This is Part 2 in a series about The Number by Lee Eisenberg. Part 1 is here.
Lee Eisenberg is not a fan of rules of thumb. In his new book, The Number, he takes a look at a few of these rules and effectively thumbs his nose at them. The author says:
[M]any financial writers are content to continue to crank out simple but useless rules of thumb. Feel free to ignore them. A solid, reliable Number will not fall out of the pages of a magazine or newspaper. If you’re looking for certainty in a Number, a large factor of you must be added into the equation.
Lee takes a look at a popular calculation whose proponents claim that in order to determine your necessary annual income in retirement for an “acceptable existence,” multiply your latest annual salary by a factor of 0.7. Lee points out that this simplifcation neglects several important factors that can greatly affect the Number, thus greatly affecting the strategy necessary to attain that number.
Here are the missing, difficult-to-quantify variables:
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Kiyosaki’s rich dad told him not to diversify — rather, seek out “the best” investments. The author attempts to use anecdotal evidence (“I knew a guy who… therefore everyone…”) to villify the financial planning industry.
Suddenly, people without much financial education became “professional financial advisors.” School teachers, used car salesmen, housewives, and insurance agents found new careers as financial advisors selling investments to people just like themselves… When one retired pilot was asked what he was going to do now that his pension had been cut from $11,000 a month to $2,300 a month, the 62-year-old pilot said, “I’m going to become a financial planner.”
The 62-year old pilot could have become a participant in any number of professions. I hope that when Kiyosaki is 62, he doesn’t plan on learning any new skills as it would go against his view of human cognitive ability. Moreover, the sentiment that teachers and housewives, etc. are less intelligent breeds is quite offensive. Anyone can learn to become a financial planner. Cedrtainly it takes time and effort to become moderately adept, but it’s not rocket science.
Kiyosaki’s not in the real estate investing business, he’s in the authorship and seminar business.
Regardless of his attitude, I could agree to a degree with some of his statements about diversification. Kiyosaki’s reasons for justifying diversification: First, it’s a good plan for passive investors — those who don’t want to or can’t put in the effort to researching good investments. Second, if one cannot focus on research, diversification helps manage risk.
Here are some articles worth the look.
* Jeff Brown from the Philadelphia Inquirer calls for an end to quarterly guidance.
* Four ways to simplify your life and save from MSN Money.
* Just when you thought real estate in New York City was getting a little pricey, now you have to worry about staking a claim to air.
* Also from CNN, more people are considering mystery shopping for making some extra money. I signed up for one of these, but the amount of effort isn’t worth the payout in my opinion.
I originally posted this in September 2003, but it never hurts to revisit the issue to raise the feeling self-worth a little bit. If you’re feeling down about not being able to afford to live on your income, just pop on over to the Global Rich List, enter your income, and voila! — instant satisfaction with your job.
If you want to feel even better, keep in mind the affluent are worse off when it comes to inflation. The luxury items to which the rich grow accustomed are much more affected by inflation then the necessities of life for the lower classes. The CLEW (“Cost of Living Extremely Well”) index measures inflation of the prices of certain items favored by rich folk. From 2004 to 2005, the index rose 4% while the Consumer Price Index rose only 3.6%.
This is a good thing, according to the article:
As long as luxury goods are inflating faster than the regular stuff, the economy is cooking. There is a good chance that just about everyone is doing OK. When luxury goods go on sale, everyone is in trouble.
If you’re still not encouraged about your own situation, take a look at the income graph. (It’s a shame that every individual in the world does not have the same expenses; if they had, this graph might actually mean something.)
Read the full article →