Then you bring in competition for resources. If everyone makes similar amounts of money and everyone is trying to have a similar quality of life, we will tend to spend 100% of our incomes on our cost of living. Just like how perfectly competitive companies will naturally compete away all profits, competition for housing, education, healthcare, etc. will naturally compete away all personal savings until the average savings rate is near zero.
The only way out of this competition trap is to find some way to escape the average. Either find a way to make much more money than normal, be much more frugal than normal, or be much luckier than normal.
When we look at others around us, we see that the Smiths take a vacation in Europe every year; the Joneses have three kids, each in travel sports leagues; Fred Johnson has a new Corvette; the Harrisons just put in a swimming pool. All those people that we take to be our peers are able to do various expensive things, and from that we generalize that we, too should be able to do those things.
The problem is that such expenditures are probably OK if you're doing one or maybe two of them. But it's hard to see that all those other people are limiting themselves in that way; it's easy to see an illusion that our peers can do all those things, and so we believe that if we're of the same economic class, we ought to be able to do them all as well.
The way out of it is with cognitive training / therapy to have a healthier outlook on your life, and/or learn to hate everyone trying to sell you stuff.
But so many other things really are choices. I see lots of my colleagues replacing their new cars every 3 years; mine is five years old, having replaced the car I previously owned for 12 (and they were a Hyundai and Subaru, respectively, even if I could afford a Mercedes). Having cable TV with all the movie and sports channels is very much a decision that anyone can pass by. How often and where you eat out makes a big difference in expenses. Clothes, shoes, jewelry, furniture, matching stainless steel appliances with wifi, ... the list goes on and on.
I am all for frugality but in many places it hasn’t worked out in the last 10 years because you haven’t had the same access to growth. Unless you already had assets in the first place.
Bringing vs buying could be an opportunity cost. I've worked in places that provided food perhaps a job change could help pay fof the lunch.
Being economical will save you money. At some point being too economical will mean you have to accept lower quality/value. There is a tradeoff.
If your parents were being economical they might not have purchased a computer in the 80s.. It was seen as an expensive toy and not purchasing one would have saved them thousands. Long term the opportunity cost would outweigh the purchase cost.
Buying a cheap kettle it might last 6 months paying a little more and you don't need to replace it for 5 years.
There is an old British saying. Penny wise / pound foolish.
It’s silly to say that not going to Hawaii for a week or not buying a $1000 handbag is going to cost you more money down the road...
Where is the opportunity cost in bringing your own lunch to work? Would he increase his chances of getting a better job if he stopped doing that in his current job?
The bringing a lunch eating alone vs eating with the group does matter. A lot of company information gets shared during lunches, friendships are made and sometimes you get to interact with people from other parts of the company. This does give you a leg up when promotions come and or layoffs.
Not going on vacation ever or not buying a purse doesn't seem like it would matter. It could if you are looking to join a social group where everyone goes and shares vacation photos or if the group goes purse hunting together.
The point is any path could save/cost you as long as it fits with your goals and your situation. Saving that college money instead of spending it and going could allow you to buy a home sooner but it also could limit your career growth. Everything is a tradeoff.
> Everything is a tradeoff.
Absolutely. You trade work against money and money against stuff. You could have more money and less stuff. Which means having less stuff now and more stuff (or less need to work) in the future. Because money and debt are tools to move consumption between the present and the future. That's the point. It's a choice and nobody is limiting your capacity to consume in the future by forcing you to consume today.
I think this is key. If you make $200K/yr, saving 1/10th that means you drive a lexus and not a benz. The Lexus is not worse than the Benz in any objective way; you paid less and got a car that is going to be more reliable and cost less when it does break. I mean, don't get me wrong, I like how the german cars drive, but you've gotta be really dedicated to own one out of warranty.
The problem is that sure, at a high income, you can usually save a lot of money by making sacrifices that are merely aesthetic, by buying goods that are objectively no worse (and sometimes objectively better) - but below a certain point, buying a cheaper good is going to get you something objectively worse; often something that will end up costing more in the long term. Downgrading from a 15 year old Toyota to a 25 year old ford is going to get you something that probably costs you more, in total, to operate, even though the initial purchase price will be lower.
I mean, I think the disagreement here is mostly at what level this happens.
Eating chicken today and saving so you can eat chicken in the future may be a better idea that eating prime rib and starving if you lose your income.
I'm assuming, from context, that the figure of merit for this discussion is having money in the future. Obviously, in the context of getting a reality tv show, a mansion in the Hamptons is "objectively" better than having a bunch of cash and a modest place to live, but we're talking about having money in the future here. Buying and living in a mansion is... usually not a great way to go about furthering that goal; I'd argue that living in a mansion, in the context of the goals we're talking about here, is objectively worse than living somewhere modest and putting the rest of the money you would have spent on the mansion in a low-cost index fund or something.
>Eating chicken today and saving so you can eat chicken in the future may be a better idea that eating prime rib and starving if you lose your income.
That's kinda my point? I mean, that if you can downgrade from beef to chicken (something that doesn't interfere with your current ability to earn money and does not incur future costs... something that will in fact lower future costs, as chicken is healthier than beef, and if you are poor, you are paying a lot more of your healthcare out of pocket than I am) sure, that's great. If your figure of merit is money in the future, eating chicken could be said to be objectively superior to eating beef.
When you aren't buying the absolute cheapest good available, you can usually find substitutes that are cheaper and impose fewer future costs, and sure, seeking those things out is great, and important to think about all up and down the income spectrum.
But there is nearly always a point at the bottom of the spectrum where there are no cheaper options that are actually cheaper long term - that don't impinge on your current ability to make money or impose big future costs.
If you don't have any place to cook, that dollar menu burger looks pretty good. If you can't get a regular loan and need a car for work, paying way too much for a low quality car at a 'buy here pay here' lot looks pretty good. Of course, both those things will cost you down the line, but what are you gonna do? you've gotta make it through today or there won't be a tomorrow to worry about at all.
It's interesting to think about how to reduce the prevalence/cost of these games.
For a newly-minted median-income household, what is a good financial decision between buying a house or renting? Buying a house with much debt and mortgage payment is risky (remember 2008?) but maybe it is a good investment until that time. Or, not buying a house and continue to pay the rent and helping someone else paying their mortgage may be the safest bet. In either case, there seems growing housing cost anyways that no financial education could help.
Maybe moving to an area where no job exists but house or rent is cheap could be an alternative that no education suggests?
IMO, financial education without considering external environment is easy. It's always like, save more and keep some cash for the risk. But what it doesn't tell people is that the risk is getting higher for the same return and more and more people deplete their income paying the premium.
[1] https://en.wikipedia.org/wiki/Household_income_in_the_United... [2] https://fred.stlouisfed.org/series/MSPUS
1) You’re comparing inflation adjusted income figures to housing prices that are not inflation adjusted.
2) You’re ignoring interest rates. Low interest rates allow people to buy more expensive houses without paying any more money per month.
Mortgage payments as a percentage of income have been quite flat across all income levels over the past 15 years: http://www.pewtrusts.org/-/media/data-visualizations/infogra...
> Of those who did manage to buy, the median age was 32; median salary, $72,000; and median home price, $182,500. (Among all buyers, the median age was 44; median income was $88,500; and median home price was $227,700.)
Assuming no down payment, a mortgage of 182,000 at 4.5% is $920 per month, which is just about 15% of $72,000 (before tax). It’s about 19% after tax. Still quite affordable.
Part of the change is we stopped building cheap houses. Building a good 600sf house for 20-25k is very possible. Land costs are also an issue in some areas, but much like the car market people build based on who’s buying not the low end of the market. The profit margin is vastly better if you aim upscale.
Prior to this people would often live with their parents or other other family members, before buying or building a home. Though this was far less common around cities.
And with the reasonable assumption that high-income households are more likely than low-income households to buy a house in any given year, we can expect the buyer of the median house to have better-than-median income.
My high school in the Midwest hardly even covered Trig. There was no Calculus course. We did invest in our football stadium, basketball gym, and various other athletic programs. I’m not saying those things aren’t important, but real education took a back seat.
My point being that there are whole host of prerequisite problems to solve before we can get to a point of using public schools to effectively solve societal problems like this. I think your second paragraph begins to speak to one of the reasons these problems proliferate.
I wonder why our accident rates continue to rise year after year.
And our government cannot come up with $400 to cover an unexpected expense either. Not without going further into debt.
Which is why all such decision makers should at least learn how to run a lemonade stand profitably.
Until then, they should not be deciding what financial education people should be getting either.
here's a rough disk space analogy with stocks and flows:
Suppose you have a disk with free space X. What rate do you consume free disk space? What rate do you produce more free disk space? if flow out (of disk space) is larger than flow in (of disk space) then after some finite time you will always run out of disk, no matter how much free space X you started with. More capacity (a larger initial value of X) just buys you more time until the emergency. Which is useful, but you still haven't solved the actual problem in terms of the delta between the two flow rates. Now if you have your flow rates under control, and you produce at least as much free disk space as you consume, what if the flow rates aren't always steady, but have variability? Then having some spare capacity can help to provide slack or buffer to deal with temporary periods where disk is consumed much quicker than usual. But there are diminishing marginal returns to having lots of excess capacity.
> Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery. --Charles Dickens
The people in government know exactly what they are doing -they just don’t care. Politicians only care about deficits when their party isn’t in power.
Which I think is telling. People don’t need unlimited road capacity, but they do want more than a few minor improvements.
Most people these days have a decent amount of hard disk space, enough for essentials, with plenty left over for discretionary usage. Although software binaries and video games are larger than ever, and pictures and video have higher resolutions, changes in the distribution of commercial media have made it less necessary to have storage space for music and commercial movies. With the vast majority of people having enough space, few people are hurt if some others require more space -- those people can just buy more storage, and doing so does not affect people who have enough space.
Roads and housing are different, because one person's usage of a particular instance deprives part or all of another person's use. People (and businesses) may be able to attain a comparative advantage by deriving more benefit from their consumption pattern of these scarce resources than drawbacks they suffer from the consumption patterns of others, so any "spare" capacity is an opportunity for someone to benefit. Demand is thereby induced.
But the matter with roads is different, because we will not see orders of magnitude improvement on road capacity, ever. What we need is completely different solutions, but it would be great if people pushing for city mobility weren't pushing against the one form of mobility that actually works most of the time.
you don't need an orders of magnitude increase in capacity. doubling it is probably enough.
you can do that by putting roads underground, right under existing roads. it's expensive, but we have concentrated and idle wealth that could be unleashed on it. let rich people who really want less congestion pay for it. people in LA willingly pay $20+ for one single-occupancy trip in the toll lanes.
I bought my first laptop in 2010 for about €630 and after three years switched to the current one. During that time two out of four USB ports became too loose to function properly in all circumstances. I have more anecdata like this from my friends and coworkers.
(I'm not American so I might be missing some nuance)
Where exactly is the line when it becomes entitlement?
It's insanely easy.
Teaching common sense and making the right decisions? Superbly difficult, probably impossible - at least at scale.
We need to ensure that people consider cooking instead of going to a restaurant, changing a flat tire instead of calling roadside services, using a screwdriver to tighten up a wobbly chair instead of replacing it, repairing a ripped seam instead of throwing out a garment ...
None of these things are particularly challenging, but they’re so far outside many peoples’ experience that they may as well be impossible. Many people will still decide to have a professional do these things for them, but it’ll at least be a proper choice instead of being forced into it by circumstance.
So the equivalent would be rising prices to eat up any benefit - and exactly that seems to happen. At least there seem to be enough studies about the rise in prices of certain sectors vs the (far lower) rise in income to debunk the "they are just uneducated/undisciplined" hypothesis.
Of course the operating systems and apps are full of bloat but that’s only a small amount of storage, really.
Yep. It's obviously ignorance or profligacy. The system is fine, it's the people who are wrong.
https://en.m.wikipedia.org/wiki/Induced_demand
Advocates of “more housing” in the Bay Area, for example, will be dismayed to see that tons of housing and higher density did not work in NYC, prices will remain high, so more housing is not the solution.
The concept of induced demand in real estate is quite different than in transportation. The theoretical mechanism involves increased amenities induced by higher density above and beyond normal supply and demand interactions. It is likely to be a much smaller effect if it even exists at all. There is no solid research showing it is a significant in practice.
Here’s a recent presentation on the issue:
https://appam.confex.com/appam/2018/webprogram/Paper25811.ht...
It's possible to build enough of anything to satisfy all the demand, even roads. The real problem with roads is the opportunity cost. There are alternative, better ways of satisfying that demand -- like building more housing, so people can live closer to where they work and don't have to drive as far.
So what's the alternative, better way of satisfying demand for housing? Nobody has one? Then we ought to build more housing, even if we have to plow through some induced demand (which may or may not even be present) in order to satisfy the full demand.
https://www.forbes.com/sites/garybarker/2019/07/18/london-ho...
London has seen extremely high levels of house and apartment building. The market is being flooded with supply, and now prices have fallen 4.4% in the last year. So apparently it's definitely possible for even big global cities to get ahead of demand.
Before someone says this is related to Brexit and not the huge increase in supply, bear in mind that:
• For the whole country prices are still going up.
• That's because in regions outside of London they're going up above inflation, e.g. in the north west they went up 3.4%. But Brexit affects the whole country, so it doesn't work as an explanation.
• Prior claims about "uncertainty" affecting prices didn't pan out. Government economists claimed in 2016 that "uncertainty" would be such a strong effect it would cause a massive recession, instead the economy grew at a strong rate and unemployment hit record lows.
So it seems pretty clear to me that the simple, well understood economic explanation of supply and demand is sufficient to explain these results. New York could probably achieve the same thing if it built enough homes.
I don't disagree with the substance of your point, but London is far from a watertight argument.
1. London has (had?) a lot of immigration from the EU.
2. London's economy is very connected to the EU. Lots of European companies use London's financial and business services.
Don't want to argue against your overall point, however.
But even the things that don't move from unexpected to expected are harder to deal with when you are poor.
Example; person A makes $14K/yr at walmart. They put away 10% of that every month. person B makes $200K/yr at Facebook. They put away 10% of that every month.
Say you get a $250 parking ticket.
If you are putting away 10% of your 14,000/yr salary - that parking ticket is gonna be a pretty big bite of your savings. I mean, if you've been putting away $1400 a year, you can cover it, but that $250 is still a big bite.
If you work at facebook... say you are still putting away 10% of your $200,000 salary - that parking ticket costs you just as much, but it is a whole order of magnitude smaller when compared to your savings rate.
Medical expenses are the more common case for unexpected bills; it's super expensive to get hurt while poor. It's not so expensive to get hurt while wealthy.
Say you are playing catch with your kid nephew and you fall and mess up your knee. If you make $14,000, you probably have health insurance with the maximum deductible, and end up having to pay a bunch out of pocket. the 2019 out of pocket limit for an ACA compliant HDHP plan is $6750 - that's going to take a lot of saving 10% to pay off. And even if you do get it fixed, you probably have a job where you have to stand up and carry things; you will need a bunch of time off, time off that you're not gonna get paid for.
Say the same things happens to the software engineer making $200K/yr. First, that job probably comes with pretty nice health insurance; you probably aren't out much out of pocket at all. The place where I work offers a HDHP plan but they actually give you an amount of money equal to the deductible every year. (me, I still take the traditional plan, 'cause I'm willing to pay extra if I don't have to deal with medical billing at all) Next? SWE jobs usually come with a bunch of paid time off. This person probably gets paid to recover at home. And if they felt like they needed to work? they probably could work from home; and for that matter, their job probably doesn't involve knees much, so they are gonna be able to go back in to work much sooner than the guy working at walmart.
This presents a difficulty that perhaps researchers and pollsters can tease out: How many of these cash-poor people genuinely are earning enough to live comfortably vs. don't know enough or don't care enough to build savings, and instead, spend up to their income? Increase their income and they'll just increase their spending and be back where they started.
It seems likely that we could take these numbers down substantially by improving financial management education. Or, simply accept that a large percentage of Americans want to live their life to the fullest that their income can allow.