The Amateur Financier

I had a very interesting conversation with my wife yesterday. Most of the time we talk, the topic doesn’t involve money, or at least, not the more technical details of things like monetary supply and money related politics. Sondra just doesn’t have an interest in most of those subjects, and the last thing I would want to do is try to impose anything like that on her.

But yesterday, we started talking about an issue about which I was surprised she cared so deeply, and on which she had very strong opinions. Pennies. Yes, those small, copper-colored (and containing) coins that are nearly worthless in modern day society. (And which are sometimes used as a means of protesting an undesired bill.)

Yup, these things, which even in a pile this big represent about $1.54

Specifically, we talked about getting rid of pennies, given the current state of our economy, and simply relying on other types of coins instead. (We also discussed the idea of eliminating nickels and dimes, as well, and simply using quarters (the smallest unit of money accepted most places anyway), although I don’t think that would work too well, as it raises even more problems than those for the pennies with fewer potential benefits.) We ended up spending more than half an hour discussing the issue, in some depth, which made my wonky heart flutter. So now, buckle up for a Sondra-inspired penny discussion.

Why Ban the Penny?

Why is getting rid of the penny even an option? Well, there are a few reasons it’s being considered. The first, and perhaps most damning, is that it costs more than a penny to make a penny. It’s sometimes tough to get an exact figure on such things, but Snopes puts the cost at 2.41 cents per penny in 2012. Which means, for every 2012 penny that entered the market, the cost was over twice as much. With all the discussion of the government wasting money, the last thing we need as a nation is the government wasting money to make more money.

Still, if that was the only reason, there might not be any discussion; there are some things the government is expected to do, regardless of the cost, and providing a medium of exchange is one of them. (Things like provide for national defense and provide an impartial justice system to handle disputes being some of the others, although that’s a story for another blog entry.) But pennies aren’t exactly a vital part of our monetary system; when was the last time you could get anything for a single penny (or less than a quarter, for that matter)? It’s not the first time a low level coin was eliminated in our country; the half-penny was retired in 1858, back when the penny had more purchasing power than a dime has now. It was the equivalent of eliminating the nickel nowadays (which some people are proposing, as well, as nickels are also costlier to make than they are worth); while it would require time to get used to the changes, it’s far from a horrible disaster to no longer use the penny.

There’s also the issue of time. We spend a good amount of every year handling money, even in these times of debit cards and online banking. Eliminating pennies means hours each year would be saved that would otherwise be spent receiving pennies as change, counting pennies, wrapping pennies in those penny roll papers, and getting more usable types of coins in exchange. While not something that eats up too much time for most of us, it does add up over the years.

Let’s Keep the Penny

Of course, if it were that simple, the penny would have been eliminated a while ago, possibly when it still cost less than a cent to make. There are still arguments in the penny’s favor, the most obvious one being that prices would need to be rounded to the nearest five cents in order to accommodate our new monetary system. Between the time and effort needed to change all our prices and the likely increased costs for most goods as a result (when stores need to ensure that all their sales end in a multiple of five cents, the easiest (and most profitable) way to do so would be to round all their prices up the nearest nickel), it will take a while before any of those time savings come to light. (Let’s not even talk about the numerous issues that arise when we look at how state sales taxes will be affected.)

There’s also the matter that some groups benefit from the low consideration most Americans have for pennies. Charities get plenty of pennies from people who’d never consider parting with dimes (to say nothing of quarters). Coinstar and similar operations benefit from people not sorting through their coins on their own time, a tendency that would decrease with only three major types of coins to go through. (Yes, I know there are half dollars and dollar coins on top of nickels, dimes, and quarters, but how often do you see those first two types around anywhere?) Any place with a wishing fountain or similar structure is likely to see a pretty hefty drop in coins thrown in should the minimal cost of such throwing suddenly increase five-fold.

Lastly, there’s the sentimental issue. Pennies have been around since the start of the country, have been our lowest unit of currency since 1858, and have had Lincoln on them for over a century (since 1909). Getting rid of pennies requires the country to part with something that is pretty well ingrained in our cultural history; suddenly sayings like ‘A penny saved is a penny earned’ would be much more nonsensical. (Although, let’s be honest, it’s not the most inspiring saying nowadays, given just how much a penny is actually worth.)

My Thoughts

So, where do I stand on the penny issue? What position did I take when talking with Sondra? Well, while I argued against eliminating the nickel and dime (at least in the near future), I do think we can do without the penny. There’s simply not much that can be done with pennies, and given the increasing move to payment forms like checks, credit cards, and debit cards anyway, it doesn’t make much sense to continue making most forms of physical cash, particularly the smallest ones.

I’m not saying we should stop using pennies immediately; it does take time to adjust to this sort of change, and the last thing we want to do is to rush people into a new situation, currency wise. Still, I think a policy of retiring pennies over the next few years, encouraging them to be cashed in for larger types of currencies as stores shift their prices and banks start giving interest payments in denominations rounded to the nearest five cents, would help to enable a smooth transition by, say 2015. Of course, given the numerous bigger monetary policy fish there are for the government to fry, I doubt something like eliminating the penny will get on the agenda anytime soon.

What do you think about eliminating the penny? Does the nostalgia many people feel for the coin justify its continued existence, even if its usefulness has all but disappeared? Would sayings like ‘Find a penny, pick it up, and all the day you’ll have good luck’ have more meaning if pennies became much, much rarer?

Well, my finals are complete, my grades have been submitted, and my lodging situation for the summer has been arranged.  It’s been a pretty busy (and not as filled with blog writing as I had hoped) week, but things have been resolved.  (At least, I hope they’ve been resolved; I was informed yesterday that I needed to pay for all my summer lodging ahead of time, throwing my plans for my money flow over the summer completely out of whack.  Lucky, my wife had enough money available from her two jobs to cover my apartment costs, but it’s a reminder that unexpected things can happen in this crazy world of ours.)

Now that my last semester of Master’s level grad school has come to an end, all I need to do to graduate is finish my research, write a thesis, and defend it in front of several professors (easier said than done on all counts, but still, it’s down to research related issues).  It’s not quite that easy, though, as now that I am nearly done with school, that means it is time for the job hunt to get even more intense!  Yes, the days of spending eight or more hours a day, every day, seeking, reading, and applying to jobs are about to resume.  It’s not the most fun way to spend your time, but when I have a good job and can support my wife and child, I’ll be very happy to have gone through the less fun parts of the task.

While I’m job hunting (and finishing off that thesis, since I can’t forget about that), though, there’s plenty to keep me busy, as I read through great blog entries and share them with you, my wonderful readers.  Enjoy all the great stuff there is out there, including:

Good Yakezie Posts

Can You Really Pull Yourself Up By Your Bootstraps? – It’s a cliché  in the personal finance area, where the answer to almost any problem you have with money is to work harder and change your financial situation through your own efforts.  But as 20s Finances wonders in this Yakezie post, is it actually possible?  Personally, I think it can be in most situations, although there are some things out of your control.

“I Want to Start a Blog But Don’t Know How” – There’s an awful lot of learning that you need to do to blog well, particularly if you want to earn a decent side (or full-time) income in the process.  I’m certainly still learning myself, hence my interest in this interview between Neal Frankle and Bob Lotich, two much more experienced bloggers.  Definitely some interesting facts shared.

My Story on How to Successfully Take Courses While Working Full Time – Since we’re on the subject of combining schoolwork with work, here we have some truly inspiring words from Miss T of Prairie Eco-Thrifter.  There’s also some advice on how to mix the two successfully, which can always prove to be tough.

How Long Does It Take to Refinance a Mortgage Loan Nowadays?  Prepare for Battle! – I’m not in a position to refinance a mortgage at the moment, seeing as I don’t have one, but there is apparently quite a bit of time and paperwork required to refinance a mortgage nowadays, at least if the Financial Samurai’s experience is anything to go on.

Getting Screwed Out of Your Hard Earned Capital: How CDs and GICs are Rip-Offs For Long-term Investing – Ah, inflation, the bane of every investor.  If you were still puzzled why putting your money in a ‘safe’ CD (or a guaranteed investment certificate (GIC), the Canadian equivalent) is bad idea for the long term, here Kevin of Invest It Wisely spells out some of the downsides for aiming for safety.

An Example of Why I am Not Sure I Believe in The Efficient Market Hypothesis – Evan of My Journey to Millions shares an example of a company showing steady growth dropping nearly fifty percent in one day.  It does show you that while the market might be largely efficient, there are areas of inefficiency to exploit.

How to Become an Online Freelancer – Appropriately written by a staff writer over at Young and Thrifty, here you have a discussion of how to make money by writing, without all the other issues that we bloggers have to handle.  Honestly, if I had it to do over, I’d likely go into something more like this, rather than trying to build up a blog (and might try to do more work in that area, now that I have more time).

A Really Dumb Financial Move – We all make financial mistakes, although it’s hard to compete with one like this one from Squirrelers.  Here’s hoping everyone reading this avoids using a non-network ATM when one from their bank is right there.

Lesson I Hope to Teach My Son – There’s a lot I hope to teach my upcoming child (and any more that come after that), and it’s nice to get some thoughts from other parents.  This article from Bucksome Boomer shares a few suggestions on what money lessons to pass along.

Why Knowing Your Net Worth Matters – As someone who avidly tracks his net worth (and is trying to share more of it with my wife), it’s nice to see others who agree.  Elle of Couple Money shares why she and her husband track their net worth, and lays out a few limits to what such tracking can accomplish.

Where the Amateur Financier Was Featured

As part of my attempt to catch up on the older carnivals and other places my articles were featured, here’s the Yakezie Challenge Mid-Week from Young and Thrifty that included my Net Worth Update: March 2010 (Yup, just a little bit delayed…)

The Cavalcade of Risk #156: Short and Sweet Edition included my article on How Much Information Should You Share?  Good to know I can be included even in a tightly organized carnival like that.

My article on Celebrating the End of Tax Season was included in Tax Carnival #102: May Tax Flowers, a nice image to put in your head after the April Taxes showers of last month.

Alright, that’s it for now; for me, it’s now time to resume my thesis writing and job hunting.  Wish me luck, and for you, I hope you have great luck in all that you do!

It’s getting near the middle of May, and in an election year, that means the already heated election cycle is only going to get hotter. You can see it already, as the Obama campaign takes firmer aim at Mitt Romney, and Romney’s supporters in turn attack Barack Obama all the more fiercely. This is not going to be a discussion of politicians, as I’m not very good in that arena, and would prefer a less argumentative way to get people to leave comments. (If you want some of the best advice I’ve seen on most politic coverage in a long time, try this article from Cracked (yes, the comedy site) telling you how to determine if a political story is B.S.) I’m just going to ask, wouldn’t you like to see something that both the Left and the Right in this country can agree on?

Well, there is at least one thing: both sides acknowledge that the tax code has gotten too complex. Both the left-leaning Brookings Institute and the right-oriented Heritage Foundation make that point pretty clearly, illustrating how complex our system has currently gotten. Admittedly, they quickly disagree on how to handle the issue (Brookings recommends a progressive tax system, Heritage supports a flat tax), but still, it’s nice to see some agreement amongst those encouraging political action from different sides.

How Complex Is It

Before we can look at possible ways to simplify the tax code, we need to understand just how complex it currently is. It’s a bit tough to say for certain, as almost nobody has actually read the entire thing. The tax code currently stands at over 3.8 million words, over three million more than the King James Bible (not known for being an quick evening read). So, very long, check.

Unlike the Bible, you can’t even count on it being it the same over time. You could get a King James Bible made for King James himself, and not notice much difference from what is being currently published under the King James name. The US tax code, on the other hand, enjoyed over 4400 changes over the last decade, not exactly the sort of thing the average person (or even the avid tax code fan, if such a person exists) could keep track of without an extreme amount of time devoted to the task. Constantly changing, that’s another big check in the too complex column.

Ideally, you should be able to calculate your taxes using this calculator

As if that wasn’t enough, there’s also the lack of common English in the tax code that would definitely imply more than a little complexity. When an entire industry has sprung up to help the typical citizen follow the tax code and submit the proper amount of tax money (and the IRS has become THE most threatening agency at the federal government), that’s definitely a bad sign. When the IRS commissioner needs help filing his taxes, you know things have gotten pretty complicated.

My Plans to Simplify the Tax System

At this point, you’re probably wondering what I would do with taxes if I were in charge. (Alright, that’s not quite true; you’re probably thinking of how you would change the tax system, and more than a few of you might be thinking that you’d just end taxes, and the federal government, and be done with it.) Well, I’ve shared some thoughts on how to change the tax system before, most of which I still stand by. (If you want the Cliff’s Notes version: gradually progressive, not much difference (if any) in how different types of income are taxed, and easy enough to understand that anyone would be able to tell if tax rates are being increased.)

Recently, though, Fareed Zakaria has come forward with a tax system (taking Herman Cain’s 9-9-9 plan as a starting point), where taxes would be taken as follows:

-9% on personal income up to $150,000
-18% on personal income between $150,000 and $500,000
-27% on personal income over $500,000
-18% on corporate income
-9% in a VAT (value-added tax)
-50% Inheritance Tax

While I haven’t run the numbers to see if this tax plan would provide us enough money to match our current tax intake, or better yet, close the deficit gap (and if Zakaria has run the numbers, he isn’t sharing), it does seem pretty solid to my mind. If I were proposing this plan, I’d just make a few modifications and clarifications before putting it forward, including:

-On the personal income: Just a clarification that this includes all (non-inherited) types of income, from earned income to investment income (excepting municipal bonds) to profits from real estate sales income, so we’re clear on how this works. Also, I’d add retirement account investments and a child income tax credit (for at least the first child or two) to the short list of deductions Zakaria laid out (state and local income and charitable donations).

-On corporate income: I’m torn on corporate income taxes; on one hand, it does make sense as a source of government income, as well as encouragement for corporations to spend their money in tax deductible ways rather than passing it all along to the owners and stockholders. (Not that the current tax deduction system is perfect, of course; the idea of CEOs getting houses, planes, and parties on the corporation dime is practically cliché.) On the other hand, the argument that the money is taxed twice (once when it is earned by the corporation, again when it is paid out to shareholders) does make sense as well. How about this: once we get rid of this whole idea that corporations are ‘people’, and return them to the place of legal constructs to limit the financial liability of investors to only the money they put into the company, we’ll get rid of the corporate income tax and only tax the income when it is paid out to investors. Speaking of double taxation:

-On the VAT: I’ve heard more than a few arguments that VAT systems or other spending taxes tend to be regressive, although there are also some that maintain that a tax on spending would help us as a country to trim our overspending. Make sure that most of the essentials of life (food, housing, medical care) aren’t included, and you’ll have more of my support, although I’m still a bit leery.

-On the inheritance tax: There are plenty of arguments out there against an inheritance tax (some mentioned in the comments on Zakaria’s piece), many focusing on issues like what happens when a small business is passed down or a family house is inherited and the inheritors have to sell it in order to pay the taxes on the inheritance. (As well as arguments that this is another form of double taxation, but I’ll be honest, I see it as, well, your children earning money from being born to a well-off family.) A few simple exemptions, like for privately owned businesses when you receive at least 30% of the business (to enable up to a three-way split in inherited control, more than enough for most situations) and a primary residence, as well as any inherited amount beneath a given limit ($100,000, perhaps) should work to keep this tax focused where it belongs.

-On the whole package: A limited number of years before the whole thing is scrapped and a new set of tax laws have to be put into place. Part of why we’re in this current tax mess is that it is easy to simply add more layers to the current tax system, allowing politicians in power to point out their additions to their contributors while maintaining that they aren’t responsible for the rest of the massive tax tangle. Instead, let’s make sure that anyone who votes for changes to the tax system has to vote for the WHOLE tax system, preferably during an election (preferably Presidential) year. (A four-year period would give us a chance to see what works and what doesn’t, so we can make educated changes to the system, while still providing more stability in the tax code than we currently seem to have.)

Whew, I got a bit wonky at the end there. Still, I think this could make a pretty solid system (and I’ll have to run the numbers myself at some point to make sure we won’t end up even deeper in debt). Plus, let’s be honest, almost by definition it would have to be simpler than our current system.

How would you change the tax system? Are there any types of taxes we should include (or avoid)? Do you think anyone has actually made it through all 3.8 million pages of the taxes code?

There are very few financial advisers who are known throughout the entire personal finance community, who are so famous that they can be mentioned by their last name and you, if you have any financial knowledge, will instantly know who I am referring to. Bach, Orman, and Kiyosaki are such advisers, but perhaps even more famous (at least among the personal finance community) is Ramsey.

The Total Money Makeover, written by Dave Ramsey, is perhaps one of the most followed and celebrated personal finance books around. As the title implies, the goal is not to simply help you with one aspect of your monetary life, but to completely remake your monetary life. So, do all the Ramsey adherents have the right idea, or are they all headed in the wrong direction, money-wise? As always, let’s find out!

Summary

The Total Money Makeover (3rd Edition, just to be clear) opens with an Introduction in which Ramsey shares the history that led to the creation of the book, as well as his current position as a financial adviser. There is a section on what the book is not (including not being sophisticated, complicated, or wrong). The opening portion finishes with a discussion of what has gone wrong with the economy lately, and a few stories of those who followed the Total Money Makeover and have been in a position to succeed in life as a result.

The first chapter introduces the idea of the Total Money Makeover. It shares Ramsey’s history and how he ended up making the changes in his life that he currently promotes. It also shares the first story of those people who have successfully followed Ramsey’s plan (many others are shared throughout the book), and points out the ‘If You Live Like No One Else, Later You Can Live Like No One Else’ motto on the bottom of every page. Chapter two covers the issue of denial, pointing out that you can’t make any improvements in your life until you admit there are areas in need of improvement.

Chapter three looks at one of the myths about debt, that is serves as a tool to accomplish important things in life. It examines numerous different types of debt, from lending to family members to leasing a car to credit cards, expressing the problems with each of them. The fourth chapter looks at other money myths, from myths about bad types of investments to the need to have various types of insurance (the myth being that you don’t need insurance, that is). Chapter five looks at how to fight two more money problems: ignorance (by trying to expand your level of financial knowledge) and trying to keep up with the Joneses (by realizing that it’s more important to get your finances in shape than to get approval from others).

The next seven chapters cover the ‘Baby Steps’ Ramsey is famous for recommending to manage your money. Chapter six covers the first one, setting aside a $1000 emergency fund, after stressing the importance of creating a financial plan and budget in the first place. The seventh chapter covers Ramsey’s recommended way to get out of debt, the Debt Snowball. It works by focusing on paying off the lowest amount debt first, then the next lowest (now using the extra money from the first, paid off debt), then the next lowest, and so on. The goal is to pay off all the debts over (a hopefully short) time, with only a few exceptions (business loans, home and rental mortgages, which are covered later).

The eighth chapter covers Step Three, building up your emergency fund to three to six months’ worth of expenses. It suggests places to keep the money and reasons to alter the order of the steps (if you know there is an emergency coming up soon in your life, such as losing your job, the emergency fund becomes more important). Chapter nine looks at how to invest once you have a solid emergency fund and no debt (except  for possibly a mortgage), building up a retirement fund. It recommends putting 15% of your gross income aside, mainly in growth mutual funds, preferably in any retirement type accounts available to you.

Chapter ten discusses saving for your child(ren)’s education, setting aside a fund to help him or her (or them) cover their college costs. Ramsey highly disapproves of student loans, providing numerous suggestions on how to get a higher education without taking them on. The eleventh chapter looks at home mortgages, stressing the goal, now that everything else has been taken care of, to pay it down as effectively as possible. Chapter twelve looks at the final Baby Step, building up wealth, sharing advice on how to further invest your money, have fun with it, and give plenty away, preferably doing all three.

Chapter thirteen rounds out the book by advising the reader to take the steps suggested to heart and apply them as so many others have been able to do. The third edition then shares the winner of The Total Money Makeover Challenge, and ends with a series of forms that can be used to help follow the steps in the book.

Pros

The Total Money Makeover presents a very helpful, generally easy to follow method of money management. The steps are clearly laid out, and the advice given is pretty solid. The nature of Ramsey’s writing, as well as all the stories shared about people successfully applying the Baby Steps, is very encouraging.

Cons

There’s been almost as much written about where the Baby Steps go wrong as about how they go right (including by me). Many of the suggestions are rather optimistic, particularly the idea that you can live off 8% of your retirement savings (when most other financial experts suggest 4%, and even that is sometimes cited as too high). The repeated Bible references are likely to be a turn-off for any non-Christian.

Overall

The Total Money Makeover provides a pretty solid guide to getting your financial house in order, breaking the process down into simple steps. While these steps might not always be THE best method to take in order to get your finances in order, they are a pretty solid approach. I’d definitely recommend following this approach (or something very similar) to getting your finances in order, as I intend to do myself.