World War Lesson

After kicking off class with our usual round of compliments and a Berenstain Bears book, I gave the Rohyingya kids a history lesson.  We had no map of the world so I drew an atrocious map of Europe, Russia, the world.

The kids are 11-15 years old.  I started by asking what they knew about WWII.  Blank stares.  “What countries made up the allied powers?” No idea. “Who was the leader of Germany?”  No idea.  “Who did Germany team up with?”  No idea. “The holocaust?”  no idea. “Jewish people?” They’d never heard of Jewish people.

World-War-Lesson

So in the course of an hour, I covered the effects of WW 1 on Germany, the conditions that led to Hitler’s rise, appeasement policy by Neville Chamberlain, hegemony of Japan, Japan occupation of China all the way on down to Singapore (including Malaysia and Myanmar), the death toll, bombing of Pearl Harbor, concentration camps, murder of 6 million Jews, murder of Gypsies, homosexuals, how the Allied powers worked together to fight Germany from all sides, Hitler’s eventual suicide and the nuclear bombs dropped by the USA on Nagasaki and Hiroshima by the bombers Enola Gay and Box’s Car.

These kids are from Myanmar, so I attempted to make the story less USA-centric, and added details such as this: Of all Russian males born in 1923, only 15% survived World War 2. Yes, that’s a fact (thanks Reddit TILs). The war caused 73,000,000 deaths. Also, Penang Island, where we live currently, was occupied by the Japanese during the war.  I told them that if they could find a Malaysian who is 80 years old or older, that person would be able to tell them about the occupation.

I explained that the war made refugees of millions of people. I told them about the Jewish refugees after WWII and the creation of Israel. They’d never heard of it. And today, a war in Syria was making even more refugees. A few of the kids sat up at that thought. They aren’t alone. There are lots of refugees in the world.

Bless his heart, Nur, a fifteen year old student, wrote down much of what I wrote on the board. He was intensely interested in learning about this major war he’d never heard of. I have a feeling he may flag down an old Malaysian and ask about their experiences.

Nur got a funny look on his face.  He then asked, “how many countries are there in the world?”  Their guesses ranged from 100 to 10 million.  Ha ha.  Luckily this was one I knew: ~205.  They seemed wowed by that.

I hope it wasn’t TMI.  As their teacher, I just feel they should know a few facts about World War II.

In a month I teach them sex education.  I’m wondering if they know as little about how babies are made as they knew about WWII.  We’ll see.

Microeconomics: Khan vs MIT

My daughter is studying CLEP coursework for college credit while she waits for her residency status to improve (aka qualify for in state tuition).  I told her I’d start Microeconomics with her.  She found a book at the library, while I tried two different Microeconomics tracks: one from Khan Academy, and one from MIT.  Here’s how the introduction classes compared:

Course Selection:

Khan: easy to find, one class to choose – select and go.
MIT: I’ve no idea whether to do 14.01SC or 14.01. I went with the latter ( I think ) 

Khan Intro video:  10 minutes.  Quote from Adam Smith and discussion of invisible hand and that it’s sometimes a net good for society if individual actors are allowed to make their own self interested choices – not always, but also not never.  He emphasized timing – 1776 connected with birth of USA – also that often when we pursue self interest the net societal gain can exceed the gain if we were to act with society in mind.  Again, not always but not never either.

Overall the video was easy easy to understand and provided a clear description of micro vs macro – micro is individual actor, macro is millions of these actors.

Khan then emphasized that economic math is based on simplifications and assumptions, so when doing the math, one must remember:  a) take with grain of salt, b) keep in mind the common sense of what’s going on; if the math leads to wonky conclusions, check the assumptions, don’t blindly trust the math.

I loved the way Khan taught this introduction video.  He emphasized ideas physically on the black board in such a way that made it effortless for my brain to compartmentalize the newly learned ideas away in a logical packing.  For example, his discussion of simplifications and assumptions: he went through this both for micro and macro – thereby emphasizing the importance and the ubiquity of the concept.  He could have said, “this applies to both fields”, but by writing it out twice, one for each, I just ‘got’ it – no need to actively put that info away into my brain myself.  He did it for me.  

MIT Intro video ( Professor is Jonathan Gruber – teaching a live class): (34 min)  Video Hits me up for a donation straight away.  Really MIT?  Don’t you have an endowment fund in the tens of billions of dollars? Er, I’ll delay that donation for now guys, k? Query: what’s the net present value of that promise?

I hit play.  Within one minute I’m thinking,  Dude! The teacher is of Steve Jobs Intensity.  I’m regretting having had so much coffee this morning. This is how I feel:

This is me at MIT

Teacher: “Micro is a dismal science because we make you choose between options.  We say, ‘You can’t have everything, you have to give up x to get y’, and that’s why people don’t like us.”  

Uh, er, that’s not why I don’t like you bud.  Dude – dial it back.  

deep breath, deep breath. sip coffee.

<two minutes later>

Now, he’s explaining why microeconomics doesn’t suck.  What?  I don’t know if I can get through an entire semester with this guy.  

Teacher: “I’m going to take everything you love in life and write it down as a U function”  But I’m hearing Tyrone from Princess Bride say, “I’m going to suck all of the joy out of your life, one semester at a time. I just sucked one day of joy away, now tell me, and this is for posterity, so please be honest, how does that make you feel?”  

OOF – I don’t know – I’m 5:42 in and I’m looking for the exits already.  

@7:34: I’m thinking he’s just going through the textbook.  He’s going from his podium notes to the black board and verbalizing the textbook. There’s no taking a step back and commenting on what and why we’re learning micro.  He’s not differentiating micro vs macro.  I could read all of what he’s saying – and probably enjoy it more – because it wouldn’t have this anxiety laced edge.  This teacher adds zero value.  

Thing is –  I learn best in class – with a good lecturer.  Whenver I have a good teacher – I excel.  Frickin Jack Crandall – High school physics junior year – LOVED that guy.  I didn’t care what he looked like or what he wore *.  The way he explained physics simply took my mind on a fascinating journey for 50 minutes every feaking day. This MIT professor had nothing on Jack Crandall.  With this guy? I pretty much want to sneak out to the smoke hole and toke a bowl at this point.  

@8:03: he’s covered 3 fundamental questions of micro + the comment “these are all resolved by one variable: prices”  No discussion of how bloody SIMPLIFIED this whole theory is.  So now I’m sitting here actively thinking ‘no, it’s not that simple – there’s more going on than prices – there’s war and conflict and disease and stoicism and consumerism and messaging from birth through death and …’ on and on.  He keeps putting up obstacles to my learning by making these clench jawed assertions.  I feel like I’m being force fed and I have to open wide even though I’m stuffed already.  

@8:24 – goodie – casual example – story time – yeah! development of ipod.

@9:14: “$300 bucks, back, when $300 bucks meant something.”  wait – are you regurgitating a tired inflation refrain from decades ago when it was relevant?  Shit, man, these are college students – $300 is a lot of money still, even if they come from wealthy families.  You are an economist for chrissakes.  Inflation has been insanely low since the ipod was introduced.  Okay, okay, sorry, I should cut you some slack. Maybe this is your first video taped lecture and you are nervous.  Carry on…

@10:10 – he’s pacing.  I’m nervous.  body language: arms crossed, hands tucked under armpits.  Okay, confirmed: he’s nervous.  

@11:30 – now he’s panning Lady Gaga.  Way to alienate your audience, buddy

@11:31 – now I’m focusing on nonsense – pleated khakis.  Ergh.  He’s explaining that his youth was spent standing in line to buy cars tickets.  Okay – he’s not a new teacher.  why is he so amped up / nervous?

Class Notes:

Theoretical vs empirical economics – models vs data.  Ok – clearly explained.

Positive vs normative economics – how things are vs how things should be – got it.  

Perfectly competitive market – ebay – producers offer goods to wide range of consumers – consumers bid up price until person who places highest value on good gets it.  answers third fundamental question which is who gets the good. Kidney auction on ebay – got to $5M before it was shut down by ebay.  

At least he’s giving an example that is relevant, fun to think about, easy to relate to.  Not bad.

Positive question: why did cost of kidney get so high?  He discusses supply / demand / scarcity – at last mentions Adam Smith – water diamond paradox – water important diamonds are irrelevant yet diamonds are expensive and water is free.  Because you haven’t considered supply.  Demand is high, but supply much higher, so price is lower. Similar in kidney case: demand is high (you die w/o it), so people will spend everything they have.. supply is low – price goes through roof.  This is positive analysis.

Normative question: should this sale be allowed?  They decided ‘no selling of body parts’.  But *should* they have done that?  *Should* auctioning of body parts be allowed?  On one hand, people die all the time, if someone is rich, why shouldn’t they be able to pay for a surplus body part?  

Wow, it’s way into the seminar and at last he asks a question to the class. Thank goodness he restated what the students answered.  But he’s summarizing based on what he thinks, he’s not checking w students to make sure he paraphrased per their intent.  I’m not terribly impressed with this MIT teacher. He’s guiding the answers and thus communicating, “I don’t really care what you have to say here”.    He cuts one student off mid sentence when he ‘gets’ what they’re getting at.  Bad teacher!

He knows his subject, but he’s not a skilled teacher.  He’d crash and burn in middle school.  

That said, I do now understand that ‘normative’ means ‘what SHOULD be’ – which  I must keep in mind during the whole semester.  Okay.  Cool.

@30:00 Poses an economics question about buying the textbook for the class. Should the students buy a used 4th edition text book or 5th edition text book, at respective costs of $85 vs $130.  “Well if your parents are paying for it then who cares your risk aversion, preference, just buy the 5th edition, amirite?”   This is a throw away comment – thrown out there for no better reason than to regurgitate conventional wisdom that Ivy league school parents have deep pockets and therefore their interests in saving $ / optimizing $ choices can be disregarded.  WTF.  I hate comments like that.  Alienating students strike #2.

Alienating comment #3: “Professional pool players are not guys who are able to do the (angular) computations”  WTF?  You are calling pro pool players stupid?  Dude, you need to stop making throw away assertions that lead your audience to want to argue against you.  Lady Gaga, rich parents, stupid pool players.  There’s ZERO utility in these assertions.  Cut them out.  Your utility function is sub-optimized when you do this.

I just feel like Prof Gruber is telling and not teaching.

Hands down, I prefer Khan over MIT, at least for Intro to Microeconomics.

*for the curious – handle bar mustache, polyester pants, short sleeved collared engineering shirts with pens in the pockets.  J. Crandall was ready to ROLL – a marble down an incline plane and predict where it would land on the floor given the physical measurements of the table and incline plane. 

 

One of my students has gone missing from class..

Sumayyah’s mom recently gave birth, so Sumayyah has stayed home to help out.  But that means she’s missing school :(. Today, Karina led me to Sumayyah’s apartment and I left with her a laptop with Wifi dongle so she can do Khan Academy from home. She seemed happy about it. She got busy with a lesson straight away.

Sum-Khan-sm

The video lessons associated with each exercise are useful – not only for math, but English too.  This one (pictured) explained what a trapezoid was. She nailed the question after finishing the video.

On Friday I’ll collect the laptop and see how she fared. Crossing fingers it works out.

The Game

It’s board game night at the local cafe.  From Monopoly to D&D, you’re always enthusiastic to play. The host invites you to join a table where the people seated are ready to start. You introduce yourself to the five players, and eagerly sit down.

You see a complex looking board, dice, cards, and colorful money. Other objects surround the board, but you’ve no clue their significance. But hey, you’re a smart cookie, you’ll pick it up as you go along.

A woman rolls the dice. She moves her pawn, picks up a card, then makes a transaction with a person you assume is the banker. She makes another transaction with another player. You’re not quite sure what she’s trying to achieve, and the game language is completely foreign to you.

The next person rolls, moves his pawn, picks up a few cards, and transacts a few of those objects that you still don’t know the significance of. The next person goes, but only moves his pawn. Same with the next player. You still have no understanding of the rules, and now it’s your turn. You roll a four, and move your pawn four spaces forward. Abruptly the ‘banker’ moves your pawn to another space altogether. She says, “No, given your assets, with a four, you end up here.” You’re behind where you started. You move your hand with an intention to pick up a card, but the banker stops you.  “Sorry, when you’re behind start, you get no cards.”

You say, “Oh, I don’t think this game’s for me. I’ll try something else.” The banker shrugs and sweeps you game pieces into her reserves.

You stand up to look for another game, one you might actually enjoy.  From one table to the next, they’re all playing the same game.  You observe for a few minutes and realize that very few seem to know what they’re doing.  The others seem completely lost.

Forget this. You grab your jacket and make for the door. The door’s locked.  Turning around, you see the cafe owner standing before you.  “You have to play.  There’s no getting out of this game.”

Irritated, you demand, “What are you saying? This is Hotel California, but for board games?”

“Pretty much,” he says.

For some reason, you don’t think to ask for the game rules.  You don’t even request the ‘getting started’ guide.  Noooo, you want to wing it.

~~~

Just by being born on this rock we call Earth, every one of us is entered into a game of money.  In the modern world, the name of this game is Capitalism™. There’s no escape. We’re all in it. Yet a large number of us never learn the complete rules.

Incidentally, the game is upgrading to version 2.0: Global Capitalism™.  Those who shunned the rules in version 1.0 are likely to get their asses handed to them in 2.0, and most likely by some foul-mouthed 12 year old living on the other side of the planet.

Why not learn the rules?  Maybe the notion of capitalism is offensive.  Sorry, whether one likes it or not, we’re all entered into the game.  Maybe it seems unfair. Yes – it is – some are born behind the start line, some are born way past it.  It’s totally unfair.  But it’s reality.

Here’s the thing: No matter what one thinks of the game, nor where one starts playing, everyone should at least know the ‘getting started’ rules.

I beg of you, please, understand the basics.  Warning: don’t get your learning materials from yahoo! finance.  They’re feeding you bullshit so that you click. Don’t go to investment  advisers either – they’ll likely try to sell you some product whether it suits your or not.  Remember, they’re playing the game too.

Game cheat/hint: unless you’re worth tens of millions of dollars and worry about estate taxes, never buy Universal Life or Whole Life insurance policies! Those are expensive hybrid financial products.  You’d be better off taking a personality quiz from the Church of Scientology.  If you want life insurance, buy term insurance. That’s it.  Put investment dollars into investments, don’t give them to insurance companies.

Here are the financial ‘getting started’ rules-of-the-game.  No equivocating here: these rules are one-size-fits all.  Buckle up.

Like any good set of game rules, we’ll begin with the objective:

Game Rule #1. The objective of the game is Financial Independence (FI). No, you don’t get to choose a different goal. FI is your goal. Accept it. Your objective is to accumulate a nest egg large enough to fund your life. That’s FI.

If you prefer, you can call it ‘FU’ Money.  Here’s Lucy Liu’s take on FU money, …and John Goodman’s character’s thoughts on FU money.

Game Rule #2. Find your FI Number.   Know how much you need in invested assets to call yourself ‘FI’.  Hint: it depends on your anticipated annual expenses.

It is this simple: Financial Independence, or FI, is achieved when the sum total of your investments are greater than 25 times your annual expenses.  This concept is most easily comprehended with examples.  Here are two:

  • If you spend $40k per year, you’ll need $1M invested to generate $40k every year without depleting your nest egg too much.
  • If you spend $100k per year, you need, that’s right, $2.5M in invested assets.

Game Rule #3. Budgets are for losers*.   If point #2 above left you wondering, “wait, but IDK how much I spend every year.” You may be moaning in dreaded anticipation of being told to make a budget.  Guess what, budgeting would be useless.  You’ll find yourself setting arbitrary goals based on wild guesses, and then failing – often. Budgeting at this point is a pointless exercise because you have not data.  It would be tremendously discouraging, and could catapult you back into actively avoiding the rules of the game. No, at this point, you need data.  You need to know what you’re actually spending. You can budget later… or not.  For now, you’ve got to track every transaction, down to the dime.

Luckily, we’ve got these amazing little attention-sinks called Smartphones-with-Apps. Install mint.com or YNAB (You Need a Budget).  Bam – you’ve got your new bathroom reading app.  Link the app to your credit card, and it’ll track your spending for you. All you need to do is lift the lid, sit, categorize each transaction, wipe, flush. Done. Eventually, the app will learn to categorize your $20 transaction at Trader Joe’s as ‘groceries’. At that point, your bathroom app time can be spent looking at spending trend graphs, or net worth balances.  Just stay seated when you fist pump “Yeah! I’m in this game!”

For the odd cash transaction, take 5 seconds out of your important daydreaming and enter the numbers at the time of the transaction.  It’s no big deal.

Game Rule #4. Optimize your spending.  Decide whether your current spending level is ideal for you and your values.  Do you really need to spend $200k per year to be happy?  Look at each category of spending.  See if you can optimize it down by making systematic changes in your habits.  Maybe you could ditch your car, as Mr. Money Mustache so fervently recommends.  Maybe you could make your coffee at home, as I do.  There’s no one single thing you must change.  I think you’ll find you could be happier if you dial in the things that don’t add value to your life. Don’t let anyone shame you into the changes – the motivation needs to come from you. And why do you care?  Well, because if you need $200k per year to live, that means you need $200k x 25 = $5M in invested assets in order to be FI.  Oof that sounds like an awful lot. By the way, you do remember that is your goal, right? If you can cut the required annual expenses, you lower the FI goal.  In one action you make the objective soooo much more attainable. It’s a direct relationship.  Simple.  Not necessarily easy, but it’s true.

Oh, and by the way, did you notice I still didn’t tell you to budget?  Guess what?  If you’ve been tracking your expenses, those nifty apps allow you to set budgets in a matter of a few minutes based on your spending patterns.  There’s really little reason to not do this at this point.  Brew your coffee, get your system moving, lift the lid, and … budget!

Game Rule #5. Calculate your savings rate.    In order to advance to the next level. you must calculate your savings rate.  Luckily, it’s easy:

Savings rate = (Income – expenses)/(income).   E.g.  Say your after tax income is $50k, and you spend $40k per year.  Your savings rate is:  ($50,000-$40,000)/($50,000) = 20%. Some fine print details to consider in figuring your income and expenses:

  • Include in ‘income’ any money your employer directly deposits into your retirement fund – matches and with-holdings alike. Omit from income all taxes/ tax withholding.
  • Include in ‘expenses’ all those stupid Coach bags, costly greens fees, and Lexus lease payments.

What’s your savings %?  Write it down and refer to it for the next game rule.

Game Rule #6. Memorize these numbers:

  • 75% = 7 years
  • 50% = 17 years
  • 25% = 32 years
  • 10% = 51 years

Putting those through our lucky decoder ring … we get:

  • If you save 75% of your after-tax income, you’ll be FI in 7 years.
  • If you save 50% of your after-tax income, you’ll be FI in 17 years.
  • If you save 25% of your after-tax income, you’ll be FI in 32 years (well that sucks)
  • If you save 10% of your after-tax income, you’ll be FI in 51 years (yeah – that’s conventional wisdom – bullshit, right?)
  • Drink your Ovaltine.

How long til you want to be FI? 17 years? 25 years?

If you answered ’51 years’, ask yourself the question again.  Loop on this question until your answer is less than that. Remember, FI does not equal retirement.  You don’t have to quit working.  You may want to, but you don’t have to. Hell, you don’t have to do anything at that point, cuz you’ll be FI. Read more about how and why this works: The Shockingly Simple Math Post on the Mr. Money Mustache Blog. 

(To be fair, if you are just starting out in your career, you may find saving 10% an absolute chore.  Set an intention to increase it when you get your next raise.  Keep going until hit your ideal savings rate)

Game Rule #7: Stop buying shit you don’t need.  Chances are you could optimize your expenses and loweryour FI number to something that feels a little more attainable.  That means cutting out paying for shit you don’t need. Here are my top five biggest bang-for-your-buck spending cuts:

  • kill cable (duh – You’ve got Netflix or Amazon Prime – oh no – not both?!?!)
  • get cheaper cell plan ($25 / month is all you need – try Ting or Republic Wireless)
  • stop eating out all the time, pack your damned lunch.
  • sell all cars until you own <= 1 for the whole family
  • carry your own water and stop buying silly bottled water /prepared coffee.

Game Rule #8: Never borrow money to buy a depreciating asset. No you don’t need a $20,000 car. This will land you back to the starting square. Unless you’re FI, you have no business buying such a car. Similarly, unless you can put 20% down on a house, you may want to keep renting.

Game Rule #9. Educate yourself on investing.

You can’t expect to build an FI fund by forwarding your monthly savings into a savings account.  No – you need that money to grow.  Understand the Rule of 72 to mentally calculate how money grows over time.

  • Read the Bogleheads.org wiki. Write an Investment Policy Statement (IPS)
  • Never pay more than .3% management fee on any fund. (check out vanguard)
  • That retirement account at work? Max that shit out. At the very least, get the employer match.  Even better: contribute the max allowable by the tax man.
  • Consider Real estate for your portfolio.  But dont’ jump into this naively.  It can be a wild ride (will write about that later).

Game Rule #11: When in doubt, pause the game and read the full rule book.  You can find complete rule-book variants for the Game of Capitalism 1.0 at the following sites.  The rule-books for Game of Capitalism 2.0 are in draft form.

  • Mr Money Mustache
  • forum.mrmoneymustache.com, lurk for a bit, then post a user case and get feedback.
  • r/personalfinance.  There’s loads of good advice there – especially the ‘getting started’ stuff the bots prattle on about. Pose your own personal case study and get feedback from the world wide crowdiverse.

Some people on the MMM forum are saving more than 80% of their income.  Crazy, right?  Hardly. Those people are winning the game.

 

Change your thinking; it’s all just a game. Yes it’s that easy – think of your financial life as just a game. You know the objective, now its time to come up with strategies and tactics to reach it.  Be creative.  How can you have fun today without spending a dime?  Or,adopt this mantra: ‘if I throw money at a problem, I’ve lost.’  Or, put a post-it on your credit card that reads, ‘do you really need to buy stupid shit right now numb-nuts?’

That’s it.  Learn these getting-started rules for the Game of Capitalism, and one day, you may discover the word ‘money’ magically disappears from your ‘big problem’ mental ledger.  Isn’t that what you want after all? To not have to worry about money? I’ll bet it is. Because not thinking about money is precisely what got you where you are today.  You are in the game no matter what, so maybe it’s time to learn the rules.

Further reading:
Bogleheads.org wiki
http://www.irs.gov (Honestly, this site is THE place to get tax info.  Random online articles can be good leads, but find the actual tax code on irs.gov to confirm.
Your Money or Your Life (audible audiobook) The audio book beats the print edition IMO, but if you prefer…  YMOYL (paperback)  
The Shockingly Simple Math Behind Early Retirement
Find out if you’ve won the FI game on cFIREsim.

*Shamelessly stolen from a chapter heading “Goals are for Losers” in Scott Adam’s book, “How to Fail at almost everything and Still Win Big.”

**Incidentally, try to set your W-2 withholding to a level that’s very close to what you’ll actually owe.  Don’t ‘save’ by manufacturing a giant tax refund. Rather, save, by fricking just saving.

**Check the Retirement Account Page on irs.gov to find IRAs you are eligible for. In general, contributions to a traditional IRA are deductible if your AGI is south of $100k, and Roth is open to everyone, unless you already have 401ks in which case eligibility ceases with AGI north of 180K (assuming married filing joint). Post your case in forum.mrmoneymustache.com and use the frugal hive mind over there to dial this in for you.