The Amateur Financier

You’ve probably learned by now, at least if you’ve been following me for any length of time, but I am a huge geek.  One of my weaknesses is a fondness for creating spreadsheets to help visualize my thoughts.  Sometimes, I even go a bit overboard, losing track of time as I work (no really, it’s happened before, and I dare say, it will happen again).

Luckily for you (and for the sake of this post), some of the spreadsheets I create are pretty useful for people other than me.  Recently, I whiled away the wee hours of the night on a few of my days off by setting up a system to compare various tax systems and the best part is, you can try, too!  Inspired by this article about a flat tax on the Financial Samurai as well as My Life ROI’s impassioned arguments against it, I created a tax system simulator, designed to enable all the other financial geeks out there to try their hands at rectifying the United States’ tax problems.  The program has been uploaded onto Google, here.

Getting Oriented

Alright, there’s quite a lot here, so it might seem a bit much at first, but let’s take a tour of it, together.  The top parts (those that aren’t enclosed in a box) are just raw calculations needed to feed into the final results (those things shown in the boxes).  I don’t think that Google allows you to view the formulas I used, which is a bit of a shame, but you could possibly work out the logic I followed for my calculations.  The real meat of this table is below, set up in the boxes:

In these tables, the italicized figures are the ones I played around with (and encourage others to do the same), while the non-italicized boxes should stay the way they are, seeing as they are either calculations based on the italicized figures or metrics that won’t change due to changes in the tax system (in the short run).  Most of the big table should be self-explanatory; the groups of tax payers with their average income (as noted by My Life ROI), the taxes paid (as individuals and as a whole) and their taxes represented as a portion of their income and as a portion of the overall government budget.  On the right, there are the current tax brackets of the US tax code, and the percentage of income to paid with each one.  Below, on the right, there’s the total income taken in, the budget of the United States, and the surplus or deficit that results.

This chart, as currently set up, shows what we could expect to collect in tax revenue if (a) the income tax was the only tax system used by the Federal Government, (b) there were no deductions of any kind, (c) the tax brackets themselves remained the same, and (d) the number of taxpayers remained the same.  It’s fairly progressive (the lowest income tax payers pay out 12% of their income, the highest ones pay out 33%), but alas, the deficit (with spending at the level of the actual budget next year; you don’t think I came up with $3.6 billion out of my hat, did you) is nearly one third of the overall budget.  Of course, you don’t have to keep all those assumptions (and what would be the fun if you did?)  By finagling these values, you can see how making changes to the tax system can affect how much is paid in taxes, by whom, and the effect on the overall budget.  Let’s consider a few shifts in tax policy, and the effects on what you pay, and what the government takes in…

Other Possible Tax Plans

Tax Revenue - $10,000 deduction

A relatively small change to start us out; simply adding a flat deductible for everyone, and suddenly the system becomes much more progressive.  The lowest tax bracket earner is now only paying 2% each year for taxes, while the top 1% earner is still paying 33% (albeit, a slightly smaller 33%).  On the negative side, the budget deficit has now increased by $229 billion dollars, so this is far from perfect, as well.  Let’s consider the flat tax to see what that looks like:

Tax Revenue - Flat Tax

Well, good news, bad news time, flat tax proponents.  The good news is, the flat tax IS in fact progressive, so long as there is a healthy (flat) deduction to go with it.  The bad news is (a) the lowest tax bracket earners are paying more than under the previous method (which was essentially the current graduated system, with few deductions and other loopholes) and (b) our deficit is much greater than either of our two previously mentioned systems.  So, there are a few kinks to be worked out (at least, if you’re trying to sway me to your cause).  Speaking of me, let’s see how my tax plan looks under the microscope:

Tax Revenue - My System

Well, there are some things to recommend it: the deficit is the lowest as we’ve seen under any of these plans, and it’s still pretty progressive.  On the other hand, near the top of the income distribution, it starts to take a significantly larger chunk than any of the other plans so far.  Personally, I’m not too bothered by that, but that’s my own personal view.  Just to show you how a tax system could try to balance the budget at all costs, here’s my system, modified to actually show a surplus:

Tax Revenue - Balanced Budget

I’ll be honest: I thought it was going to have to be more punishing than this in order to actually balance the budget.  Don’t get me wrong: it has the highest taxes for everyone of any of the systems we covered so far (with the exception of my default plan,  the current set of tax brackets with no deductions, but that was more a matter of convenience than a real plan).  The deduction is lower, the tax rates are higher, and the tax brackets are much closer together (meaning you reach the highest tax bracket with much less income).  Still, as changes to reaching a balanced budget are concerned, it’s one method that doesn’t involve turning down requests for money from old persons, the army, and the sick (to say nothing of old, sick Army veterans).

A few final notes before I leave you to play with my little tables.  First, it’s obviously just a table for income tax; if you want to figure out how the tax rates would compare between these systems and say, a sales tax system, it can’t really help you.  Second, it’s obviously greatly simplified.  Given the wealth of different tax deductions available, to say nothing of different tax rates for different types of income (capital gains vs. earned income, for example) designing a truly representative spreadsheet is a bit beyond my time and talents.  That said, hopefully this will be amusing, and dare I say, helpful.  Enjoy!

My biggest problem with working the graveyard shift is that it completely throws your sleep schedule off, even on those days you don’t work.  Yesterday, for example, I ended up staying awake all day, simply because the sun was out.  You don’t realize just how much of an effect sunlight can have on your ability to stay awake until you find it keeping you from getting any rest at all.

I think, from now on, when I have days off, I’ll just have to stay up all day and sleep at night; that’s what I do when I am visiting my Sondra, and it seems to work out alright.  It’s also what a few of my coworkers do as well, and they seem to have adapted quite well to it.  The only problem is that then I have days like today, where I have to go back onto a night schedule in order to make it to work.  Alas, I think that all this switching from nocturnal to diurnal is not worth the small premium I get on my paycheck by working the third shift.

Alright, enough of my complaining; it’s time to go through some of the interesting personal finance posts from last week and see what some of my talented fellow bloggers had to say:

Blog Entries That Made Me Think

National Protect Your Identity Week – Apparently it’s nearly the end of National Protect Your Identity Week.  Stephanie of Poorer Than You reminds us that even as we prepare to disguise our identities for Halloween, we need to be concerned with protecting our identity throughout the rest of our lives.  (Also, remember to keep voting for Stephanie in NatureMade’s Good Mood Gig contest.)

Party Like It’s 1999!  Ten Takeaways from This Recession – With the recent return of the Dow Jones Industrial Average to 10,000, people are starting to look back over the events of the last year and taking much different lessons than they would have during the depths of the downturn.  If you asked me back when I started The Amateur Financier what the next eight months were going to hold, I doubt that a soaring stock market but stagnant job market would be high on my list of possibilities.  The Financial Samurai draws a few lessons from the whole of the past 18 months, and his points are right on the mark (particularly about asset prices coming back).

Presents for Kids: Who Do They Belong To? – An interesting question: if your very young child receives a monetary gift, who should get to spend it?  My Life ROI raises a few possibilities, from you (that is, your parent) to the kid him- or herself.  Personally, I favor the third possibility he suggests, putting the money into a savings account or other investment until the child is old enough to know what he or she wants to do with it.

Is Generation Y’s Financial Situation Really That Bad? – Given that we were coming to age in the wake of the internet bubble bursting and now are getting a raw deal with this ‘Great Recession’, there’s no shortage of people bemoaning the plight of the young investor.  But, we have one advantage that many people in the older age brackets would love: time to recover.  As long as these downturns don’t scare too many of my fellow Gen Yers (including the author of this post, the Generation Y Investor), we can recover and do just as well, if not better than our elders.

Scary Calculation on Credit Card Debt Elmination - Studenomics reminds us all that paying off our credit cards by only paying the minimum due is nigh impossible.  Quite fitting for about a week before Halloween, it’s downright scary how long it can take; a mere one thousand dollar debt at 18% takes over seven years to pay off, twenty dollars at a time.  Save yourself some time (and lots of money): pay more than the minimum.

Where The Amateur Financier Has Been Featured

The Skilled Investor featured Is Your Child An Investment? in the Carnival of Financial Planning – 111th Edition

Well, I’m in a bit of a humorous mood today, so we’re going to do something a little different.  There are any number of weird and wacky words  and phrases that are used by investors to help describe the investment world.  You don’t normally think of investment bankers, accountants and others as the wild and crazy types, but they apparently have a pretty decent sense of humor when it comes to creating names to associated with the financial world.  Let’s take a look at some of them (courtesy of Investopedia)

Ankle Biter – A small cap stock, that is one with a market capitalization of less than $500 million.  The titans of Wall Street must have pretty high ankles if a company worth $500 dollars gets the same moniker as a 2-year-old toddler.

Black Knight – A company attempting a hostile takeover of another company.  A nicely descriptive phrase regarding how a targeted company will likely view the potential acquirer, conjuring up some potent imagery of invading hordes and kidnapping.  (Also, one of the nicknames that my Sondra uses for me.)

CNN Effect – The slowing of consumer spending during times of gripping news.  During a war or terrorist attack, people tend to be glued to the tube, trying to get all the latest news, before going back to their normal schedules..  I suppose nowadays it could be called the Fox News Effect or MSNBC effect, depending on your political leanings.

David Hasselhoff Index – A stock index of companies associated with David Hasselhoff, under the assumption that companies linked to him are more likely to be profitable. (Really?  Alright, we’ll run with it.)  Other related celebrity indexes include the Eva Longoria Index, the Lindsay Lohan Index, and the Paris Hilton Index.  (Again, I have to ask, really?)  All are based on the idea that companies linked to particular celebrities dervie some sort of unquantifiable benefit from the association.

Eat Your Own Dog Food - To use the products that your company produces.  If you’re a software company, for example, it means that your employees use your software in the course of their work.  It’s a good way to show confidence in your own products, but I have to ask: what do professional investors eat that ‘dog food’ is the food product that they chose for this expression?

Fool In the Shower – A central bank that doesn’t wait long enough for a stimulus action to work, increases the stimulus, and eventually ends up overshooting its goal.  Used by Milton Friedman, who used the allusion of a fool in a cold shower, who cranks the heat all the way up and ends up being scalded.  A good reminder that major policy changes take time to move through the economy.

Hot Waitress Economic Index – The theory that the more attractive waitresses there are, the worse the job market is doing (since attractive people have little trouble finding other work in good economic times.  So, if your waitress (or waiter; unlike Wall Street, I try not to discriminate) looks like a supermodel the next time you go out to eat, the downturn in jobs isn’t over yet.

Mad Hatter - A corporate executive who is considered incapable of leading the company.  One good warning is if he starts yelling out ‘Change Places’ at various points during a board meeting.

Samurai Market - Slang term for the Japanese Stock market; included here because I’ve been spending way too much time on the Financial Samurai’s website of late (and because, as my carnival on Monday should have indicated, I’m a bit of a Japan-ophile).  Similar to terms like ‘Yankee Market’ for the American stock market and ‘Bulldog Market’ for the British stock market.

There Ain’t No Such Thing As A Free Lunch (TANSTAAFL) – A reminder that there is a cost to every decision we make, in terms of time, energy, or money.  Also, a reminder that nobody, with possible exception of your mother, will ever give you something with nothing expected in return.  (Also known as There Is No Such Thing As A Free Lunch (TINSTAAFL) for those who don’t like to use the word ain’t or have double negative in their phrases.  In either case, even the acronym is a mouthful.)

A Ton of Money – A lot of money; apparently, if you actually had enough one dollar bills to weigh one ton, it would add up to $908,000.  Personally, I would prefer a ton of twenties or hundreds, but even a ton of singles is a pretty hefty wad of money.

That’s all the definitions I have time to share; there’s plenty more to consider (and chuckle at) on Investopedia’s financial buzzwords list.

As you might know, from any of the times I’ve mentioned it on my blog or via my Tweeter account (@amateurfinance, just in case you’re curious), I recently hosted the Carnival of Twenty-Something Finances.  It was an interesting and even, dare I say, fun experience, but it was a little overwhelming.  Since it was the first blog carnival I’ve ever hosted, I had little idea what to expect.  So, for anyone looking to host a blog carnival of their own in the future, here’s some of what I learned from my experience, which I now pass onto you:

First, get an early start on making up your post.  I’ll be the first to admit, I’m a bit of a procrastinator at heart (especially now, when I’ve got a night job that throws off my schedule both on work days and rest days), and tend to push things off as long as I can.  You might be tempted to do the same thing with your blog carnival; after, you’re just going to be cutting and pasting a bunch of blog posts’ names and web addresses, right?  But doing a good job requires more than that; you should read all the posts, get a feel for what they say, try to organize them by topic or type (maybe even picking out a few as your favorites and calling them the best of the carnival) and write a short blurb for each one.  Done right, a decent blog carnival can take just as much time and effort as a good blog post  (and perhaps even more, especially when there are a large number of entries and/or you decide to go really over the top with your presentation).

Which brings up my second piece of advice: go all out with your carnival blog.  It’s tempting to look at a carnival as a freebie post; other people write all the interesting stuff, you just put it all together, slap on a few personal touches, and watch as you get all sorts of traffic from the contributors, their readers, and anyone who happens to mention the carnival in the future.  But that’s exactly the opposite of how you should be thinking.  If you’re going to drawing all this traffic to your site (and to this one blog entry in particular), you want it to stand out and be memorable.  Show the visitors to your blog (some of whom are likely seeing it for the very first time) some of your wit, charm, and intelligence, as you try to impress them and convince them to become dedicated readers.  It’s like a first date, so put your best face forward and give it all you can give.

Your Goal: Make your carnival more amusing than this

Third, choose a good theme for your carnival.  A strong and unique theme can help you stand out from the crowd, provide you with plenty of ‘color commentary’ you can add to carnival, and even help you decide how to organize the posts you receive.  (My theme of anime fit pretty well with dividing the posts by topic, while the previous host choose a Major League Baseball theme that worked well with how he ‘ranked’ the articles.)  Try to pick a theme that you really like, that isn’t too close to the topic of the carnival (besides seeming uncreative, you might end up stepping on someone’s post), and that doesn’t conflict with the advice in the posted articles (if you’re hosting a weight loss carnival, don’t post pictures and recipes of your favorite desserts with comments about their delicious taste and aroma.)  Also, unless your blog specifically covers more ‘risque’ material, themes like your favorite pornos or types of drugs should be avoided.

Fourth, follow the golden rule: treat the contributors as you would like them to treat you when you submit to a carnival.  Read through their work, comment if you have anything useful to add to the conversation, write to them if you have any questions or comments, send a quick email letting them know they were included when the carnival has been posted; anything you can do to make the whole carnival seem easier and more fun can help make it that much more popular.  Besides encouraging others to act the same way, you’ll also help to increase the chance that blog writers will link back to the carnival and visit it themselves, all of which will help to drive some traffic to your site.  (Which is at least part of the reason you’re doing this, right?)

Finally, have some fun with it.  Yes, a carnival is a lot of work, hours of time spent reading blogs you might not care about, organizing them, adding comments and pictures, and generally making the whole package that much more presentable.  But there’s fun to be had, as well; choose a theme you’ll enjoy, add clever quips to your descriptions of the contents, even drop a few jokes into the post.  All this will make it much it much easier to handle all the reading and other work you’ll need to do, and can let you add a personal touch to the post, as well.

That’s all there is to making a good blog carnival post.  So go out there (there being the BlogCarnival page, in this case) find a good carnival related to the topic of your blog, and start the hosting!  It’s definitely a fun time.