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Friday, April 28, 2017

Book Review: Why Your World is About to Get a Whole Lot Smaller

Posted by Tim Stobbs on January 29, 2010

Well, Why Your World is About to Get a Whole Lot Smaller, is likely one of the longer titles I’ve seen for a book, but thankful the text is no where as long a the title.  Actually Jeff Rubin writing is a very readable style that makes the pages just fly by so I managed to read the full 265 pages of text in just a few days.

Overall the book focuses on one major driver in our lives: the cost of oil.  Which when you start to think about it really touches just about everything in your life via one important fact: transportation of goods.  So from your apple at lunch to your cheap clothes from China everything today gets touched by the price of oil.

Really cheap stuff from China is only possible by cheap oil  since no one in their right mind would transport stuff half way around the world to process it and then ship it back unless there was money to be made doing it.  Rubin does his best in this book to point out that is going to end sooner than later by oil prices going through the roof, like in the range of $225/barrel in the next decade or two (current price is around $70 to 80/barrel).

The problem is really two fold with those classic drivers of supply and demand.  On the supply side he points out the obvious we are running out of the really easy and cheap oil.  Otherwise no one would spend the money to extract oil from the oil sands.  And it’s not just happening here but just about everywhere there is oil.  Also the new finds are not nearly big enough to offset declining production.  Then to top it off demand is going through the roof just about everywhere but especially China and India.  But it’s not just there for example a lot of production in the middle east is actually being used internally at highly subsidized rates.

So the interesting implication to all of this will globalization will halt in its tracks and things will revert back to a more local production base.  So yes there will be some down sides like no more cheap dollar store toys, but there will also be some positive parts especially with greenhouse gases. To illustrate his point I will quote:

In OECD countries, where consumers pay the full price for a barrel of oil, triple-digit prices will do more to reduce greenhouse gas emissions than a hundred Kyotol Protocals.

Rubin predicts we won’t solve emissions with accords but rather good old fashion trade.  To illustrate the point I’ll provide another quote:

The most direct strategy for halting the seemingly endlesss growth in global carbon emissions, is not another round of Kyoto talks calling for voluntary cuts.  What we need to do is to impose a carbon cost on emitters at home, then impose the same standards on imports.

So we will likely solve the problem with the US and Europe having either a carbon tax or cap and trade and then putting that same standard on imports.  Sudden shipping distance will matter again and local will be cheaper driving a new round of local manufacturing for all countries.

Overall I rather likely the book.  It’s very readable, brief and to the point.  Also he doesn’t point out the world will end, rather it will just change again.  Which when you think about it happens all the time.

The Allowance Game

Posted by Tim Stobbs on January 28, 2010

Recently we started our oldest son on an allowance and it has been amusing for him to near constantly hold his first tonnie in his hand for the last few days.  He talks just about non stop about buying something with his money.  His personal favorite obsession at the moment is lego, so we keep pointing out he will have to save up some more toonies prior to buying something.

So how did we come up with an allowance system?  Well that was a bit of guess work and a few other common suggestions I’ve hear about.

First off, I’ve heard from a few different sources that a rule of thumb for allowance should be about $1/week/age of kid.  So according to that we should be giving my son $5 a week, which to start out is just nuts for me.  We decided on $2/week because we wanted him to learn about saving up for things.  You can’t buy much at $2 and that is the point.  He will have to learn to save if he wants anything bigger.

Also I feel pay should reflect what is done for it.  Right now his responsibilities are minor.  He just have to clear his dishes from the table after supper and lunch each day.  Then once a week he is expected to help clean up the kid’s play area in the basement.  As we add other duties I’ll be happy to raise up the level of pay.

We also had some prerequisites we were waiting for prior to introducing the allowance.  First off he has to be able to count to ten and recognize numbers.  After all it’s just about impossible to teach about money with out using numbers.  Second he had to get the concept of money, at least the part of that is what we exchange to get things and then we exchange our time doing things to get more money.  The last requirement was the fact his wants were exceeding what we where willing to pay for.  I really do want my kids to get the idea that wants are unlimited, but money is limited so you have to choose what you want.

So that’s the current plan for allowance in our house.  I suspect it will keep evolving for a while, but it’s already been useful to explain some concepts like we don’t replace money.  If he loses the money it’s gone and we won’t replace it.  So if you have kids on allowance, how much do you pay?  What chores do you assign your kids?

Can You Retire Early Stuck in the Middle?

Posted by Tim Stobbs on January 27, 2010

I made the comment the other day in regards to the fact that every early retirement story I’ve come across has some element of luck.  The people in question either lucked on the stock market, did well on real estate or had their own business and got bought out.  Yet that got me thinking: can you do it with no luck at all and be stuck in the middle for income?  Is it even possible to retire under 50?

So let’s try out that theory, meet my crash test case of fictitious people called Bill and Jane.  They earn between them $71,000 a year (the 2007 median salary in Canada for a two income household with kids).  So let’s break up that pay by a 60/40 split of $42,600 for one and $28, 400 for the other.  You can pick out their careers and who makes more if you want, for me I’m just assuming they get in dead end jobs and never move from this salary during their entire working career.  In actually fact they may start lower and work up, but on an inflation adjusted basis I’m assuming they are a flat line all the way.  So after tax, CPP and EI and no other deductions they clear $33,161 and $25,762 respectively, or in total $58,923 (in SK).

They are a frugal couple so they only spend $24,000/year on expenses (but not the mortgage).  On top of  that is a mortgage payment on a $250,000 home (I’m assuming they buy within their means and stick to a condo or a smaller older house in a ok location, but not a great one).  Mortgage payment for a 25 year period at 5% average rate is $690.66 twice a month assuming they bought with 5% down when they turned 22 (combination of wedding gifts and saving).  I’m assume they don’t accelerate a single payment and pay off the mortgage at 47.  I’m also assuming they pick that $28,000 as their spending rate for retirement which includes some cash for travel and fun things since the mortgage will be gone when they leave work at 47.

I’m also going to assume that having a two kids eats up any spare money until they turn 28 when they start to get serious about early retirement.  After that point, after expenses they can save at most $18,347.16 per year, but wait, who’s looking after the kids?  Let’s take off another $12,000 a year for child care, but in reality you get a tax deduction for that so let’s assume after their tax return they pay $740/month net.  So that leaves only about $789/month for saving until the kids get older, so let’s assume that lasts for 10 years.

So Bill and Jane start saving but are smart and put the money in an RRSP and reinvest the tax refund.  So that boosts their savings to about $994/month while the kids are in care.  So at 5% for 10 years that leaves them with $154,350.  Then the kids leave care and they put the extra $740 a month into savings, but let’s assume outside the RRSP.  So in total they can save $1734/month for nine more years, leaving them with $477, 741 at 47.

Now the draw that down from 47 till 65 when they get OAS and CPP at their $28,000 a year and they only get 3.5% return now.  That leaves them with only $195, 577 at 65.  So assuming a 4% safe withdrawal rate they have about $7823 from their nest egg a year, plus their CPP and OAS they should be fine in full retirement.

So in conclusion it can be done, but you have to do just everything right.  Keep you costs way down and keep your shelter costs reasonable and it can happen.  If you want to spend more than that you will need luck or hard work to make more money.

This post is now part of the 243rd edition of the Carnival of Personal Finance.