Don’t trust stupid Internet financial advice. Compounding interest is real

It seems I have turned into the “anti-marketer” police on the Internet, first about location independent businesses and now about the time-value of money. A guy on Twitter spit out a retarded tweet,

If you drive a lot of miles out of necessity this is for you.

If you buy a new car for $30k and drive it for ten years it works out to $250/month or less than $10/day.

If you rely on that car to get you and your family where you need to be, and safely, it isn’t a bad deal.”

This guy might not be retarded but this piece of his advice sure is. I can’t tell about him as a whole because this advice is so bad that I don’t want to read the rest. He is forgetting the time-value of money. The true cost of the $30K car over ten years is not the cost of the car, but the cost of the investment foregone because of the car. Let’s imagine you buy a $15K car instead and keep the other $15K. Compounding interest formula is A = P(1+r/n)^nt

P = principal amount (the initial amount you borrow or deposit)

r = annual rate of interest (as a decimal)

t = number of years the amount is deposited or borrowed for.

A = amount of money accumulated after n years, including interest.

n = number of times the interest is compounded per year

Dont worry, I had to look this up. Let’s even skip that and look at the simple interest formula, A = P(1 + rt). If you save the $15K and invest it @ 5%/year, you’ll end up with $22,500, or $7,500 more. So now the cost is not $250/month, but $312.50/month.

That’s not all, however. 5% a year is conservative. In addition, neither calculation takes into account inflation. More importantly, neither calculation takes into account financing.

If you have $30K in cash to buy a car, fine, but you’re also probably in the financial elite, and you’re still not earning interest. Most people finance cars. If you finance $15K, you’ll probably be paying 5% interest. So you can add another $7,500 on top of your $7,500 in foregone income, under simple interest, and more than that under compounding. So now you are not paying $250/month but rather $375, if you account for foregone gains and for interest.

It’s even MORE complicated than this, because the interest in most consumer loans is front loaded. That means you’ll spend the first quarter to half of the loan term primarily paying off interest. If you end up having to sell the car…. congratulations, you just paid a lot in interest.

I pointed some of this out to the guy and he said, “Yeah I know buy a $5k hatchback and invest everything else in mutual funds. I love MMM and learn a lot from him, but his car advice is big practical for high mileage commuters imo.” There is a big gap between $5K and $30K and he knows it or should know it. That reply is sufficiently painful that it reinforces the idea that he’s not worth listening to.

It’s smart to try not to be a high-mileage commuter, but that’s not always possible (circumstances of work and housing sometimes mandate it). But the guy didn’t even begin to address the real financial cost of the thing he’s advocating. He says he is a “Personal finance coach with a passion for helping others remove stress and worry from their financial lives.” He has 27.5K followers, or about 27 times the number I do, yet I know 10x what he does about finance.

Simple or compound interest aren’t even Black-Sholes or fancy shit that requires calculus. It’s simple math with some exponents, and the calculators for it are widely available online, and this simple math shows the true cost is far higher than $30K. If someone wants to pay it, fine, do it, but to think that $30K is “only” $250 a month is why this guy is giving advice on Twitter and not working in finance. As far as I can tell no one else noticed this on Twitter. The fools are following the fools.

The more you know about finance, the more painful the decisions of many people around you will appear. “Normal” consumption patterns will begin to seem crazier and crazier. You will hear people brag about the “house” they bought, which in fact the bank owns, and you will hear them ignore closing costs (can be 10% of the total) as well as foregone investment opportunities. In some markets buying makes sense, in others renting makes sense. Buying property was great in 2010 – 2014. Probably not so great today.

Electric cars change the cost equations because right now their initial cost is higher and their long-term costs are much lower. That is another important consideration. They also don’t spew poisonous fumes into the air, which is nice.

Part of the reason you’re poor is because you don’t understand compounding interest or that the alternative to spending money isn’t sticking it under a mattress, it’s investing it in an index fund. You’re poor because you don’t know math. Don’t end the week with nothing in your career and don’t take financial or health advice from Internet randoms without checking it first. The same is true of me. Don’t trust what I say. Check it for yourself. Wikipedia says, “The Florentine merchant Francesco Balducci Pegolotti provided a table of compound interest in his book Pratica della mercatura of about 1340.” “Richard Witt’s book Arithmeticall Questions, published in 1613, was a landmark in the history of compound interest.” So this formula is around 400 years old, maybe older, but Twitter guy with lots of followers doesn’t know it. What else doesn’t he know?

Location-independent businesses are rarer than online seminar hucksters would have you believe

I see a lot of unlikely claims by guys online about location independence, independent income, etc…. they’re improbable, not impossible, but I worry about the low-information guys who are attracted to “location independence” but who don’t have the unique, non-commodity skills to get there.

The commodity / non-commodity concept comes from economics: in a perfectly competitive market, commodities move to the price of marginal production and distribution cost. Think of something like steel: a given grade of steel is a given grade of steel and is completely undifferentiated; if producer A can make steel $1 cheaper than producer B, the market will move towards producer A until producer A’s capacity is exhausted. In many fields workers are a lot like this. If you are working fast food, retail, etc., you are competing with a vast pool of local and sometimes global labor, and you are interchangeable with thousands, sometimes millions, of other people. You will likely not be able to command above-average wages without differentiated skills.

If you don’t have the attention and cognitive skills to read the above paragraph, or if you find it boring, you are not going to make it as a location-independent worker.

In most cases, people have to work for many years to develop differentiated skills, as well as the industry connections needed to deploy those skills effectively. Programming is a common example of this, but most programmers take many years to develop their skills, and many people lack the IQ necessary to be a programmer (that is why so many programmers with three years of industry experience and a CS degree make six figures… most people literally cannot do the work). There are many other examples. To become a doctor takes four years of college, then four years of medical school, then three years of residency. At the end you are a highly differentiated worker, but you are not location independent (mostly).

There are many other kinds of differentiated skills, but most of the guys pitching online seminars don’t have those skills and haven’t demonstrated those skills, though they often claim to have them. Something about the online world encourages a set of magical beliefs that you can, without real skills, learn how to make large amounts of money. Pretty f**kin unlikely.

So how does most of the world really work? Unless you are founding a tech startup or working for one of the big tech companies, it is very hard to make very large amounts of money right out of the gate (say, ages 22 – 30). Even tech founders and workers see much larger financial gains 10+ years in. Most people spend their early career building skills and building connections. Many people focus, wrongly, only one of those things. If you build skills without connections, you may have lots of skills, but you don’t have a way to leverage them. A couple years ago I wrote, Company loyalty is dead. Switch jobs every 18 months to two years [Career]. If you don’t build connections you will have a harder time switching jobs and getting the pay bumps from job switches.

To get 50%+ pay increases, you basically have to switch jobs. There is something in human psychology called “anchoring.” Once an “anchor” is set as a reference point, it’s very hard to re-set it. If your job at an organization is paying you $45,000, you are unlikely to get above $50,000 even if you are generating $100,000 of value for the organization. If you switch jobs you may be able to go up to $75,000 or more at the new organization. Then it’s possible, in two years, to go BACK to the old org, show them your $75,000, and negotiate for $90,000. Or $110,000. Six figures is another psychological barrier.

Switching jobs effectively usually requires connections, however, as well as a portfolio, if possible. So if you have skills but no connections, you retard your ability to get the new gig. If you develop connections without having skills, you may try to get jobs but then not be able to do them. Sometimes this works, as most of us have found worthless people in high-level jobs, but it is best if you have both. It’s like dating, you might be able to find the rare hot chick who is into a typical fat video gamer with limited ambition… it’s just going to be super rare to find her, and if you want success with women you’re better off doing the typical things, developing yourself, lifting, improving your social life, chatting up chicks, etc.

Markets are very efficient. Not perfectly efficient, but very efficient. So if you try to do “location independent business” without real skills, you are running into efficient markets without sufficient specialization, which is a recipe for stagnation. There are arbitrage opportunities out there… Someone who speaks flawless Mandarin and English might be able to exploit some. A random guy who is hearing about THE DREAM of getting out of the corporate grind… probably can’t.

The guys who make it with location independence have often built up non-commodity knowledge and execution ability. So many claims online are very implausible without being utterly impossible, and the guys who want to believe, want to believe so bad that they’re willing to blind themselves to reality.

Lots of guys reap most of their income gains between ages 35 and 55. By 35, information and reputation advantages have compounded sufficient to allow smart guys who are good workers to acquire the in-depth knowledge necessary to command high salaries. Most guys have also gained sufficient reputation in their industry to be known as a good worker. Very few unknown quantities get hired for mid- or high-level jobs. Too risky. You have to prove yourself first. Guys making good money usually have good skills, they’ve proven themselves, and they have good reputations. All things that are hard to do via online, location-independent businesses.

Being a guy is a relentless process of proving yourself. When two guys get together, they size each other up… is this other guy for real? Or is he full of shit? One problem with online gurus is that you can’t see them solve problems in real time. When you can do that… you really learn about a man. Whether he is effective or not. It is possible to seem effective without being effective… I have had to fire people like that before.

With chicks, you are seeing if they are for real… do they actually want sex… do they look the way they seem to online… etc. Often they are not for real.

I think there are more guys trying to sell “Location independent” seminars than there are guys who are in location independent businesses.

A lot of what you encounter online is really marketing and dreams, not reality. I think that reality-based persons are not spending that much time online, which is so often a waste of time (for me as well). There are a lot of attractive but unlikely claims being made online, and you are welcome to believe them if you want, but you are going to suffer if you believe the stories a lot of guys are selling.

To reiterate, you need to BUILD SKILLS and preferably industry knowledge and industry connections too. Most people do NONE of those things and as a consequence their careers suck. Most people eat too much sugar, get too little exercise, and watch too much TV, and therefore their bodies and their lives suck.

Most guys are going to make more money in conventional businesses and government than they are going to make in the wilds of the Internet… this is also why most smart guys are NOT going to come out as game experts or Red Pill guys. That’s a good way to lose your footing in the corporate and government worlds. That’s a good way to retard your earnings, maybe permanently. Once you are identified without ideologies too far outside the Overton Window, you may be permanently f**ked from earning the largest amounts of money. I would like to change the Overton Window, but the very first thing a game guy needs to do is recognize reality (or have a force of determination so strong that he creates his own reality… a lot of the best players seem to believe their own hype, which leads to success with chicks).

It’s totally true that you may be the exception who makes more money online than you will in most corporate jobs. But if you don’t have exceptional reasons to think you’re the exception, you’re probably the rule, and your career is going to reflect that. This isn’t as sexy a post as EARN SIX FIGURES ONLINE, LET ME SHOW YOU HOW, so the guys who really need it probably aren’t going to find it, but I want a single place to point the bullshit generators to when it’s time. I want readers to know also that I never said having an online, location-independent business is impossible (it’s not). Trying to build one without unique skills and strong connections is just very very unlikely and is contrary to how most business really works. I get the impression that most guys pitching one-man businesses either lack business experience OR have it, know what they’re pitching is bullshit, and pitch it anyway to separate the unwary or hopeful guy from his cash.

“Why women prefer male bosses”

Why women prefer male bosses” won’t entertain the obvious answer: because on average male bosses are better and less likely to leave the industry.

Feminists don’t like to say this, but in industry everyone knows that most women who have kids quit work or downshift their careers. Yes, there are exceptions. One of my key mentors was a woman who didn’t downshift, but she’s the exception and she knew she was the exception. She was reluctant to mentor younger women because she’d tried before. She’d mentor them, then a couple years in they’d have a kid and goodbye.

That’s also why jobs like nursing, teaching, and pharmacy are so popular among women. They have relatively short training periods. Women can get up and running by age 25 if not sooner. They don’t have a lot of headroom or upward mobility, but those professions are all ones that make it easy to drop in and drop out of the workforce.

You could just, you know, look at women’s real priorities and infer labor market outcomes from that, or you can screech DISCRIMINATION and PATRIARCHY on Twitter instead of working.