Poor Economics and California

I never imagined that reading “Poor Economics”, an international development book, would convince me that I need to consider investing in real estate in California. Let me explain.

Poor economics is a book about why poor people stay poor. One of the author’s arguments is that many poor people stay poor because they do not know how to save. This in turn makes it easy for them to spend the little money that the have on today’s indulgences rather than tomorrow’s necessities. A few poor people have escaped this trap because they have learned how to save.

One man in Africa who knew he would not have enough money to purchase fertilizer at the beginning of planting (because he didn’t have the self-control to not spend the money on temporary indulgences) instead bought the fertilizer at the end of harvest and stored it until it was time to plant again.

Another man would invest his extra money or “savings” into buying single bricks, one at a time, in which he used to slowly build a home. His purpose in doing this was to one day have a savings deposit (in the form of bricks) that he could then sell and pay for his children’s school when they reached the proper age. Although the depreciation of the house (and therefore the savings) was very high, his method of saving brick-by-brick allowed him to send his children to school when no one else in his village could afford it.

Yet, another women in India would borrow money from a “loan group” at 4% and then save it in a bank that charged her 20% every time she wanted to withdraw. For the poor, it often costs them much more to save, but those who chose to save (despite the 24% cost in this example) come out much richer than their peers who choose not to save.

When I read this chapter on financial institutions, loans, and savings for the poor, I immediately thought of Andrew and I’s situation in Los Angeles. As students starting our first jobs in a big city, we are considered poor. We both have dreams of attending Masters in Business programs in the future and are looking for ways to save with that purpose in mind. Why can’t we save brick by brick? Because it is a personal hobby, I have done a lot of research over the past 5 years on real estate investment and have always wanted to purchase real estate for myself. Last year I got that opportunity when I entered into a joint investment with my father on a condo in Provo, Utah.

As Andrew and I prepare to live in Los Angeles, we are preparing to spend around $2000 in rent every month, an expense that we will never see again. Possibly, with the help of some knowledgeable individuals, a lot of research, and some push from poor economics, we can turn that $2000 into a $500 interest payment and a $1500 investment on the principle of a condo. Over two years time, we would have over $36,000 (plus the down payment amount) invested into real estate rather than miraculously gone into someone else’s pocket. We can literally save brick-by-brick for our future education.

This was my ah-ha moment for the day and I thought I would share it with you. Other than that, we also traveled to two villages outside Lilongwe and distributed over 200 innovator DNA surveys and demographic reports. The day was long (we arrived home around 8pm) but we accomplished so much and are ready to head out to a third village tomorrow!

(Below: Andtew’s post)

This morning Kylie and I were hopeful to get many surveys distributed to the various farmers in Mpingu, Malingunde, and Lasodzi. We arrived at the office quickly and set about printing, editing, and checking our surveys. We would only get 1 shot at making sure they were correct and they had to be okay this round.

Once printed we spent the next hour writing names on each to make sure they were assigned to the right AEDO and right area. It was a lot of work and both Kylie and I worked frantically to get done in time. With the last name signed and form dated, we climbed into the car – off to Mpingu!

Our visit with the AEDOs went smoothly and they promised us a quick turnaround of 5 days.

We set out to the next area Malignunde, and that turned into an experience. The drive was a little farther, and the circumstances in the village area a little more humble than Mpingu. When we arrived we were greeted by an additional 5 AEDOs and began our meeting.

When the question turned to the timeline that we could get the data back, one of the AEDOs Alex, asked about what transport and materials would be provided. Gibson informed them that CBF didn’t have funds to provide transport, but a stipend could be provided to cover food as they interviewed the farmers. That comment sparked an hour long debate as to whether it should be 9 days of stipend or 7 days (the actual period they would be working was 8 days).

To give some additional perspective, the AEDOs were vying for $2500 kwacha each, per day. In total that would be $25,000 kwacha for all 5 AEDOs for the additional 2 days they wanted. In US dollars, that is $56 dollars split between the 5 people. Not a lot of money for many people back home.

However, that would be the equivalent or arguing for around (a little under) 10% of someone’s annual salary. No wonder debate sparked over the stipend amount.

We got back to the office late and began printing, sorting, and prepping for the next day. It was going to be an early morning for the team and we wanted to be ready for it! Kylie fell asleep shortly after dinner, and I stayed up a little and finished the remaining forms.