Tuesday, May 26, 2009

Looking on the bright side of poverty level...

So, who's better with money, Warren Buffett or Slumdog Millionaire?

The answer might be surprising, say some contributors to The Economist, who found some (to them) unexpectedly sophisticated financial decision making by people living on less than $2 a day.

It makes sense when you think about it. None of us want what we eat tonight to depend entirely on what we earn or find today. So we all engage in what economic deep thinkers call consumption smoothing. That's the set of tricks we play to try saving money as we juggle replacing drafty windows against upping our retirement plan contributions next year.

Some of the smoothing and saving techniques in the $2-a-day world may seem strange. Savers there pay someone to hold money for them instead of collecting interest. But don't sneer. Check cashing is a $1.6 billion industry in the U.S. according to the trade group Financial Service Centers of America. Nearly three in four of us who filed income taxes last April got refunds, IRS reports.

Borrowing microloans from third world developers isn't that strange either. We tap our relatives. And like third world borrowers, many of us put sweat equity into some of our investments too.

So, Slumdog or Buffet? Much as I love Buffett-backed Dairy Queen, I'm voting Slumdog. They're plowing more of their profits into infrastructure for better long term results. More of their kids will likely graduate high school than their parents did. More of our kids may not, reports the Education Trust in Washington.

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