

Give Me A Dollar and I'll Give You 90 Cents Back - lwc123
http://larrycheng.com/2009/11/11/give-me-a-dollar-and-ill-give-you-90-cents-back/

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patio11
The following is oversimplified but has a grain of truth to it: Poor people
pay for access to their own money. Rich people are paid for accessing their
own money.

Here's a practical example for you: a one month train pass from my home town
to Nagoya costs about $200. A six month pass costs $1,000.

Given these facts, some people (through either lack of means or lack of savvy)
will in a six month period buy six one-month passes, each time incurring a $1
ATM fee, for a total cost of $1,206. More savvy people will buy the six month
pass on a credit card and pay it off before the grace period runs out, which
costs about $990 ($1,000 less the $10 your bank will give you to say "Thanks
for your business! Please charge more stuff!").

If you know you're going to be working in Nagoya for six months, buying the
six month ticket is equivalent to buying six month CDs at an APR in excess of
40%. The actual rate offered on a Japanese CD is typically .5%. Somewhat
surprisingly, there are many people at my day job who buy both one month
tickets and own $5,000 or more in CDs.

~~~
jordanb
It's worth observing that your CD example may be rational given that CDs are
more liquid than train tickets.

Train tickets are generally non-transferable so, absent a black market, they
are not liquid at all. Buying a six month ticket is making a $1,000 investment
in being in that situation for six months.

Maybe they'll lose the job in question, move, or need the $1,000 in cash for
some emergency. Depending on how likely those possibilities are, the buyer is
going to have a lesser or greater preference towards a more liquid place to
put their money.

~~~
patio11
I would agree absent for the unstated knowledge that everyone at my office is
a Japanese salaryman and, as such, the most negative thing you can say about
my job security is that I may lose my job if I die.

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evansolomon
The point about gold is a bit misleading. Gold is not an "appreciating asset"
any more than a baseball card that has a misprint and skyrockets in value is.
Gold is priced on a world market and, for those of us in the US, purchased in
dollars. When the value of the dollar goes down, the value of gold goes up,
and the opposite is true. Macro factors have an effect on both sides of the
equation (for instance, if nuclear war broke out tomorrow it's likely that
both gold and the dollar would decline together, though there is probably a
case for gold going up at that point) but in general gold moves inverse to the
dollar. There are lots of reasons to expect the dollar to lose more value in
the short term, but calling gold an "appreciating asset" is only true to the
extent that the dollar (or currency of your choosing) is an inherently
depreciating asset.

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mattmaroon
How about the lottery? You give them $1 and get back as little as $0.25 in EV
depending on what you play. And that's not even counting that you're taxed on
winnings as normal income but unless you're a professional gambler (and if you
are, shame on you for buying lottery tickets) you can't deduct losses in a
losing year.

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sgman
The argument that gold is equivalent to currency is false. It's almost
impossible to buy food from the grocery store with the gold watch you got last
Christmas. For all practical purposes, gold is a second-hand good like
anything else, and selling it to a dealer ensures you get nowhere near the
appropriate value for it, just like selling any other second hand good.

~~~
nandemo
I think both the article and your reply are a bit misleading because you talk
of both "gold" and "gold jewelry", which aren't the same thing.

While gold is not exactly equivalent to paper money, it is _a_ currency. Only
it's not as used as before, and of course not as liquid as US dollars
nowadays. It is certainly more liquid than other currencies though: most
people would prefer to be paid in gold than in Zimbabwean dollars.

But of course gold and "gold watch" are different stuff. Plain "gold" usually
means coins and bars, which are pretty much liquid. The spread can be as low
as 2.5%, not much different from retail foreign exchange. Definitely not like
any other second hand good.

~~~
dmm
The spread on Gold American Eagles is currently 1.02% at apmex.com. That's
better than most atm transactions :)

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philwelch
I'm surprised he didn't call out insurance policies and warranties, which are
always negative expected value in return for smoothing out risk. For some
things this actually makes sense (you can't afford to gamble a few million
bucks on "I'm never running anyone over in my car") but things like extended
warranties, you're usually better off saving the money and, if need be, buying
another toaster oven if yours goes kaput.

I'd imagine one of the things that happens when you get rich is you get to
save all this money poor people spend on risk mitigation.

~~~
drusenko
As you become rich you have more to lose. My experience is that you tend to
spend more money on risk mitigation (even though the percentage of income
spent may be lower).

~~~
DougWebb
The percentage is what it's all about though, isn't it?

If you earn $30000/year and have to spend $12000 on self-paid health
insurance, that's an unbearable 40% of your income.

If you earn $250000/year and choose to spend $20000 on health insurance,
that's a reasonable 8% of your income, and you're probably getting better risk
mitigation too. (eg: no copays, 100% coverage, vs the out-of-pocket costs that
would go along with the cheaper insurance.)

And $250000/year isn't even that rich anymore. In northern NJ, that's just
starting to get comfortable.

~~~
drusenko
There are other forms of risk mitigation that apply strictly to the rich, such
as umbrella policies, media insurance policies, etc etc etc. I'm not familiar
with very many of them, but they can often be costly.

These are needs that the poor will never have, because no one will ever
imagine suing them (as they don't have anything worth the effort and cost).

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chime
1\. ATMs - Only charged if you're at an ATM outside of your bank's network.

2\. Travelers Checks - They were useful long ago when credit cards did not
exist and carrying large amount of cash was dangerous.

3\. Check Cashing - The bank that issued the check will cash it for free,
regardless of account status.

4\. Currency Exchange - Can minimize this by ATM / credit cards
(MasterCard/Visa) but in reality, there's currently no way to get around
currency exchange fees. Here's an article on this topic:
<http://travel.nytimes.com/2006/06/25/travel/25prac.html>

5\. Coinstar - Never had to use this (wife takes away all my change and it
magically disappears).

6\. Gold buyers - This one is not like any of the above despite what the
author claims. Liquidity of the gold has nothing to do with it but rather the
issue that the gold buyer's judgment is what decides the value of the goods.
In all of the above, the financial company treats everyone based on pre-set
rules (1% charge, $10 fee etc.) And my 1,000 quarters are just as valuable as
your 1,000 quarters to Coinstar. Not so with gold buyers. They will offer the
smallest amount that they think the gold seller with accept. The amount of
gold or precious metal is a factor but not the sold variable.

I think #1-5 are pretty good services and shouldn't be lumped with the scams
of #6. However, this article does highlight that people will pay for services
like accessibility, insurance, portability, and security of assets that they
already own.

~~~
Dobbs
> Check Cashing Is not true, most banks will but some (Wells Fargo) charge you
> to cash a check they issue. At least they have when I've attempted to cash
> my pay check there instead of my normal bank.

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dkokelley
I think the argument about gold vs. dollars as assets is laughable. The author
cherry-picked an 8 year period to compare 'historical prices'. I don't doubt
that gold was a better position to be in during the last 8 years, but it's
dishonest to say that gold is always a better investment than cash.

I expect long-run that gold will be a better position, but it tends to
fluctuate wildly, and there are periods where cash is a better investment
compared to gold.

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snowbird122
How about slot machines that actually advertise "Pays out 95%"! as if it were
a good thing.

~~~
DougWebb
For most gamblers, that is a good thing. Sure, if you play for a long time
your winnings average out to a 5% loss; that's how the casino makes its money.
But over the short term the random element means that the slot machine can pay
out much more than 100%. So people play in the hopes that they'll get lucky
and hit a high-pay-out short-term streak.

No one would play if it paid out 95% on every pull.

Of course, the real gamblers play poker or blackjack, where the odds really
can be in your favor, if you develop the necessary skills.

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chubbard
Almost everything we buy works this way. Every good you purchase is marked up
in price from what the seller paid for it. The true value you receive is
always less than what the seller receives. So trading money for goods or
services you nearly always receive less value in exchange. It's just more
apparent when we take away goods and services and just show exchanging money.

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csbrooks
Graphs with y-axes not at 0? Ick...

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mseebach
And at the grocery store, I give them a dollar, and they give _zero_ cents
back. Nothing, nada. Can you believe that scam? Implied value: food and stuff
I need.

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dabent
Rule: Anytime money changes hands, someone will get in the middle to take a
cut.

