I have been thinking about something like this, but from a different angle.
There's a lot of things in life where you do a lot of things that use up resource X, but one or two dominate. If you try to conserve X, there's not much point in conserving it anywhere else. Unfortunately, few people bother to work out what dominates, and they try to conserve everywhere.
Trying to save water? Don't worry about anything except meat consumption and lawns. Trying to save electricity? Stick to trying to save on heating and air conditioning. Don't bother with the lights. Trying to help people? Stick to GiveWell's top recommendations. Don't bother with anyone local.
Trying to save money? It might not be worth bothering to clean your own house.
Edit: If you disagree about what I'm saying you should worry about, feel free to comment. I'm interested.
You know, people keep suggesting that housecleaning is something that's cheap to outsource, but when I look at cleaning services, they always seem quite expensive. Several hundred a month if you want it done regularly. I normally clean my apartment once a week.
I'm not sure if this is just my area or what. [Edit: It also seems ridiculously hard to get an actual price off of any cleaning service's website, even a ballpark figure, which is annoying as hell.]
Continuing to clean on your own but also having someone come in once a month means you can offload the most unpleasant tasks and your place is also much cleaner than it otherwise would be IME.
Edit: for pricing use HomeJoy.
The biggest problem I have with outsourcing housecleaning is that it is not only fairly expensive, but also very hard to find someone who does a good job.
We currently pay $90 every two weeks for a cleaner who comes and does about 2-3 hours worth of work. It is 2-3 hours worth of work that my wife or I could do about as fast if we chose to, and either one of us would generally do as good or better a job.
It's still probably worth it, because most of the time we didn't have a cleaner, we didn't choose to do it, even though it made us happier to have a cleaner house. We absolutely limit their tasks to the things we are less likely to do regularly, or are physically hard on our bodies (floors, showers, toilet -- both of us have back problems). Overall the house is cleaner, and in fact, we are motivated to do certain things (pick up, organize, clear dishes in drainer, etc.) in order to have the house ready for the cleaner.
I think the point at which it makes sense to outsource this is when you are making around $30-40 per hour for your time.
Most finance advice I've seen (and I've spent a good bit of time in the finance blogosphere) starts by saying that you should track what your expenses are for precisely this reason.
Other trigger points should be when to self-insure. The usual guidance is when you could easily pay the replacement costs. Insurance is always a low odds bet. The only economic reason for it is when losing the bet would devastate you financially.
So I agree 100% with 1 and 3, primarily because the profit margins on those insurances are huge, and the losses are so small.
Renters insurance and homeowners insurance on the other hand is quite inexpensive relative to what they cover, and the typical loss rates for insurers are a high percentage of premiums + float, what you are paying in premiums beyond your expected loss rate is very small but reduces the potential volatility of your wealth dramatically.
I guess it depends on what you mean by "rich", if you mean merely "financially independent" and not having wealth far beyond your lifestyle requirements, I'd still generally decide to carry home/renters/health insurance, and most wealthy people do. Note that these cover more than simply your stuff/home, they also have liability clauses that protect your from various claims including personal injury, which can be very expensive and have little or nothing to do with your residence. If you have wealth, it's actually a good idea to carry higher limit car insurance and a personal umbrella to protect your legal liability exposure.
I used to analyze insurance using a pure linear EV with catastrophic check. i.e. always better to self insure, as long as the worst case scenario isn't a financial catastrophe.
Now I think of it more like portfolio balance. It makes sense to do things which give up a little bit of expectation in order to reduce the overall volatility of your net worth. Having exposure to a huge risk like your home being destroyed and you having to rebuild it adds a lot of volatility. And you can insure against it for a very small amount relative to your exposure. Also note that the actual linear -EV from buying most common insurance is a relatively small percentage of the premium cost. For typical home/auto/life/health insurance, the expected loss rate is 80-90% of the premiums.
Compare to electronics insurance or travel insurance, or credit card life insurance, where you are typically paying 5-10 (sometimes 100) times the actual expected loss rate.
I'm not sure what you mean by cryonics insurance, but if you mean life insurance to fund a cryonics contract, I don't see how you can avoid it until you have enough assets to cover the cost. I can see possibly recommending term + aggressive savings over various kinds of permanent life insurance, but there are some significant tax advantages and creditor protections to permanent life insurance that may tip the scale.
Disclaimer: I am licensed to sell life and health insurance in MI and CT, but nothing said here should be construed as a particular recommendation of any kind of insurance -- everyone's individual needs are different.
Thanks for the insights. I am not in the industry. I hadn't thought about the tax and creditor aspects of life insurance. I can see how those could become murky really quick.
As for the cryogenics, yes I was thinking of some sort of life insurance policy. Maybe I should take it off my list since 'permanent death' would be financially devastating. My thinking was you probably have other things to focus on if you can't pay it out of pocket.
As for house and renter insurance, I don't think the insurance company's profit is a good indicator of how much expected value they are for an individual - maybe a best case scenario. For example, these factors would vary by individual. Who is subsidizing them?
I think the biggest thing people who haven't thought about this deeply miss is how large the potential liability exposure is if you don't carry property and casualty insurance. As your wealth rises, and the financial hit from losing your house becomes small enough that you could realistically self-insure (say net worth 10-20x home value), it starts to be pretty much mandatory to carry some kind of umbrella policy to insure against crazy liabilities, and nobody will sell you an umbrella if you don't also have house/auto/etc. insurance. Like all insurance, this is -EV, but it's so cheap compared to the potential loss that it's generally crazy to go without it. The wealth threshold at which it could plausibly make sense to self insure entirely is in the super-rich range: probably around 100Mil$US
While you are probably subsidizing some dumb-asses to a degree, the bulk of your property risk is due to things out of your control like severe weather.
What most people should do, once they have a solid emergency fund is take a much higher than normal deductible on their auto and home/renters insurance. 5000-10000 deductibles will save a lot of money, but still keep you insured against catastrophic loss. Threshold for this is when you have a comfortable emergency fund, and I'd suggest a deductible equal to what you could save again in 6-12 months of belt-tightening without affecting your longer term financial planning. Health insurance, about the same, except most people are forced now to take a large deductible whether or not they can afford one.
At least in California, you're nominally allowed to self-insure your car, but it's rare and not an especially good deal: your options are traditional insurance, a large cash deposit (in the tens of kilobucks) with the DMV, or a self-insurance certificate that's usually only given out if you're managing a large fleet of vehicles. There's also the option of a surety bond underwritten by a non-insurance company; how good a deal that is depends on who you're negotiating with and I don't know what your options are.
It certainly makes sense to spend on different things depending on your wealth. But I think people already do this, intuitively. I'm sure they generally don't do it optimally but it doesn't look to me as if the main problem here is failure to react correctly to change in wealth; I think it's just that most people do a very poor job of choosing what to spend how much on.
Suppose you expect your wealth to change enough in the foreseeable future to make a big difference to how much you should spend on what. Well, then you're anticipating either a large rapid change in wealth or slower change plus a substantial time lapse. Those are both things that I would expect might affect my preferences in ways I can't necessarily predict accurately. So rather than "wealth triggers" I would suggest sitting down once a year and shortly after any big sudden wealth change, estimating your assets and likely future income, and reviewing your spending in the light of that.
What's the value in discussing specific numeric thresholds? As the last paragraph indicates, any given person's optimal spending patterns will depend on their preferences, which may differ a lot between people (as well as between different temporal instances of "the same" person, which was my point above).
I used to be a poor student, and while I had a few indulgences I was frugal by virtue of being unable to afford some things. Now I have a job that makes plenty of money, and I spend it on things I would have once considered a poor value or even outright wasteful (uber instead of public transit, order something on Amazon I am unlikely to use).
I imagine if I had much much more money, I'd spend it on things I consider wasteful now.
If the total value of my assets reaches $5M, I intend to bounce around a lot and annoy everyone.
... Oh, wait. Trigger action patterns. My mistake. As you were.
I've remarked elsewhere that I'm not convinced of the value of discussing specific numeric values for these things, but because I'm a helpful chap here are mine.
For a lot of these, my actual answer is "Not interested until I have more money than I ever expect to have, not only because I don't see how I'd get it but because if I did then I would regard it as indecent not to give most of it away".
House cleaner: starts being plausible at approximately "$100k/year and really busy". Depends a lot on family circumstances (e.g., two parents working full-time with two children versus childless couple one of whom doesn't have a paid job).
Disagree with this one. Even at a low income I found that having someone come in once a month was definitely worth it. Depends how much you value having a neat house/how much you disvalue cleaning.
Health Insurance: Shouldn't insurance go down as you get richer, since you'll be more able to absorb risk? I suppose you might want more health coverage, but you'd also have a higher deductible so it's not clear if it would be more expensive. Doesn't your work usually pay for health insurance though? I was under the impression that they had to do stuff like that to avoid the problem of only high-risk people getting health insurance.
Virtual Assistant: From what I can gather, that's a voice with an internet connection (Warning: TV Tropes). Want!
On personal assistant, I think the 3% of wealth value will not transfer to different people simply.
For many people, the value of a personal assistant is that they can accomplish so much more with their own time. I know a number of people who have taken this approach and report that it was an investment that paid off financially for them.
If you think of it as a pure cost, then yes, you would try to pay 30k ish and not be interested until you had a very large income.
For those people I know who actually use this, they employ people who are quite skilled and may command 50-60k/year or more, and who produce economic value in excess of their paycheck.
The key determinant seems to be the point at which your marginal ability to earn more money per hour from time saved is about 2-3 times what you have to pay your PA per hour. If you are in the right kind of job (sales, business owner), the threshold is probably somewhere around 150k/year. If you are in the wrong kind of job, it probably never makes sense until you are wildly rich.
Driver does work similarly, but again, the threshold is much lower if you need to drive around, but can profitably use time in the car to accomplish work that pays you more than you are paying your driver.
Yes, I agree that these are highly dependent on your circumstances.
My figures (so far as they were properly thought out at all) were based on my estimate of the most likely ways for me to reach the relevant level of wealth. I can think of four (none of them either very probable or spectacularly improbable) and none of them would make me benefit a lot from a PA, but for sure there are people who would benefit far more and might have good reason to employ a highly skilled PA.
What actuarial or other research exists on the potential profitability of establishing a dual health insurance and healthcare providers? Looks like a blue ocean to me.
As one random example: no one dares suggest that bills should be paid according to wealth, for instance, instead people quietly assume that fair is each paying ~1/n, which of course completely fails utilitarian standards.
This seems to indicate that people are not utilitarian rather than that they don't want to talk about money.
You are asking good questions, however your original argument, that Americans don't ask them because discussing money is taboo, is hardly correct. If you take a society where people openly discuss theirs and each other's salaries, savings and budgets, all the same questions remain.
Oh, and as for the concept of ownership in general, it almost never makes sense unless you love both the concept of owning something and the thing you own. Renting a boat is cheaper and less time-consuming unless you sail daily. Tying your funds in real estate for non-business/investment/tax purposes only makes sense if working on your place brings you joy. Owning cars only makes sense if you are willing to drive an older model and/or like to tinker, otherwise leasing is cheaper and more flexible. Note that most other items on your list are not ownership: an insurance policy, donation, hired help etc. But that's a side point.
Owning cars only makes sense if you are willing to drive an older model and/or like to tinker
Interesting point of view. I'd have said that leasing only makes sense if you care about having a newer model.
as for the concept of ownership in general, it almost never makes sense unless you love both the concept of owning something and the thing you own.
I disagree. I think that ownership provides a number of significant benefits not all of which can be straightforwardly converted to money. One benefit, for example, is control over your property and the associated freedom to do with it what you want. Another benefit is reduction of risk in uncertain and turbulent times.
Another benefit is reduction of risk in uncertain and turbulent times.
Ownership of which things reduces risk, though? If you own a fishing boat, now you're vulnerable to additional risk (damage to your boat, the constant threat of big expensive repairs - 'a boat is a hole in the water you throw money into'), and you no longer have the resources you have spent on ownership of it up front rather than renting a bit at a time; those were resources that could have been a cushion against risk. If you spend $20k on a fishing boat & all its many expenses, you're now down $20k and up on risk; if you keep your $20k, well, $20k buys a lot of protection.
A valid point. Ownership is not an unmitigated blessing :-D and there are certainly trade-offs in play.
I am not saying "you should always own if you can", I'm just objecting to shminux' "almost never makes sense" -- I think it makes sense considerably more frequently than "almost never".
Agreed on several of these, but not the car one. Cars are non-optional in most of the U.S. The value of having a paid-off one that you won't lose if you find yourself unemployed for an extended time is considerable.
What I mean is that if you prefer (and can afford to) to drive a car that is no older than 4-5 years, it is cheaper and less hassle to lease it for that long than to resell it and buy a new model after that. Of course it is rarely a prudent course of action to not keep a car longer.
Owning a car can have a large advantage over leasing, if you are likely to keep the car a long time. An owned car can also become a second backup car, that it's no big deal if it breaks down) if you get a newer one. Leasing two cars at once is a big waste of money.
Owning versus renting a home is not clear cut at all. Renting a house is a huge money pit unless you are frequently moving, and renting an apartment vs. owning a house is often not comparable in lifestyle. Owning a house gives you the property and flexibility, and can result in longer-term wealth building.
There is a lot of debate in America about whether or not we are still in a housing bubble, but it seems to be the general consensus that in at least some areas of the country, buying a house is probably not a good long term investment.
There is a lot of debate in America about whether or not we are still in a housing bubble
Do you, by any chance, mean the northern part of America that sometimes goes by the name of Canada?
In the USA, the pre-2008 housing bubble has certainly popped. Now, one can argue that there is another one inflating right now, but I haven't seen many people make that claim.
The Motley Fools have a pretty good, and brief overview.
There are other articles around that name various sets of large American cities that are maybe/probably bubbling, and California is often cited as being at the forefront of the bubble.
However, you are right, the claims are that we are in a new bubble, not the same old bubble.
instead people quietly assume that fair is each paying ~1/n, which of course completely fails utilitarian standards.
Indeed, every utilitarian must necessarily love the thought of giving people an incentive to lie about their wealth - alternatively, to produce their tax returns - every time a restaurant bill is to be split.
I don't think there is much reason to lie. You would expect that people would be willing to pay based on how much they value their friendship and how much they value money. Thus, rich people who value the marginal dollar less would pay more. There's something else going on here.
Two possibilities I came up with are that people are signalling that they are capable of taking care of themselves and don't need charity, and people are signaling that their friendship is genuine and they're not in it for the money.
I feel like the second one is kind of silly. Friends help each other out. If you try to signal that you're friendship is genuine by not accepting any kind of help from each other, then you've removed the entire point of friendship.
If lying is a problem, then don't bother explicitly stating income. If someone doesn't want to pay, they don't have to. If multiple people want to pay, they can split the bill.
I guess that's where it comes from. The richest, most generous guy not to pay won't want to look as poor and selfish as everyone else, so they'll pay too. Anyone who's concerned enough about money probably isn't going to bother eating out.
What I really don't get is why they pool the bill in the first place. If you're not going to just have the richest guy pay it, why not have everyone pay for their own meal?
I think it's to speed things up. It would cost much more time to have everyone pay for themselves, and waiters would hate you.
This is only related, but not exactly to the point:
I don't get the math people here (in the US, where I'm living) use.
People will frequently cite 2M to 4M as a good stopping poing to never work again. This is a LOT of money. It's a completely unbelievable amount of money for 99.9% of humans in history. In a completely stagnant economy, this could sustain you for 200 years in present day Brazil, having a good time.
Then people say they don't eat out because it's expensive. Say you eat every day, for a counterfactual difference cost of 5 dollars per meal, accounting for lost time and cutlery costs. That's 400x5 2000USD per year. In the next 40 years, this amounts to a mere 80.000. This is so much less than the difference between 2M and 4M.
Then people say they don't sign up for cryonics, which costs like 1000 per year.
Then people use lift and uber to go places which on a daily basis could cost half a million dollars over a lifetime.
Anyway, I think the world is somewhat financially mad. I also think I know two classes of Americans, one which earns 100k plus (many of which programmers) and one which earns 17-28k (most of which students or researchers). And I mix their data up in my mind, and come up with a very peculiar idea of the American reasoning about money.
I think it is partly about mixup, and partly because many people don't think clearly about their financial planning until forced to. If someone who makes 100k+ and spends most of it wants to retire in the same style they are used to living, they may well need 2-4M to do so comfortably and safely if retiring early. Social security is progressive, the max you can get as a single person is around 42,000/year. To get that, you must work for 35 years at a high income level and wait to draw your check until age 70. Then you still need to produce another 58,000 somehow from your own assets, which at current recommended withdrawal rates requires almost exactly 2M to do and maintain your wealth. Now, you could purchase an annuity for much less, but few people are comfortable dumping all their money into such vehicles. At current life income annuity rates, that would be a bit less than 1M$ to provide 58,000/year to a 70 yo. So you only need about 900K, but what if you want to retire at 65, or 60, or 55? Then you need to take less SS, or live off assets until age 70, or maybe you can't take it at all yet, and must live off assets alone. Whether you need 2M or 4M or more depends on when you retire, and how much risk of breaking your plan you are willing to take.
It's my job to model this for people. Most are surprised that they don't need 2 million or more, because their needs are more modest than above, and they don't plan to retire very early. That said it's different for everyone, and when younger people talk about stopping/reevaluating their career because they have enough money to retire, they usually mean in middle age not at normal retirement ages. At 40, unless your lifestyle is very frugal by the standards of people who are able to save 2-4M in that time frame (generally 100k+ earners), you probably do need that much to retire comfortably.
It also depends a lot on how you feel about your work. Most higher income earners have found a niche where they feel reasonably good about what they do (it's hard to create a lot of value when you feel like a cog or a moocher), and enjoy at least big parts of their jobs. In that case, why would you retire before you had plenty? OTOH, if you are burned out and it's a struggle to go to work every day, you might be willing to live on a lot less if you knew you could quit now, or soon.
Note: I know very few people who actually live like they are poor today in order to have great wealth tomorrow. Those who are very frugal while working, either are hugely committed to earning to give, or intend to retire or do something risky or different at a very young age, and don't ever intend to not live relatively frugally. Certainly they intend to either give away or enjoy the fruits of their industry long before a typical retirement age.
Two comments.
Inflation is very relevant. Especially when you are talking about annuities -- SS is more or less inflation-adjusted, if you invest your retirement money into equities it will inflation-adjust by itself, but if you buy an annuity that pays you $58K/year, that usually means $58K nominal dollars (inflation-adjusted annuities tend to be much more expensive).
For many people it is the case that they have paid off their mortgage by retirement age. Not having to pay a mortgage tends to noticeably reduce the living expenses.
Agreed that inflation adjustment is important -- it usually makes sense to annuitize a portion of your portfolio to reduce longevity and market risk. The ballpark I was using is based on a 1% per year increase. hedging more against inflation with a higher escalator or CPI adjustment would be more expensive. Not adjusting at all would be less.
On housing -- it doesn't always make the most sense from a financial standpoint to pay off your mortgage. If you do, on the one hand, that's less money that you need for living expenses, on the other hand, it's net worth tied up in home equity -- tends to be close to a wash in terms of the net worth required to retire at various points. In the current low mortgage rate environment, many people would need more net worth to support expenses with a paid off house than without.
Obligatory links:
either are hugely committed to earning to give
See 80,000 Hours.
or intend to retire or do something risky or different at a very young age
See Mr. Money Mustache.
don't ever intend to not live relatively frugally
thanks for the links -- although I think some of the people in Millionaire Next Door skirt closer to what OP was referring to -- people who never spend money, not to retire early or do something interesting with their money, but just to hoard it.
I have known a few people who I considered pathological savers -- people who, like the fictional Scrooge, seem to save for the sake of saving, and do not ever enjoy the wealth they have created, nor do they turn it to a useful purpose in the world via large charitable donations. This is very rare in my experience, however. The only people i have known like this are in the generation that grew up during or shortly after the Great Depression.
Another factor -- I don't eat out because it is too expensive. But not because I couldn't afford the difference cost of 5 dollars per meal; I certainly could. But the additional utility of eating out is less than $5 -- in some cases, the utility is actually negative (that is, there are cases in which I would spend more money to make my own meal than to have to go out; I have certainly turned down free meals!) I really like having control over what I eat, and I don't like a lot of things that restaurants think I should like. I hate waiting around for food; if I must wait, I'd prefer to spend that time cooking. I do not enjoy the environment of most restaurants.
Whether or not this sort of thing is what your friends mean when they say it's too expensive, I don't know. But it's hard to believe that it is not at least part of what they mean; after all, most of us can identify a simple way to save $5 that we don't take, so we must be weighing the value of the goods and services differently. It is also worth noting that it is not uncommon for people to consider going out to eat, but find that they are not particularly motivated by any of the choices -- a clear indicator that the value of going out (in those cases) is not that they are motivated by the food served.
Also related, also not to the point:
http://lesswrong.com/lw/hfw/why_is_it_rational_to_invest_in_retirement_i_dont/
It certainly makes sense to spend on different things depending on your wealth. But I think people already do this, intuitively. I'm sure they generally don't do it optimally but it doesn't look to me as if the main problem here is failure to react correctly to change in wealth; I think it's just that most people do a very poor job of choosing what to spend how much on.
Suppose you expect your wealth to change enough in the foreseeable future to make a big difference to how much you should spend on what. Well, then you're anticipating either a large rapid change in wealth or slower change plus a substantial time lapse. Those are both things that I would expect might affect my preferences in ways I can't necessarily predict accurately. So rather than "wealth triggers" I would suggest sitting down once a year and shortly after any big sudden wealth change, estimating your assets and likely future income, and reviewing your spending in the light of that.
What's the value in discussing specific numeric thresholds? As the last paragraph indicates, any given person's optimal spending patterns will depend on their preferences, which may differ a lot between people (as well as between different temporal instances of "the same" person, which was my point above).
In American society, talking about money is a taboo. It is ok to talk about how much money someone else made when they sold their company, or how much money you would like to earn yearly if you got a raise, but in many different ways, talking about money is likely to trigger some embarrassment in the brain, and generate social discomfort. As one random example: no one dares suggest that bills should be paid according to wealth, for instance, instead people quietly assume that fair is each paying ~1/n, which of course completely fails utilitarian standards.
One more interesting thing people don't talk about, but would probably be useful to know, are money trigger action patterns. That would be a trigger action pattern that should trigger whenever you have more money than X, for varying Xs.
A trivial example is when should you stop caring about pennies, or quarters? When should you start taking cabs or Ubers everywhere? These are minor examples, but there are more interesting questions that would benefit from a money trigger action pattern.
An argument can be made for instance that one should invest in health insurance prior to cryonics, cryonics prior to painting a house and recommended charities before expensive soundsystems. But people never put numbers on those things.
When should you buy cryonics and life insurance for it? When you own $1,000? $10,000? $1,000,000? Yes of course those vary from person to person, currency to currency, environment, age group and family size. This is no reason to remain silent about them. Money is the unit of caring, but some people can care about many more things than others in virtue of having more money. Some things are worth caring about if and only if you have that many caring units to spare.
I'd like to see people talking about what one should care about after surpassing specific numeric thresholds of money, and that seems to be an extremely taboo topic. Seems that would be particularly revealing when someone who does not have a certain amount suggests a trigger action pattern and someone who does have that amount realizes that, indeed, they should purchase that thing. Some people would also calibrate better over whether they need more or less money, if they had thought about these thresholds beforehand.
Some suggested items for those who want to try numeric triggers: health insurance, cryonics, 10% donation to favorite cause, virtual assistant, personal assistant, car, house cleaner, masseuse, quitting your job, driver, boat, airplane, house, personal clinician, lawyer, body guard, etc...
...notice also that some of these are resource satisfiable, but some may not. It may always be more worth financing your anti-aging helper than your costume designer, so you'd hire the 10 millionth scientist to find out how to keep you young before considering hiring someone to design clothes specifically for you, perhaps because you don't like unique clothes. This is my feeling about boats, it feels like there are always other things that can be done with money that precede having a boat, though outside view is that a lot of people who own a lot of money buy boats.