’ve got another friend not as rich as me. Before I talk about him, let’s define rich.

One of my high school students lives in our neighborhood – the regular big and decent part like me. He said I was rich. “You’re right” I replied, “And here’s how you can tell”.

Anyone who owns any piece of exercise equipment is rich. They have enough money and space to buy extra things and enough energy (or aspirations of) to work out for whatever reason. Non-concern about basic things like food and shelter comes when you’re rich. I have a bike. My student has a rower. We’re rich.

My not-as-rich friend Bobby (a different one) likes to talk about how expensive things are. Travel is expensive. Our HOA is expensive. Vehicles and food and kids are expensive. Listening to him costs me energy.

But our conversations aren’t about money. Life isn’t about money. It’s not even really about the things money leads to.

It’s not the dinner, it’s the company.

It’s not the hoa, it’s the safety of family and proximity of friends.

It’s not the place tickets, it’s seeing your Ohio cousins once a summer.

That’s what Bobby misses and what Rachel and Brian get.

When I talk to my rich friends I listen for that: How do they love their peoples? When I talk to my rich friends that’s what I say: Here’s how I love my peoples.

The Algebra of Wealth (isn’t really about money)

MIKE3 Comments

“The whole shooting match,” Scott Galloway ends his book, The Algebra of Wealth, “Everything meaningful in life is about others.”

It’s not a great personal finance book. It felt like Galloway looked at his bookshelf, categorized the books he’s read into sections, found some news and research, and put it together.

But it’s an interesting personal finance book.

It’s interesting because Galloway is a brand. It’s a flavor I don’t care for, without nudging from J.F., I never would have read this book. Even then, I didn’t love it. Until that last line when it all came together.

We get personal finance wrong. We think of it as a thing people do, a distinct part of their life. We have the marriage part. We have the work part. We have the parenting/childhood parts. We have all these buckets, but they aren’t buckets. These are not different parts. It’s one life.

Any message (like your choice of personal finance) is like an organ transplant. The organ might be good (advice), but if the receiver rejects it, it doesn’t matter how healthy it is. There has to be a match.

This is why personal finance is full of gurus. Scott, Dave, Suze, Ramit, don’t persuade. They select. It’s a sampling effect. Ramit’s book: I Will Teach You To Be Rich brings in people willing to hear the message. Scott’s book brings in people familiar with his schtick.

And this is what Galloway gets so right. It’s not about money, it’s about the meaning and, “everything meaningful in life is about others.” That’s the seed to a successful transplant.

We miss this in our message. Maybe the medium isn’t the message. Maybe the meaning is the message. What does this mean to us? To our tribe? To my history?

People want meaning. They find it thru gurus.

Wheaton Scales

MIKE1 Comment

In 2010, Paul Wheaton created the Wheaton Eco Scale. He begins by noting our perceptions of other people. Those one or two steps ahead in a similar FESPE (financial, ecologic, spiritual, personal, etc.) journey look “pretty cool”. Those four or five steps “downright crazy”. While, “one level back are ignorant and two levels back are assholes”.

We’re all on our own journeys, coming across shamans, oracles, and gurus at different times. Part of this is why there are no bad books.

The importance of Wheaton Scales hit home during two successive days. First, reading the philosophy/finance forum of Early Retirement Extreme. Commenters noted how communicating about FIRE is such a challenge. Part (maybe most!) of the burden comes down to talking to someone in their language. It’s not about all the things I know so much as it’s about all the things they’ll understand.

Second, sitting in church and listening to the pastor talk about debates, agreements, and conversations among theologians. I know who he’s not talking to – me! He’s talking to the two guys who fact check, give feedback, and have studied the Bible for years.

Wheaton Scales snuggle up nicely in our mental models, like a pet on a cold afternoon, because they match JTBD. The aim of Jobs is moving from supplier language (how I see the world) to demand language (how other people see it). Wheaton gives a model for thinking through that.

And scales like this are nice. And helpful. It’s better to be mostly right than precisely wrong.

Would you buy a ski chalet? 

MIKE6 Comments

How much money do you need? Make sure it’s at least at least one million. Now, double your number (I will move the goal posts for you). If it’s not at least $20 million, raise your number to that.

Would you buy a ski chalet?

A form of this question regularly rises on a sub-Reddit. 

Business sellers (occasionally it’s sunny stock situations) come into a large amount of money and ask strangers on the internet: *How do I…*. What a time to be alive! Bags of money bring baggage. So, would you buy a ski chalet?

On Reddit answer is no.

And it’s not even close. 

Potential purchasers make three assumptions that posters point out. First, that they will always enjoy skiing and the attractions of a single place. This is unlikely. Retired wealthy Redditors reply that they want to travel more and wider, now that they have more time. That they might get injured while skiing, which takes the shine off. Or their children, who they now want to spend more time with, will lose interest or get injured.

Second, ski chalet’s are in mountains, and mountains are not the most accessible places. It’s probably a plane ride, a rental car, and maybe even connecting flights. The sweet spot, per the commenters, is two hours. Vacation places within two hours get used and enjoyed. It’s logarithmic.

Third, vacation homes away from home are inconvenient to manage. Imagine spending a large amount-though you can afford it and then paying someone the lowest price to keep an eye on it. This is not a recipe for success.

Ultimately, the advice breaks down to three points: do things you enjoy, with people you love, and not too much stress. This is the main point of the story.

And this advice supplies to people who are not in the market for a ski chalet. One of the maxims for thinking analytically, is to take things to an extreme case. If we had all the money we thought we ever needed, How should we spend it? This is an actual question being answered by people who answered correctly and incorrectly.

Do things you enjoy, with people you like, and not too much stress.

It’s not the price of the ski chalet that’s the problem, is that it doesn’t fit with this advice.

Reverse Financial Advice (MUSU)

MIKELeave a comment

Financial advice is tricky because it’s a bunch of priority influenced trade-offs. There are many ways to succeed financially, it’s just a question of how: What are the priorities and trade-offs?

Our previous personal finance MUSU was based on the Michael Douglas movie, The Game. In that thriller, Douglas is sent on an adrenaline adventure. We never know if what he lives through is real, or just the game.

That start up could imitate market crashes, pandemics, and stressful situation. Individual investors would never know if what they live through is real, or just the game.

Today is another personal finance idea.

A lot of advice starts with the idea of goals. What is your goal retirement age? What is your goal retirement income? What are your contribution goals for the kids’ education?

Share your goals, work backward in time, make assumptions, and then generate a plan.

But as humans, this is difficult to articulate. As we saw with opportunity, cost neglect, if it’s not an obvious choice in front of us, we don’t generate it. I want to retire at 65 and live on 80% of my current expenditures and pay for two college educations. Blah. Generic options like multiple-choice tests in school.

Thinking different – please read this book – is hard. So it’s logical to conclude that non-differentiated thinking means that it might not be what a person really wants.

The pitch: show us your portfolio, and we will tell you your goals.

For example, someone comes in with a limited portfolio in a bunch of individual stocks. The goals of this person is to rely on luck. Or, someone comes in with $X,000. This is the portfolio of someone who wants to work for twenty more years.

A lot of clients would come in and go oh hell no. That’s good! That reaction creates boundaries to what they truly do/don’t want out of their financial plan.

Additionally, this presentation could be presented using base rates: People with X at age Y work for Z more years – just like you will unless something changes.

This is a hard sell because finance is, like Rory Sutherland writes, a “name brand”. People buy financial advice for the same reason they buy name brand products, as downside protection. I don’t need it to be good, our subconscious reasons, I just need it to not be shit. Brands are undifferentiated on purpose!

The “white suv meme” circulates on the internet and we laugh. But new leads to unexpected factory recalls, disappointed customers, and other monkey wrenches. New/Unproven is not what the customer wants, though it’s better on some dimension. That goes for cars as much as it goes for financial advice. Even if, a little game or a backwards approach might lead to some good ideas.