Disclaimer: Possible political controversy here.

I was asked who I thought was the worse parasite, someone living on his investments or someone living on the welfare system?

To answer that, I suggest reading this primer on simple “Robinson Crusoe” economics first.

Imagine two people who only eat apples. Each day they each pick 50 apples. Since 40 apples is enough to sustain each of them, they don’t need to work–that is, pick apples all the time. When Apple Eater #1 is not working, he spends time hanging out while consuming (spending) the apples he saved. Apple Eater #2 is working in his spare time to fashion a picking stick (investing) which will allow him to pick 50 apples in half the time. Eventually, he makes 10 sticks. Apple Eater #2 offers to lend out a stick, which allows one to pick 100 apples in the time it normally takes to pick 50, in return for five of those apples. Lending 10 sticks out, he gets 50 apples a day from “rent” or “dividends” instead of work. Apple Eater #2 is living on his investments.

A welfare recipient is someone who either can’t or won’t work, in Apple World and in reality. Normally, such a person would starve, but there is a third group of people called government, who don’t pick any apples either, and who go around taking other people’s apples and giving them to others.

Overall, I’d say the welfare recipient is worse. Without him, everybody would be better off money-wise, except the government workers. Conversely, without the person lending out the money (sticks), everybody would be worse off, because they wouldn’t be able to pick as many apples.

Note that I said “money-wise.” It may well be that the welfare recipient is a nice person that the entire community likes and that the capitalist is a mean bastard. Apple-wise, though, the capitalist has made people richer (in apples) and the welfare recipient has made people poorer (in apples).

Let’s further complicate the example: Can the capitalist morally patent his stick, thus preventing others from making their own sticks? Is it better to take people’s money legally, but perhaps not morally, and give it to the poor, than the poor taking it illegally and ending up in prison? The latter is very much the US solution; the former is the European solution. What about the carrying capacity of the apple trees? Did the sticks make the world better for the apple trees? Should we care? What if we pick so many apples that there are none left to eat?

Indeed, things quickly get complicated when considering the systemic effects. From a micro perspective, though, the capitalist is a giver and the welfare recipient is a taker.

I’m almost afraid to ask, but what do you think?

Originally posted 2010-08-26 11:56:24.

I see bloggers falling into three categories.

• Pro-bloggers are like professors in that they are they bearers of the current culture. In particular they carry the knowledge that does not get written down in books and they try to impart both book knowledge and their experience on their students (here readers). Pro-bloggers often repeat themselves just like professors present essentially the same talks year after year with few modifications. There are two reasons for this: 1) Being busy teaching every day makes it hard to be inventive (one might even say that mentally if you say the same things over and over, the brain does not get the opportunity of getting creative, creativity usually being the result of downtime.) 2) The material and thoughts are there. Once a “best way” of explaining something has been developed, why not keep reusing it?
• Researchers. I would humbly submit myself to this category both in terms of blogging and also professionally. Rather than present old ideas, researchers strive to present new ideas. This means that the ideas are more unrefined (you rarely get a presentation right the first time, try the tenth time!) but also more interesting as well as being occasionally irrelevant. I posit that nobody can present novel ideas on a daily basis though.
• Students and amateurs which are full of enthusiasm, but don’t know everything yet. They discuss what they learn as they go along: Today I started my emergency fund; I will pay off my debt in a year; We are turning down the warm water heater; … Such enthusiasm rub off and a combination between student and professor, that is, someone who is able to lecture as well as being able to connect with amateurs, is probably the most effective way of monetizing a blog.

(Most blogs are a mixture of these three).

Learn about a subject, find a voice that people like (hint: people tend to like people that are much like themselves), developing the course material and start lecturing. When a semester has finished, restart the cycle.

The most important thing is to be dependable – I can not stress enough how important and consistent record of publication is to a pro-blogger (or a professor). As discovered here, research or new ideas, does not pay as well as lecturing which is true in the real world as well(*). Even though all knowledge is based on research at some point, the researchers are too far removed from the money-stream to benefit directly(**). Its effect are not easily quantifiable either. For instance, more than a quarter of the world economy is based on quantum mechanics, but I assure you that the inventors of quantum mechanics are not deriving royalties from the trillions of dollars that economy represents.

(*) Unless kept proprietary and somehow inserted into the money stream.

(**) It is semi-easy to evaluate the return on an investment letter. You see it on your broker account. However, how would you evaluate the value of this idea as applied to all parts on your life on your bank account?

In the real world, when staying on the same path, students and amateurs tend to turn into a researchers and researchers tend to turn into professors. For example, someone who initially talked about starting an index fund will go on to research other investment choices, and then go back to explaining what index funds are. I suggest that those who do not want to go through this natural progression are “doomed” to be temporary in nature.

For instance, sooner or later a student/amateur will have learned all the basics. At this part it becomes hard to remain excited about starting a new project because said project has already been started. In particular, once a person has paid down his debt that topic is certainly gone. Also, sooner or later a researcher will run out of ideas(***) and that spells the end, because consistency as mentioned above is so crucial. However, a professor never runs out of topics, because the same topic is presented over and over.

(***) Incremental researchers run out of ideas much slower which is why professors at research universities, who are expected to do research for a living as in publish or perish, prefer the low-risk/low-return incremental method over the high-risk/high-return sporadic method. This is not much different from investing in terms of how incentives (you’re rewarded for publications) rather than stated goals (to produce ground breaking new ideas) influence behavior.

There are some natural exit points though. Students naturally graduate and move on to something else. Amateurs naturally fade away and develop new interests. Researchers, in turn, can also move on to something else and find a new area that are low on their S-curve. Professors have a much harder time stopping, because they are deeply vested in what they do (why, they earn real money, something that students and researchers don’t tend to). For instance, several probloggers have discussed the stress of continuous posting due to the fact that they will lose too many readers if they let off. For example, when I stopped the consistent daily posting in late April 2008, I lost about a third of my readers and about half of my daily visitors. If my main income was based on those metrics, you can easily imagine, what kind of pressure this puts on a problogger.

Originally posted 2008-06-30 07:32:32.

I like this guest post from MoneyCrush for the following reasons. First, it is a big step outside convention. When I grew up I was told that cars should be replaced every two years (it doesn’t really make much sense to me now) and so keeping a car running for that long is impressive; particularly so because modern cars are clearly not built to last that long. Second, it’s a big step … oh did I already mention that? … because getting the idea not to pick the default option is unusual and so it usually works to an advantage. Third, our RV also happens to be that old (it’s a ’91 model) although it only has fifty thousand miles on it.

---

I’ve had the same (used) car for 19 years now.

Back in 1990, the first Mazda Miatas were all the rage. The base models were selling for premiums of up to $8000 over their sticker price of about $13,900. There was no way I could afford one, although I wanted to buy one so badly I could taste it. A year later though, the frenzy had worn off a little. I bought a used lease-return Miata from an Acura dealer for about $12,000. (Which was $3000-$5000 less than most of them were selling for in the area.)

Buying a used car at all felt risky to me. Most people I knew bought a brand new car whenever they finished paying off their old one. Despite that, I went into the deal planning to drive the car into the ground, which I assumed would be around 100,000 miles.

By 1999, it had more than 100,000 miles on it. People kept asking me when I was going to get a new car. When I’d visit people I hadn’t seen in a while, they’d start out conversations with “Oh you still have that car?”. At the time I’d never known anyone who had a car with more than 100,000 miles on it. (Now I know plenty of people who have cars like that.)

I started to get worried, and began to think that maybe they were right: I should buy a new car.

Ok, let’s face it.

The real truth was that I’d just gotten a new job making $40,000 a year — almost double what I’d ever made before in my life, and the idea of a new car was attractive. But what I told myself was that the car was getting really old and would probably start falling apart soon, so I should get a new car. I checked out the 6cylinder BMW Z3, which seemed to be what I was looking for. You know, a sporty looking convertible.

But then I got to thinking. What if something happened and I lost my job? Did I really want to pay a higher insurance premium to have essentially the same type of car I already had? The only visible differences between the Z3 and my current car were the price (about $40,000) and the fancy name plate on the back. Did I really want to go into even more debt? Also I loved my current car. It’d be stupid to buy a new one.

A year later, my husband and I started divorce proceedings. And I blew out the engine on my car because of a dumb mistake.

Once again, I considered buying a replacement car. After all, who replaces their engine? That’s a pretty critical part.

My situation was too risky to buy a new car, and the used cars I could afford were about the same price as a new engine. But they weren’t cars that I loved, so I bought the engine instead.

Then there was the dot com bust, and I lost my job. (Did I mention that I worked for an dot com?)

That’s when I decided that hanging on to my old car was one of the best decisions I’ve ever made. Still, for years and years afterward, people I knew urged me to buy a new car every time they saw me.

I have yet to figure out why. Maybe it was the dent in the door that I didn’t bother fixing. Or the faded paint. Or the shredded top that I finally replaced when too much duct tape limited my visibility (having the roof slashed by a vandal may have contributed to the decision to replace that.)

My car turned 20 this year, and I celebrated its birthday by making a wish that I’ll get at least another 10 years out of it. It has about 215,000 miles on it. The only other major part I’ve replaced has been the drive train. Otherwise, there’s been nothing but the occasional new radiator, power steering pump, and timing belt. I do need to go put a little duct tape on the seat, because I’ve worn a hole in it. Mazda has stopped making some of its parts, so if I can’t get non-manufacturer parts for it when it needs repairs, I’ll have to start hitting up junkyards soon, but that’s ok. I’ve always wanted to take a car apart…

I haven’t added this figure up in a couple of years, but the last time I calculated it I’d spent about $28,000 total on my car over the 17 years I had owned it to that point. That figure includes the $12,000 purchase price, but does not include gas or insurance. Since then I’ve probably spent another $2000 on it.

I found data (from 2006) on the FTC site that says, “According to the National Automobile Dealers Association, the average price of a new car sold in the United States is $28,400.” Finance that whole amount over 72 months and you get a monthly payment of $499.57.

If I’d bought a new car every time my car needed a $1000, $2000, or $3500 repair or batch of maintenance, I’d have bought about 7 new cars by now. Even if I’d only bought a new car every 7 years, I’d have bought two additional new cars by now. A total of 3 “average” new cars is a whole lot more than $30,000.

Plus, none of them would have been as much fun. Saying “no” to a new car has definitely been worthwhile.

---

This post participated in Carnival of Money Stories #53. Check it out for more interesting tales of money. Do you have a similar story? Want to share it?

Originally posted 2010-05-05 14:36:23.