Listening to Mandarin (2008-01-05/04-20)

Today I am intrigued by juxtaposition of contrasts in spoken (and written) Chinese:

• to ask, "Is it?" say shì bú shì (是不是), putting "is" next to "isn't";
• to refer to "thing," say dōng xi (东西), putting "east" next to "west";
• to ask, "How many?" say duō shao (多少), putting "many" next to "few"; and
  
• to refer to "size", say dà xiǎo(大小), putting "big" next to "small."

Though not in this blog's goal list, "Chat in Mandarin" is my 2008 non-work mental challenge. I listen daily on my 30 GB iPod to Instant Immersion Mandarin Chinese or Pimsleur Chinese (Mandarin) I, usually while doing 30 minutes of moderate activity. I chose Mandarin because Asia would be new to me and because there are perhaps 1.05 billion speakers. It's the language with the most native speakers (followed by Spanish and English, which I already speak)--an order of magnitude more speakers than other Chinese languages like Cantonese.

I've written about mental self-improvement several times. Recent research into neuroplasticity suggests thinking, learning, and acting actually change the brain. One of the activities Mozart's Brain and the Fighter Pilot: Unleashing Your Brain's Potential consequently encourages is memorization. Since Mandarin is not in the Indo-European language family like Spanish and English, it poses a memorization challenge for me (though thankfully not due to noun declensions or verb conjugations).

An additional memorization challenge is learning Chinese characters or hàn zì (汉字). In fact, some recommend against learning characters at first; others think writing is the main reason Chinese is so hard. (In contrast, to me the four tones don't sound hard so far.) I am studying an average of one simplified character and compound per day from Tuttle Learning Chinese Characters Volume 1: A Revolutionary New Way To Learn And Remember The 800 Most Basic Chinese Characters.

For flashcards I enter hàn zì into Zhongwen Development Tool (zdt)，a program discussed in Chinese forums that has a plug-in to search the CEDICT Chinese-English dictionary. I also downloaded a Pimsleur word list for zdt. The zdt stores hàn zì, pīnyīn romanization, and English definition. Other information (e.g., Learning Chinese Characters visual imagery), I enter into Mnemosyne.

Instant Immersion Mandarin Chinese came with Talk Now! Plus software from Eurotalk Interactive. However, both of the SourceForge programs (zdt and Mnemosyne), like the Pimsleur language learning system, use spaced repetition techniques (an idea I first encountered in Tony Buzan's Use Both Sides of Your Brain). Mnemosyne uses an early version of (and simpler interface to) the SuperMemo algorithm discussed in this month's Wired.

This juxtaposition of modern research and tools with an ancient language and writing may help my memory, but it also provides direction for travel. True immersion may be available in the People's Republic of China, where the official language is Standard Mandarin and the government uses simplified characters.

Reading Agile Software Development with Scrum (2007-12-17/2008-01-01)

"Scrum is built on an empirical process control model which is radically different from the defined model that most processes and methodologies use."
--Ken Schwaber and Mike Beedle, Agile Software Development with Scrum

This past month I attended a Seattle XP Users Group meeting, read Agile Software Development with Scrum (one of two books that are primary sources of information about Scrum), and toured SolutionsIQ (a Seattle-area Scrum training and consulting firm). I wanted to see how my company's experience with small teams compares with our colleagues' in the industry. We'd been using agile development methodologies and tools since before starting the company, due to reading Extreme Programming Explained: Embrace Change, Planning Extreme Programming, and similar books by Kent Beck and Martin Fowler.

Readers of this blog may recognize in agile development methodologies the management paradigms I profess. My management methods led my company to agile development methodologies like Scrum and Extreme Programming. My blog posts on management books provide the following principles:

1. Update opinions from observations. ("The Map is Not the Territory.")
2. Develop a culture of interdependence. ("Mature from Dependence to Independence to Interdependence," and "People are smarter than you think. Give them a chance to prove themselves.")
3. Prioritize what's important. ("Good is the Enemy of Best.")
4. Jointly determine the course. (See The 8th Habit.)
   
5. Set up and manage systems to stay on course. (See The 8th Habit.)
6. Focus talents on results, not methods, then get out of people's way and give help as requested. (See The 8th Habit.)
7. "Never automate something that can be eliminated, and never delegate something that can be automated or streamlined."
   

The principles above aren't articulated in industry terms, however. Specifically in software development these principles lead to the following practices:

1. Inspect results and update process.
2. Rely on people.
3. Work on highest priorities.
4. Teach self-managing teams.
5. Improve processes.
6. Remove impediments.
7. Automate testing.
   

These practices are agile:

1. Agile Software Development with Scrum emphasizes empirical process control.
2. Agile methods have a people-first orientation.
3. Product backlog and sprint backlog are prioritized.
4. Scrum uses self-managing teams.
5. Extreme Programming suggests various process improvements like spike solutions, coding standards, continuous integration.
   
6. A Scrum Master uses a daily stand-up meeting to learn impediments to remove them.
7. Extreme Programming emphasizes automated unit (and acceptance) tests.
   

I would list examples from our experience (e.g., engineering estimation, comparison to CMM Level 2 and key process areas, serving manufacturing clients, consensus decision-making) but this blog post is already long. However, I'll write that I'm pleased with how agile practice embodies good paradigms and principles.

[Updated FAQ link.]

Reviewing 2007 in Seattle (2007-12-31)

I'm pleased with 2007 in Seattle, though I'll adjust my goals for 2008 in light of a review of the past year. While I had personal goals--some qualitative--, and even goals for how I help others, there are some quantitative goals I mentioned in this blog. Below is the year in numbers, Harper's Index style:

• Total pages I read for "Where's William?" blog: 8,263
• Number of books I wanted to blog in 2007: 50
• Actual number of blog posts about books in 2007: 30
• My blogged books score: 60%
• Number of books I want to blog in 2008: 12
• Six-hour days I wanted to spend in the forest in 2007: 6
• Six-hour days I actually spent in the forest in 2007: 5
• My outdoors score: 83%
• Six-hour days I want to spend in the forest in 2008: 6
• Pounds I wanted to lose upon returning from Paris: 15
• Pounds I lost and kept off at first through workouts and frequent small healthy meals and later through walking: 17
• My weight score: 113%
• Body fat percentage I want to lose in 2008: 4%
  
• Songs I wanted to perform on the guitar in 2007: 5
• Songs I performed on the guitar in 2007: 0
• My guitar score: 0%
• Songs I want to perform on the guitar in 2008: 2
  
• Maximum miles I wanted my car driven in 2007: 14,400
• Actual miles my car was driven in 2007: 9,508
• My mileage score: 151%
• Maximum miles I want my car driven in 2008: 9,600
  
• Days/week since 2007-09-06 I wanted 30 minutes of moderate activity: 5
• Days/week since 2007-09-06 I did 30 minutes of moderate activity: 4.2
• My walking score: 84%
• Days/week I want 30 minutes of moderate activity in 2008: 5
  

Reading Plato and a Platypus Walk into a Bar (2007-12-25)

A New York boy is being led through the swamps of Louisiana by his cousin. "Is it true that an alligator won't attack you if you carry a flashlight?" asks the city boy.
His cousin replies, "Depends on how fast you carry the flashlight."

--Thomas Cathcart and Daniel Klein, Plato and a Platypus Walk into a Bar: Understanding Philosophy Through Jokes

Confusing the cause of an alligator attack is an example of post hoc ergo propter hoc, a fallacy that Plato and a Platypus Walk into a Bar describes in chapter II, "Logic." (It is a minor spoiler to opine that the punchline of the best post hoc ergo propter hoc joke is, "'Schmuck, that's the way you wave a towel!'") Logic is one of ten topics in the book that together give an overview of the story of philosophy. Thomas Cathcart and Daniel Klein summarize major schools of thought in each topic, and illustrate them with interspersed jokes. I read their book--a gift from Ryan--on Christmas Day at our apartment and friends'. I found it funny, and finished wanting more details on some philosophers--or at least more jokes.

Reading The Four Pillars of Investing

With relatively little effort, you can design and assemble an investment portfolio that, because of its wide diversification and minimal expense, will prove superior to most professionally managed accounts.

--William J. Bernstein, The Four Pillars of Investing: Lessons for Building a Winning Portfolio

A neurologist from Oregon seems an unlikely candidate for financial author and theorist. Perhaps it is not surprising, then, that William J. Bernstein, Ph.D., M.D.--author of The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk and The Birth of Plenty : How the Prosperity of the Modern World was Created--contrasts much of his financial advice with conventional wisdom. He writes, "Your social instincts will corrode your wealth by persuading you to own what everyone else in the market owns."

Of stockbrokers Bernstein writes, "He also occupies the lowest rung in the hierarchy of investment knowledge." Of the financial press he writes, "Ninety-nine percent of what you read about investing in magazines and newspapers, and 100% of what you hear on television is worse than worthless." U.S. stock returns are a "random walk" that no one can predict and few in the industry understand. (See the "drunkard's walk" in Conned Again, Watson!; this concept also inspired the title of Burton G. Malkiel's A Random Walk Down Wall Street, which I have borrowed from the Seattle Public Library or SPL.)

Perhaps some of Bernstein's assertions are not surprising: "Risk and return are inextricably enmeshed." While this stands in contrast to occasional low-risk, high-return offers, most readers know these to be too good to be true. Other authors, too, warn against overconfidence, Mistake 1 in Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today by Larry E. Swedroe (also out from the SPL). Edelman and Bernstein emphasize that "You are your own worst enemy."

However, unlike your coworker on the telephone daily with his broker (a broker who Bernstein writes "services his clients in the same way that Bonnie and Clyde serviced banks"), writers Edelman and Bernstein agree that "Stock picking and market timing are expensive, risky, and ultimately futile exercises." Edelman and Bernstein both follow modern portfolio theory; Bernstein especially believes the market is efficient. And in response to the high-fee funds recommended by your financial consultant, Bernstein warns, "The primary business of most mutual-fund companies is collecting assets, not managing money. Pay close attention to the ownership structure of your fund company and of the fees it charges."

Some authors--like Edelman--look at the 10.40% total return of the S&P Stock Index from January 1, 1926 to June 30, 2003 (while noting that past performance is no indication of future results). Bernstein, however, begins with Venetian prestiti prices from 1300 to 1500. "[T]he odds always favor data gathered over the longest time periods." He proceeds through economic history and then uses the Gordon equation to estimate the long-term expected return of the market as 6%.

Bernstein's combination of theory, history, psychology and business (the four pillars) is appealing to me because of its academic approach and statistical emphasis. The Four Pillars of Investing offers an intellectual investigation into the folksy advice to build portfolio income, written in an equally engaging style.

Reading Quantico (2007-11-14/17)

"Goddamn it," the President said, "Did they give them to you without a subpoena?"....
Chao put on a stubborn look. "It is our job to find dangerous criminals. Would you have it any other way?"

--Greg Bear, Quantico

A friend who knew I had read local author Greg Bear's Darwin's Radio, Darwin's Children, and / offered another book after my appendectomy: Quantico. Like the Greg Bear books I've read, Quantico is still-relevant (copyright 2005, 2006) near-future hard science fiction. (The science is even more current than Quarantine.) Like the Darwin series, Quantico involves molecular biology; like /, significant events occur in Seattle and Washington (although some events take place at Quantico).

Quantico is a frightening techno-thriller set in the US after another attack similar to 9-11, intending to portray the dangers of bioterrorism like Amerithrax:

The biological weapons and process in this novel are possible, but not in the way I have described them. I have tried to persuade of the dangers without providing salient details.
The dangers are real, and immediate. Sober judgment, selflessness, nonpartisan planning, and sanity are the only solutions.

The story also includes a female president with a stand on violations of personal privacy as a strong part of her campaign. The tension between liberty and security is therefore part of the book. In the scene with the President and Chao, I also wondered why the FBI would not pursue a subpoena. (To their credit, several agents in the book express skepticism about information extracted via rendition or torture.)

Such famous quotes as, "Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety," and "Give me Liberty, or give me Death!" show this tension is part of the history of the United States of America. Unfortunately, so is depopulation from imported infection--see Guns, Germs, and Steel.

Sometimes on issues with different but similarly important needs, debate becomes polarized around the conflicts between those needs. For example, economic growth and environmental health are in tension in environmentalism. In such cases one can sometimes search for solutions with synergy between the two needs, e.g., bright green environmentalism. This is the type of solution I support.

In Quantico, Bear uses his "powerful [imagination to]... conjure up not only possible methods of attack, but also ideas about how governments and individuals will respond and what kinds of high-tech tools could prevent attacks." Let us hope they respond in ways that enhance liberty rather than reduce it.

Reading Conned Again, Watson! (2007-10-24/28)

We all lose time and money every day to bad decisions. Often, we are not even aware of it. We continue in blissful ignorance, happy in the illusion that our native common sense is doing a good job of guiding us.

--Colin Bruce, Conned Again, Watson! Cautionary Tales of Logic, Math, and Probability

In my apartment the week following my emergency appendectomy, sometimes I had the energy to read (as opposed to only energy enough to watch Battlestar Galactica). As a break from personal finance books, I read entertaining Sherlock Holmes tales that were also instructional. Like Blink, Bruce's book is ultimately about decision-making. Conned Again, Watson! incorporates paradoxes and problems into nearly every chapter:

1. "The Case of the Unfortunate Businessman" discusses the "cab driver's fallacy", the prior investment fallacy, and the fallacy of mistaking relative for absolute savings. It begins with a scam modeled after The Big Con.
2. "The Case of the Gambling Nobleman" discusses the gambler's fallacy and the Martingale betting system.
3. "The Case of the Surprise Heir" includes the birthday paradox.
4. "The Case of the Ancient Mariner" connects the drunkard's walk to Pascal's triangle, and both to the normal distribution.
   
5. "The Case of the Unmarked Graves" illustrates both the Monty Hall problem (using probability trees) and the Wason test.
   
6. "The Case of the Martian Invasion" explores permutations in Bible codes and failure rates.
7. "Three Cases of Unfair Preferment" includes one with nontransitive dice.
8. "The Execution of Andrews" discusses the conditional probability fallacy using contingency tables.
   
9. "Three Cases of Relative Honor" describes game theory games similar to the Prisoner's Dilemma, including one similar to Arthur Conan Doyle's in "The Adventure of the Final Problem."
10. "The Case of the Poor Observer" discusses the problem of drawing conclusions from limited observations.
    
11. "The Case of the Perfect Accountant" mentions Benford's law.
12. "Three Cases of Good Intentions" discusses the theory of double-blind medical trials.
    

Rereading The Truth About Money Parts 2-5 (2007-10-11/)

Many people fail to save because they simply don't want to stop spending. Fine. Keep spending. In fact, I want you to.
Just change what you spend your money on:
Instead of buying a bottle of ketchup, buy Heinz stock.

--Ric Edelman, The Truth About Money

Like Kiyosaki, Edelman writes, "instead of buying things that later will have no value (like an empty ketchup bottle or a vacation), or virtually no value (like costume jewelry, clothing, or furniture), make sure the things you buy will retain and even grow in value." What are these things? Unlike a bottle of ketchup, there's no grocery store for investments. Parts 2 through 5 of The Truth About Money explain things that retain or grow in value, with many examples, graphs, and stories. (The cover is right that it's "personal finance that's fun to read!") This grocery store of investments has aisles for cash equivalents, income-producing investments, growth investments, and packaged products:

1. Cash Equivalents have little or no default risk. They can mature in more than one year--e.g., some bank certificates of deposit or commercial paper, U.S. EE Savings Bonds, U.S. Treasury Notes, and U.S. Treasury Bonds--or less than one year--e.g., checking accounts, savings accounts, money market funds, some certificates of deposit, and U.S. Treasury Bills. Ric recommends having six to twelve months' expenses available in less than one year, but otherwise avoiding cash equivalents because inflation erases their returns. Some cash equivalents have surrender charges and tax penalties--e.g., life insurance cash value or fixed annuities. These are not appropriate for cash reserves.
   
2. Income-producing investments are subject to default risk (indicated by the bond rating), event risk, and interest rate risk--which one can reduce by holding to maturity or hedging (e.g., with gold). Ric recommends favoring total return rather than rate or even yield. The Truth About Money discusses these income-producing investments:
   
• U.S. Government Securities include--in addition to cash equivalents--Ginnie Mae, Fannie Mae, Sallie Mae, and Freddie Mac. A GNMA repays principal as well as interest, and can prepay in 12-15 years instead 30 years.
  
• Municipal Bonds may be (currently) income-tax-free, but Ric disputes the relevance of this--and the wisdom of insuring them. In addition, municipal bonds are often callable.
  
• Ric recommends against Zero Coupon Bonds because they give low returns, lack payment before possible default, incur taxes on phantom income, and are callable. He also discourages taking physical possession of their certificates.
  
3. Investments that confer ownership or equity instead of (or in addition to) income rely on growth for their value. The Truth About Money discusses these growth investments:
   
• Stocks grow in value, generate income, have returns that beat inflation, and have tax advantages (tax on capital gains is less than the tax on income or interest, tax isn't due until sale, and heirs don't pay capital gains tax). One can purchase stocks through brokerage firms, discount brokers, or dividend reinvestment plans. Although buying international stock adds currency risk exposure, Ric observes that the international stocks and companies are increasing in value.
  
• Real Estate investing adds diversity--but also hassle. For real estate investment Ric recommends lots of cash, for reserves and purchases.
  
• Collectibles don't make good investments due to the possibility of fraud or damage, and inability or unwillingness to sell.
  
• Hedge Positions could help insure against inflation (e.g., gold), deflation (e.g., bonds, dividend-paying stocks, and cash), recession (e.g., oil and gas, minerals, forest products), lack of confidence (e.g., real estate, gold, and precious metals), collapse of the dollar (e.g., foreign stocks and currencies), and stock market crash (e.g., selling short or options trading like covered call writing).
  
4. Just as a real grocery store has prepared foods, the investment grocery store has packaged products--which are really investment companies. These make investments affordable, liquid, diversified, and professionally managed. Open-end or mutual funds have an annual expense ratio and a sales charge (front-end load, back-end load, level load, or no-load). The Truth About Money discusses these packaged products, beginning with six mutual fund types:
   
• U.S. Government Securities Funds exist, despite the perception that mutual funds are mostly a method to invest in stocks. These include Ginnie Mae funds, zero-coupon funds, intermediate funds, short-term funds, and ultra-short funds. Related funds are adjustable rate mortgage funds and global government funds.
  
• Municipal Bond Funds include money market funds, single-state funds (to avoid state income tax), Puerto Rico funds (to avoid all income taxes), insured muni funds, and high-yield muni funds.
  
• High-Yield Corporate Bond Funds (in contrast with short-term and intermediate funds) invest in long-term speculative grade bonds. Investors thus face credit risk in addition to interest rate risk.
  
• Balanced Funds invest in four asset classes: cash and cash equivalents, government securities, corporate bonds, and corporate stocks. There are related fund types: Asset Allocation Funds add other asset classes, Growth and Income funds limit asset classes to stock and bonds only, and Equity Income invest in stocks which pay dividends.
  
• Stock Funds can focus on different categories of market capitalization, different sectors, or different indexes.
  
• International Funds are open-end or mutual funds available in a variety of types: global funds, international funds, single nation funds, regional funds, or sector funds.
  
• Closed-End Funds, while still investment companies, differ from open-end or mutual funds. Shares generally trade on a stock exchange rather directly with the fund.
  
• Unit Investment Trusts are the third type of investment company different from open-end or closed-end funds. They have a fixed portfolio and definite maturity date.
  
• Wrap Accounts are not investment companies but accounts that protect investors from unnecessary trading commissions. However, Ric lists "11 Reasons to Avoid Wrap Accounts."
  
• Annuities are available from insurance companies. Variable annuities are securities products, however. They provide tax-deferred growth and guarantees against loss (in the form of living benefits and death benefits) at the cost of fees similar to mutual funds, plus contract fees and mortality charges.
  
• Real Estate Limited Partnerships are companies that permit investing in real estate with less hassle (for the limited partners). The Tax Reform Act of 1986 retroactively classified their income as passive, so investors cannot deduct losses from active income.
  
• Real Estate Investment Trusts (REIT) are like Real Estate Limited Partnerships, except that they are publicly traded.
  

This ends the tour of the investment grocery store (complete with links to Wikipedia). See the book for more detail. And have fun shopping!

Rereading The Truth About Money Part 1 (2007-10-10)

It is for all these reasons--to protect against risk; to eliminate debt; you're going to live a long time; to hand such major expenses as children, college costs and weddings; to buy cars and homes; to afford a comfortable retirement; to protect against long-term care costs; and to pass wealth to your heirs--that you need to create a financial plan.

--Ric Edelman, The Truth About Money

Part I of The Truth About Money, "Introduction to Financial Planning," discusses the reasons one needs and wants money. Chapter 1 then lists "The Four Obstacles to Building Wealth": procrastination, spending habits, inflation, and taxes.

Imagine a raise of $100 per month invested in stocks producing a combined 10% return. As Kiyosaki writes, buy an asset the produces portfolio income. Investing $100 per month from age 28 to age 65 (e.g., now until 2044) would be a total investment of $44,400. Compounding would make the investment worth almost $414,000.

This scenario enables calculating an example of the four obstacles Ric Edelman lists:

1. First, reducing the years of contribution from 37 to 25 (e.g., now until 2032) illustrates the effects of procrastination. If the same investment begins at age 40 instead of age 28, the total contributions decrease to $30,000, while the investment value at age 65 decreases to a little more than $123,000. This is almost $291,000 less than original scenario!
2. Imagine celebrating the raise by buying a Starbucks Grande Caffè Mocha on the way to work each day, except two vacation weeks. This spending habit could reduce the $100 raise by about $67, leaving $33 per month for investment. At age 65 there would be almost $135,000, or $279,000 less than the original scenario.
3. The preceding examples ignore inflation. If inflation were nominally 3% per year, $1.00 at age 28 would buy as much as $3.03 at age 65. So the $414,000 at age 65 would only buy as much as $137,000 did at age 28. Inflation would remove more than $277,000 of purchasing power.
   
4. Finally, consider taxes. A $100 raise could have a marginal tax rate of 33%. Kiyosaki notes the US government taxes earned income the most. This could reduce contributions to $67 per month, less than $30,000 total. At age 65--ignoring capital gains taxes--there would be almost $279,000. Withdrawing from the investment each year to pay capital gains tax, however, would reduce the value to about $203,000, or about $210,000 less than the original scenario.
   

In summary, the example effects of the four obstacles to wealth are as follows:

1. Twelve years of procrastination reduces the value of the sample investment by $291,000.
2. A workday mocha spending habit reduces the sample investment by $279,000.
3. Three percent inflation reduces the purchasing power of the sample investment by $277,000.
4. Income and capital gains taxes could reduce the value of the sample investment by $210,000.

The conclusions appear to be start now, buy assets instead of consumable expenses, invest to beat personal inflation, and take advantage of tax deferral. These are beyond the scope of this blog post, however.

(The remainder of this post explains calculation details: As an example--not an endorsement--, First American Mutual Funds FSKSX had a past performance of approximately 10%. The calculations use 9.569% compounded monthly, with no volatility for simplicity. Each scenario has additional assumptions:

1. The future value (37 years * 12 months/year =) 444 months later of a $100 per month annuity at (9.569%/year / 12 months/year = ) 0.7974 % per month is $413,890.79. The future value of the same annuity only (25 years * 12 months/year =) 300 months later is $123,333.15.
   
2. On Capitol Hill, Seattle, 8.9% sales tax makes a $2.95 mocha cost $3.21. Five mocha purchases per week for 50 weeks of the year is an average of 21 mocha purchases per month. The average cost is then $67.41 per month.
3. The inflation calculation assumes 0.25% per month, which is similar to current values but low considering long-term averages. The present value of a future sum of $413,890.79 at a rate of 0.25% per month for 444 months is $136,590.49.
4. A "regular" employee who earns $30,651 to $74,200 per year in Washington state would have no state income tax, but would pay 25% United States income tax plus 6.2% for Social Security plus 1.45% for Medicare. For that tax bracket capital gains taxes are 15%. The calculation assumes this applies to all the gains, which is the worst-case scenario--but still has less effect than the spending habit or procrastination example.)
   

Reading Rich Dad, Poor Dad (2007-10-07)

If you want a lesson in confusion, simply look up the words "asset" and "liability" in the dictionary.... An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.

Robert T. Kiyosaki, Rich Dad, Poor Dad: What the Rich Teach Their Kids about Money--That the Poor and Middle Class Do Not!

Being from a middle-class background, the subtitle of Rich Dad, Poor Dad caught my eye in the Barnes and Noble personal finance area Saturday. As several responses to Don't Let's Go to the Dogs Tonight show, I like anecdotes. I read with interest Kiyosaki's contrast between his rich capitalist businessman dad and his poor socialist employee dad during his childhood in Hawai`i.

The folksy capitalist philosophy in Rich Dad, Poor Dad begins with an income statement and balance sheet. Kiyosaki simplifies each into two boxes with a line in the middle: for the income statement the line is horizontal, and for the balance sheet the line is vertical.

In the top of the income statement are earned income ("work for owner"), passive income, and portfolio income. In the bottom of the income statement are taxes ("work for government"), ownership-related expenses, and other expenses. Subsequent diagrams expand on portfolio income (dividends, interest, rental income, royalties), ownership-related expenses (mortgage payments, real property taxes, insurance, maintenance, utilities), and other expenses (fixed expenses, food, clothing, fun).

In the left side of the balance sheet are assets which create income--your business, stocks, bonds, mutual funds, income-generating real estate, notes, and intellectual property. In the right side of the balance sheet are liabilities ("work for bank") which create expenses--consumer loans, credit cards, and mortgages.

Poor Dad says, "Go to school, get good grades, and find a safe secure job." In other words, concentrate on earned income in the top of the income sheet. Rich Dad says, "The rich don't work for money, they have their money work for them." In other words, concentrate on passive and portfolio income in the top of the income sheet--with passive income being faster. In the bottom of the income sheet, the government taxes earned income the most, and passive income the least.

Rich Dad, Poor Dad consequently characterizes classes using these boxes. The earned income of the poor pays expenses in the income statement and little affects the balance sheet. For the middle class, expenses and taxes rise with income in the income statement, as do liabilities incurred on the balance sheet. The income of the rich purchases income-producing assets, with less rise in expenses or liabilities. (For example, a corporation deducts expenses from income before taxation.) In this way they practice the "pay yourself first" advice of The Richest Man in Babylon.

The challenge is defining "your business." Kiyosaki writes, "If I have to work there, it's not a business. It becomes my job." Timothy Ferriss has similar suggestions for a "muse" in the "Income Autopilot" chapters in "Step III: A is Automation" of The 4-Hour Workweek.

The goal for both Ferriss and Kiyosaki is freedom. The latter explains his wants:

I want to be free to travel the world and live in the lifestyle I love. I want to be young when I do this. I want to simply be free. I want control over my time and my life. I want money to work for me.

Readers of this blog will recognize this desire to travel and live abroad.

[Added diagram and corrected word.]