The Amateur Financier

One of the biggest problems with many personal finance books is that they are written with the assumption that everyone is the same when it comes to money.  There’s a single path to financial security that is laid out, which may be different for each adviser, but assumes that everyone has the same goals and end desires.  You might not be on the same step, but inevitably, you’re moving toward the same goal.

Master Your Money Type from Jordan Goodman takes a different approach.  Rather than assuming that everyone is the same when it comes to money, it looks at six different money ‘types’; distinctive personalities and approaches to earning, investing and otherwise using money.  Does a more varied approach yield a better personal finance book?  Let’s find out.

Summary

The first chapter starts out with the basic premise: that by understanding how you deal emotionally and psychologically with money, you can get a better grip on your finances and control your spending, investing, and saving habits better.  It then provides a brief overview of the six money types covered in the course of the book: Strivers, Ostriches, Debt Desperadoes, Coasters, High Rollers, and Squirrels.

The second chapter takes a closer look at the emotional relationships we have with money, and how it can affect our attitudes and actions.  As Goodman notes, there are many different things that money can mean to us; for some of us, money is a source of security, for others, it’s a source of power, and for still others, it means means love, happiness, or a way to relieve our pain.  These feeling are born from a number of different sources, from our parents’ and grandparents’ attitudes about money to our experiences in childhood and as young adults.  The chapter ends with some of the basics of acknowledging, confronting, and changing our undesirable fiscal personality traits in order to get our financial house in order.

The next six chapters (which compose the bulk of the book) look over each of the aforementioned personality types in depth.  Each one explains what the main traits of the personality type are, the pros and cons associated with each type, and several examples of people whom Goodman has worked with in the past who exemplify those those personalities.  He then covers some of the more harmful traits each personality exhibits, and provides a shift in thinking to help rectify them.  Once the emotional stuff is out of the way, he provides a financial plan to help each type get their finances under control, usually with tools most appropriate for each type.  Each chapter ends with a list of resources that will be most helpful to people with those personalities.

First up in chapter three are the Strivers.  These are the people with a strong desire to be successful, or more importantly, to be perceived as successful by those around them.  At their best, Strivers are driven, focused, and determined to make their goals a reality; at worst, they stretch too far to appear well off, overestimating their income and underplaying their expenses.  The solution for this overreaching is to rein in the tendency to stretch their budget to show off their self-worth, and there are numerous budgeting and cash flow tools at the end of the chapter to allow them to still put their wealth on display, but doing so while staying in budget.

The second major type is the Ostriches, so called because they bury their heads in the sand when it comes to money (never mind that real ostriches don’t do that; it’s too good an image to resist).  The good news is that this group isn’t consumed with money, but they take it too far, not knowing (or caring) enough to get their money under control, and sometimes falling for bad advice because they don’t have the savvy to realize how bad it is.  The solutions given are to take control of their money, in the least painful ways possible, by automating their savings and investments as much as possible.

The next chapter covers the Debt Desperadoes, possibly the group with the fewest positive traits (mainly the ability to bounce back from a crash) and several negative ones, including denial of the reality of their situations.  The chapter opens with a quiz to see if you’re spending too much and several of the reasons that people can get in high levels of debt.  The list of financial solutions range from creating a financial plan to deal with the existing debt to the possibility of bankruptcy.

The Coasters are an odd breed, having a a decent handle on their spending and earning, but not having a longer term plan.  They have a tendency to prefer stability to change (even positive changes).  There’s a sub-category called Optimists who have a tendency to believe that everything will work out, and that the universe will provide what they need in life.  The major piece of financial advice for these groups is to expand their financial planning to ensure that their plans will cover ALL their goals, with plenty of retirement planning tools included.

The High Rollers are next; their pros include a high tolerance for risk and belief in their vision, while their biggest problem is the tendency towards thrill-seeking and gambling.  The major suggestions include making educated gambles, shifting a portion of invested money into safer investments like bonds, and making sure that the money put into speculative ventures can reasonably be lost without adversely affecting longer term goals.

The final group is the exact opposite; Squirrels value stability and safety over everything else, and as a result, have a tendency to live much below their means and not enjoy life as much as they could afford to do.  This is taken to the extreme in the sub-type of Bag Ladies, who tend to accumulate a great deal of wealth without any enjoyment (think of the stories you’re heard of the people who live like paupers and end up leaving several million dollars to charity when they die).  The solution is to slowly bump up the risk they take, to be better prepared for the future.

There’s a list of resources at the end of the book, providing a collection of material that could be useful to anyone who needs further information.

Pros

-More Individualized Approach to Personal Finance Advice: As mentioned at the beginning of this article, one of the strongest advantages of this book is the lack of a ‘one-size-fits-all’ attitude.  The book understands that all the readers are not the same, and attempts as best it can to tailor the advice in such a way as to be helpful for everyone.  While a book can’t hope to provide every single person with a unique plan for financial success, it does manage to differentiate significantly to help a wide variety of people.

-Interesting View of Money and Psychology: In a similar vein, too many books don’t take into account the effects of individual personalities and attitudes on how to handle money.  While some books cover the problems or goals for a particular group (get out of debt books for Debt Desperadoes, for example), a holistic approach for many different personalities is a bit of a rarity.  Getting advice on a variety of different money issues from both an emotional and monetary perspective helps to handle numerous different problems.

-Solid Financial Advice: It might seem like this book focuses on the mental aspect of using money, possibly skimping on the details of how to actually manage your money.  But, Goodman provides a solid foundation of money management and plenty of tools to help plan your financial future, from retirement planning figures to basic budgets, spread throughout the book.

Cons

-Sometimes Hard to Find Needed Information: Since the book is organized primarily according to the money types rather than the tools provided, it can be hard to find the budget tables (in the Striver chapter) or the investment return tables (unexpectedly, in the High Roller Chapter).  Given that many of the financial tools could be helpful to multiple types (there are several references telling one group to look in a different chapter for the appropriate tools), it seems like a better organization would be to put all the financial planning tools in one section, like an appendix.

-No Advice for Blended Types: Although there are early comments from Goodman about the need to consider that you may fall into multiple types and need to look at all aspects of your money type, the book doesn’t make this easy.  All the examples are solidly (and usually intensely) within one type and the book provides advice for only one type at a time, some of which contradicts the advice for other types.  A bit more advice for those who fit into multiple types (perhaps a section at the end of each chapter describing how to handle money for people with some traits that fit into another type) would be helpful.

-Too Many Resource Pages, in Too Many Places: At the end of each type chapter, there’s a list of resources specifically suited to that money type, and there is also an appendix that includes a list of general resources.  Many of the recommended books, magazines, and websites, showed up multiple times following the individual chapters, and again in the appendix.  Cutting down the number of places to list resources would make the book run smoother (and seem a bit less like an attempt to sell other books).

Overall

Master Your Money Type is a pretty solidly written book.  A few organizational changes would make the book a bit more useful, but it’s still useful and interesting.  Knowing your money type is an interesting point of view for money management, and it’s good to see someone looking at finances through a psychological perspective.  If you’re looking for a solid, unique personal finance book to help understand the basics, it makes a good introduction.

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“The only things certain in life are death and taxes.”  There are few guarantees in life, but these are two of them; you will die at some point (hopefully, not soon), and you will have to pay taxes.  Of course, with such inevitability, it was only a matter of time before someone decided to tax death.  (Or rather, the money left behind after someone dies; after all, as another old saying goes, “You can’t take it with you when you die.”)

The ‘Death Tax’ Explained

There are actually two different types of taxes that are commonly called ‘Death Taxes’: inheritance taxes and estate taxes.  To understand the difference, let’s consider a hypothetical example.  Your great, great uncle Jedidiah dies, leaving a large fortune (let’s call it $10 million dollars) in his estate, a goodly amount of which is going to you (let’s say that old Jedidiah left you one tenth of his final estate).  Of course, such a fortune is high enough to be taxed; the taxes could be taken in one of two ways:

While You're Visiting Angels, Your Family Might be Facing Taxes

Estate Taxes: Jedidiah’s entire $10 million estate could be subject to taxes, taking a substantial portion of the money in the estate before the money is disbursed to you or any other beneficiaries.  Essentially it’s a ‘tax’ on the whole ‘estate’ (witty, no?)  Since Jedidiah is gone, it falls to whomever is administering the estate, and there is usually a single rate applied to the entire estate after any exceptions or allowances are applied.

Inheritance Taxes: In this case, Jedidiah’s fortune isn’t taxed, but the amount that you receive IS taxed.  If the entire $10 million dollar estate is disbursed, your share ends up being $1 million, on which the tax ends up being levied.  Inheritance taxes also can differ according to whom is being taxed, with direct lineal relatives being taxed the least and non-relatives facing the greatest tax rates.

There are numerous similarities between the two taxes; both types usually exempt transfers to a surviving spouse as well as charitable contributions, for example.  (The federal government only levies an estate tax, although some states tax inheritances.)

Also, it’s probably worth noting gift taxes, taxes designed to limit the amount of money transferred from one person to another while they are both still alive.  A major reason that such taxes exist is so that Jedidiah (or other persons of means) can’t give away all their money before they die in order to avoid estate or inheritance taxes, which is one reason why they are frequently grouped together in legislation.

This year is a bit odd; for 2010 (and only 2010, barring any Congressional changes to the current policy) the federal estate tax has been repealed.  It’s scheduled to make a come back in 2011, meaning that this year is likely to have some debate over whether it’s better to allow the tax to reinstate or eliminate it permanently.

The Cons and Pros of Estate and Inheritance Taxes

If you’re a long time reader of The Amateur Financier (or any personal finance publication), you probably realize that there’s going to be some argument of whether these taxes are good or bad.  For a change of pace, let’s start with the cons first:

-Inheritance or estate taxes may reduce the incentive to save.  If Jedidiah knows that up to half of his fortune will go to the government rather to his heirs, he might not make as much effort to gain more money.  Essentially, it’s the same argument against excessively high income taxes; if the tax rate is too high, the amount of income (or bequest) needed to get a net increase isn’t worth the time and effort.

-These taxes are also a form of double taxation; every dollar that gets passed onto your beneficiaries must have been earned and taxed already, so the estate and inheritance taxes are at least the second round of taxes to which the estate is subject.

-The tax adds to the complexity of the tax code.  As with any type of additional tax, there’s added paperwork and red tape to go through.  Add in the numerous ways people try to avoid the tax (by giving away their fortunes, for example) and the counter measures the government adapts (like the aforementioned gift tax), and soon the tax code gains another few volumes.

-Lastly, the argument is made that death is not the appropriate time to be collecting taxes.  The term ‘death tax’ that’s frequently attached to these types of taxes is used by many opponents to emphasize the improper timing of such taxes (and arguably, the wrongness of the tax in general).

That’s quite a list of arguments opposing inheritance and estate taxes.  Of course, if those were the only arguments, these taxes would already have been repealed.  Let’s see what’s the proponents of keeping such taxes have to say:

-Since the taxes typically fall only on the wealthiest estates (those in excess of the 1 million dollars as of 2011 assuming that the tax is reinstated), the tax is progressive, only affecting the wealthiest individuals in the country.  Many proponents argue that’s it’s a reasonable way to ensure that the overall tax system is progressive as well, preventing the wealthiest individuals in the country from dodging taxes altogether.

-Estate taxes can increase the motivation to accumulate wealth.  Though this seems like a direct contradiction of the first ‘con’ above (and it is), the fact is that different people have different motivations and will be affected differently by the existence of an inheritance tax.  One wealthy person might be demotivated near the end of their life, not wanting much of their estate to go to the government, while another might look at the tax as an obstacle to be overcome on the way to giving the amount they want to their beneficiaries.

-There’s also an argument made that the estate tax is ‘fairer’ than many other types of taxes.  Since it’s levied after the person who originally earned the money is deceased, taking money from heirs who didn’t materially contribute to earning it seems more justified.  (Opponents of the tax would argue that the government has no more (and probably less) claim on the money than do the heirs.)

-A final justification for the estate tax is pretty simple; it brings in money to the federal government.  The Center on Budget and Policy Priorities puts the ten year cost of eliminating the tax beyond 2010 at $1.3 trillion, money that will have to come from other tax revenue or be eliminated from spending (or, given how our government tends to handle such situations, just added to the deficit).

With so many different aspects to the estate tax, both in favor and opposed, it’s hard to make a blanket statement about whether it’s better to keep it repealed or reinstate it.  Not that will stop any number of commentators (myself included).  Personally, I’m inclined to think that the good outweighs the bad, although I’m betting I’m missing part of the story.

Did I miss any major effects (positive or negative) of the estate or similar taxes?  Do you think the estate tax should remain repealed?  Do you expect (or hope) to be wealthy enough to be affected by the estate tax when you pass on?

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Previously, in our Wacky Wednesday hi-jinks: You’ve rented a time machine and attempted to profit by investing money and coming back two hundred years later to spend the profits.  The plan worked; your measly one thousand dollars had become more than 4.8 BILLION dollars; unfortunately, inflation has taken such a toll that this amount is about the cost of a used hovercar.  (”The Pinto Mark XIII, now with non-exploding hoverpods!”)  It takes several Reagans (one million dollar notes, so named for the late twentieth century president on their front; whether this is an honor or an insult, you don’t yet know) just to buy a cup of coffee.  Realizing your error, you run back towards your DeLorean shaped time machine, only to find it being towed away…

You wave and shout to get the tow truck men to stop, but they give you a dismissive shrug, make a few comments about ‘work is work’, and continue to haul away your only way to get home.  Eventually, your shouts and curses, (and the tears welling up in your eyes) convince the driver of the hover tow truck thing to give you a lift back to the rental place.

As you climb into the cab of the hovering tow truck, you wonder why everything in the future seems to be hovering.  After that, you wonder what you should do from here.  You don’t have much more money (adjusted for inflation) than you had back in early twenty-first century, but you’re in the FUTURE!  You could go on adventures on the moon or join a Star Fleet crew, visit strange solar systems, and sleep with green women (or men; far be it from me to judge you).

As thoughts of space flight and glorious science fiction adventures dance through your head, you look out the window to get a better view of this strange, new world.  You’re greeted by a bunch of billboards (floating, of course; you wonder if there was a law passed in the twenty second century that absolutely everything had to float or what).  After adjusting your eyes to the garishly designed billboards, you manage to make out some of the things being advertised.

The first sign you make out seems a bit odd; non-artificial strawberries on sale, 500 grams for 200 Reagans.  You’re still getting used to this whole future currency, and the metric system always gave you trouble (and you don’t even want to guess what the whole ‘non-artificial’ comment means), but it sounds as if a carton of strawberries is selling for the 2010 equivalent of two hundred dollars.  They certainly sound rather precious.

A few more billboards continue to erode your confidence that this is not the fantastic future for which you were hoping.  An assortment of ‘food pills’, living tubes with huge monthly rents, and ads for ‘One of the Last Remaining Forests’ make the future seem less utopia and more distopia.  It isn’t until you see the billboard for ‘Soylent Green’ that you finally decide you’re much better off back in the past.  You’re not sure if it’s some kind of twenty-third century joke or truth in advertising run amok, but you sure as hell don’t want to find out.

Now that you’ve decided to go back, you try to figure out how you can still profit off of time travel.  Clearly, depending on interest alone isn’t going to be enough to make you rich with no effort, so you may as well as see if there’s any way to make a Reagan or two off of your next time machine rental.

Unfortunately, most of the easiest ideas that pop into your mind just won’t work.  Trying to set up your own time travel travel agency would require a lot of work; getting the needed permits from the Time Police alone could take hours.  Ditto for exchanging products across time; while selling strawberries (and other natural products) in the future sounds like a great way to make money, you can’t imagine nobody else would try it if it was allowed.

Your mind briefly goes toward the idea of gambling.  While most forms of gambling disappeared shortly after time machines began being used commercially (the one casino that remained open was the site of the famous ‘Trump Debacle’; nearly one billion dollars won by ‘gamblers’ armed with future knowledge in the course of one day, leading to lawsuits for decades), there’s still the chance of passing information about future events to yourself before they went mainstream.  It’s just a matter of getting by those Time Police.  But come on, they can’t be everywhere (or everywhen) right?

You finally settle on your plan as you pull into the time machine rental place; travel back in time, pull your money out of the investment that got overtaken by inflation, pass it to another version of yourself along with some hints about future sporting events, and then distract the Time Police elsewhere.  Maybe you can try to kill Hitler; that always gets their attention.

You settle on your plan, and go up to the debit machine to pull out your money, to find that your account balance is empty.  Thinking it must be some horrible mistake, you vow to stay in the future just long enough to complain to your broker, when the full amount reappears in the account.  Still confused, but rather happy, you go to pull the money out again, when once again, it disappears without a trace.

Bewildered, you wonder just what’s wrong with the machine for a moment before it hits you; there’s nothing wrong with the machine, there’s a flaw in your plan: if you take the money out in the past, it won’t be available for you to use now in the future.  The only way you can have the money now is if you don’t travel back to take it out.  Frak!

How can you get around this paradox?  Will you be stuck in the future forever?   Does Roger like asking rhetorical questions as a way to wrap up these articles?  (Answer: Heck Yes)  Stay tuned next week (or the week after if I get busy again) for the next exciting chapter!

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Have you ever had a good idea, a wonderful idea you couldn’t wait to put into practice.  Then, before you had the chance to actually carry it out, you discovered that someone not only had the same idea, but managed to put it into practice before you even got the first step off the ground.  That’s pretty much the way I felt when I read this post on Evolution of Wealth.

The article itself is pretty reasonable, a round up of all the latest Yakezie posts, which is the sort of thing done by any number of blogs (including mine).  It’s what’s down in the comments that’s irking me; apparently, I’m not the first person to have the idea of using a carnival to promote the Yakezie challenge, and not being fast enough to get it up and running before anyone else, all I can do is wait on the sidelines.

Oh, well; running a carnival is a sometimes tough job, and I’m just glad that there are other people willing to shoulder that sort of responsibility.  I’ve already offered to host the carnival, so perhaps one week soon, you’ll see my weekly thoughts entry being replaced (or augmented) with a Yakezie carnival entry.  Either way would be pretty fun…

Enough about future round-ups, though; now it’s time to share some of the good articles from this past week:

Good Yakezie Posts

Debt Free News From a Debt Free Reader #6: Some good news to kick off our list; it’s always good when someone is able to get out of debt.  Go, Dustin!

How I went from No Blog to 122,661 on Alexa in Two Months: Not really personal finance, but another inspiring story nonetheless (particularly if, like me, you’re trying to make a go of this whole blogging thing.

Lease or Buy?  What to Know Before Your First Car Purchase: I’ve always bought used cars (and drove them until they couldn’t be driven anymore), but this is a good overview of the advantages and disadvantages of each car acquisition method.

Russian Women and Their Money: An intriguing view of how Russians traditionally handle money.  (It’s always amazing to me how many cultures have women controlling the purse strings.)

How Financial Planners SHOULD Behave and Act as a Fiduciary: A great list of things that a good financial planner should be doing for their clients.

Pros and Cons of Being Wealthy: Even with the cons listed, I’d still be willing to give being wealthy a try.

How to Get More Money Back on Your Tax Return: Apparently, it’s tax season in the great white north as well; here’s a list of tips aimed at Canadians (though there’s good advice for the US, as well).

Is Passive Income Real?: This guest post argues no (pretty persuasively), but I think that getting close to passive would satisfy me (and most people, for that matter).

Conventional Wisdom Leaves Much to Luck: Another guest post (they’re getting pretty popular, lately) about the flaws in conventional wisdom when it comes to retirement withdraws, and ways to protect yourself.

Combat the Closing Techniques-The Puppy Dog Close: One of the more diabolical marketing techniques (’Just take the puppy home for the weekend, you can return him if you don’t want to keep him’) and how to combat it.

BOND is Back!: Besides a great title line, this entry is filled with helpful information about a variety of different government bond types, from savings bonds to TIPS.

That’s pretty much it for this week; be sure to check the link in the first paragraph for an excellent collection of great articles (including mine).  Enjoy all the great personal finance reading!

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Happy CARD Day!  If you’re asking yourself, ‘just what the heck is Roger talking about?’, you’re in luck; in honor of CARD Day, I’ll take a few moments to go over the fun and joy of the CARD Act and how it affects you, and your credit cards, too.

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, more commonly called the CARD Act (get it?  get it?) imposes new rules on credit card companies.  The rules are designed to protect credit card users from some of the more, uh, ‘questionable practices that credit card companies have used in the past.  A fact sheet goes over all the gory details of what is now longer allowed in the world of credit cards; a few of the highlights include:

-Restricting rate increases on existing balances.
-Contract terms must be constant for at the least first year of service
-Ends ‘double-cycle’ billing (when the balance from the previous month would be used to calculate the owed interest, enabling the companies to charge for balances that had already been paid off)
-Requires credit card users to opt-in before they can go over the limit on their cards.
-Applying payments over the minimum to the highest interest rate debt.
-Most sobering to anyone who keeps a balance, the credit card companies will also have to provide the amount of time needed to pay off the total amount owed if only the minimum payment is paid.

All told, a great victory for credit card users!  Take that, credit card companies!  Under these new rules, things are going to be much better for consumers; no more worries about abuse from credit card companies.  If a one or two major credit card providers have to go bankrupt, so be it.

Except…they haven’t, have they?  You may have noticed that American Express hasn’t packed up their bags and left town, nor that MasterCard didn’t tell their employees not to bother coming in today.  Heck, if you’ve been following the Olympics, you’ve probably noticed that not only is Visa advertising repeatedly, but they are offering the opportunity to win trips to every Winter Olympics in the future.  If these regulations are rein in credit card companies so much, how do they still have so much money.

Unintended Effects

As you might have guessed, the credit card companies haven’t spent the nine months since this bill was first signed (back in May of 2009) just waiting for the new rules to come into effect.  In the time they had to prepare, there have been signs of the credit card environment as it will exist under this law; higher interest rates, more fees, and less rewards.

It’s also harder for customers with low credit scores to get cards (or to keep cards when they don’t use use them often), and credit limits are being lowered for many credit card users.  Ironically, some of the people this legislation was designed to help may end up suffering the most by being unable to get any credit at all.

(All of this doesn’t touch upon one of the more controversial elements of the CARD act, preventing those who are under 21 from getting a credit card without either (a) proof of income or (b) a co-signer.  I’ve maintained that this is just common sense; if we were talking about 4o year-olds rather than typical college students, I can’t imagine it being a major issue.  The only reason college students get targeted by card companies is the assumption that the Bank of Mom and Dad will be around to bail them out.  Of course, there are those, like Stephanie of Poorer Than You, who might vehemently disagree.)

What to Do as a Credit Card User

What are you, the hapless credit card user, supposed to do?  For the most part, the same thing you should have been doing even before this act went into effect.  Pay off your credit card balance in full each month, don’t charge more than you can pay off, and work to pay down your debt as aggressively as possible.  Basically, the Commandments of Credit Card usage are still in effect.

You will may have to make some changes to your behavior as a result of the new rules, though.  With companies more likely to cut your credit limit or close your card, it’s important to regularly use all your cards in order to keep the accounts from being closed.  It’s also important to have an emergency fund other than your cards, as the credit line you are depending on may disappear just when you need it.  If you’re trying to build up points for rewards, also be sure to keep an eye on the rules; it’s possible that the number of requirements and restrictions will increase as companies try to maximize their profit levels.

Follow these precautions, the CARD rules will be nothing but good for you!

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After nearly a year of rising stock prices, with falling unemployment (albeit rather slowly) and higher than expected economic growth, there’s been a decided change in the commentary from many in the media.  The pitchforks and torches have been put away, and being an investment banker is no longer something you don’t mention out in the bars.  The question has begun to shift from “How do we recover?” to “How do we prevent this type of thing from happening again?”

One potential answer to the latter question is to start taxing financial transactions.  A financial transaction tax (or FTT, to save me some typing every time I mention it through the rest of the article) would be a small tax on most types of investments commonly traded, such as stocks, bonds, options, futures, and swaps.   The goal is to increase the stability of the markets by increasing the costs of buying and selling financial instruments, thus decreasing the volatility of the market (and earning the government a little money on the side).

The tax would be 0.25% on stock transactions and 0.02% on bonds, futures and swaps, with options taxed according to the underlying value of the security which it is optioning.  (Mutual funds would be affected indirectly; while mutual fund purchases or sales would not be taxed at the individual level, the purchases within the fund will be taxed, increasing the expense ratio.  I didn’t find any explicit comments on how ETFs would be taxed, but since they are bought and sold on the same exchanges as stocks, I would guess that the same 0.25% stock FTT rate would apply.)

This tax would be pennies on the dollar

The FTT is being designed to avoid affecting small investors as much as is possible.  In addition to the small amount of tax being considered, the tax as proposed at the end of last year would not apply to mutual funds (as mentioned already), pension funds, or retirement, education or medical savings accounts.  Further, the tax would be offset for small investors by a $250 tax credit, enough to offset the costs of investing $100,000 in stocks during the year.

National Effects

-Increasing the Cost of Trading: While the tax is on the small side, it will increase the cost of trading, particularly for large and/or frequent transactions.  Some of these costs will be passed onto individual investors regardless of the intent of the law; for stocks, this could mean higher trading costs at all levels, while it will mean higher expense ratios for mutual funds.

-(Possibly) Decreases the Amount of Short Term Trading that Occurs: The stated goal of the tax is decrease ‘churning’, rapid and repeated short term trading that adds little real value to the economy but increases the volatility.  Of course, how much of an effect such a tax will have is up for debate; compared to the costs charged by brokerages to buy and sell most financial instruments, the tax is rather negligible.

-Raise Tax Revenue: A study by the Center for Economic and Policy Research (CEPR) notes that this type of tax could generate a sizable amount of income.  Even with a fifty percent reduction in trading volume (cutting the amount of all financial instruments being traded in half), the tax could still raise more than $175 billion each year (over $350 billion if trading volumes remain where they were in 2008).  Granted, when the government routinely runs budget deficits in excess of one trillion dollars, even the most optimistic projections mean that this won’t be enough to plug up the deficit, but it represents one more source of funds available to the government.

Personal Effects

-For the Passive, Buy-and-Hold Investor-Not Much: As mentioned, the tax is pretty small; if you aren’t buying and selling repeatedly throughout the year, you’ll incur rather little in the way of FTT tax liability during the year.  Add in the exceptions for retirement and other tax-advantaged accounts and the tax credit to offset small investors’ expenses, and there’s a good chance that you’ll end up profiting from this tax.  The only real problem you have is that the expense fees of the mutual funds in which you invest will increase, as they pass the expense of the tax onto you.  However, as the Financial Adviser magazine notes, the increases will be rather small; actively managed funds will see an expense fund bump of 0.15%, while index fund fees will go up 0.05%.  At worst, that’s about a 50% expense fund bump to the lowest of the low index funds.

-For Active Traders-Could Have a Larger Impact: If you’re buying and selling multiple times in a month, a week, or even each day, the impact of tax will be much greater.  The cost of the FTT on a $1000 transaction is only $2.50, but if you do ten of those each day, two hundred days each year, that’s a total cost of $5000 each year that you’ll have to pay toward the FTT.  Of course, let’s put that in perspective; if you’re paying $5 per transaction each time you buy and sell stocks, you’ll end up spending $10,000 in commission costs, twice the amount you’d pay in the tax.  It will increase your expenses, of course, but that’s all part of the plan, to convince you to trade less often.

My View

Being a passive investor (as well as someone young enough to worry about spending much of my life paying extra taxes to cover the national debt), I like this plan.  It seems to be a pretty good method of raising tax funds, decreasing speculation, and encouraging a more passive approach to investing.  I approve.

(To be fair and try to give some time to the opposite side, here’s an argument against the FTT (or Tobin Tax, another term for this type of tax), although it seems to argue most strongly that building a ‘financial security fund’ from the FTT in order to bail out financial institutions in the future is impossible, because the government will spend it well before we reach another financial crisis.  You’ll get no argument from me there; but if we just pour the money raised into the general fund from the start, I still don’t see much of a problem.)

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As you may know (from reading Tuesday’s post), I’ve recently taken the GRE.  I did rather well, at least on the portions that were instantly graded (the Quantitative (Math) and Verbal sections; there are two Analytical Writing segments that need to be graded yet).  I received a 610 in the Verbal Section and a whopping 750 in the Quantitative section; since the GRE, like the SAT, is on a 200-800 scale, both scores are better than average, and the 750 is near the top.  Needless to say (although I’m about to say it anyway), I’m pretty happy with my score.

While I’m on the subject of good news, here’s another positive development: my fiancee Sondra had a gallery opening last night to display some of her wood working, and it went over very well.  Granted, the gallery was at her school, and she had to share it with the other people in her wood working class, and a good number of the people at the gallery opening were more interested in the food than the wood working, but still, it was nice to pieces she had worked so hard to complete on display as part of a gallery.

So, as I’m in a very happy mood and also filled with GRE related knowledge, I thought I would take a moment to share some of the tips and lessons I’ve learned about how to do well on standardized tests, like the GRE, the SAT, PCAT, assorted AP tests, etc.  This is hardly a be all, end all list to getting a perfect score, but should hopefully help you to boost up your score at least a bit if you ever find yourself forced to take one or more of these tests in the future.  Let’s begin:

1) Know the format of the test: One of the biggest advantages of standardized tests is that they are well, standardized.  This makes them easier for test makers to grade; feed them into a computer or hand the answer key to a grad student and before you know it, the grading is done.  It also means that you, the test taker, can familiarize yourself with the format of the test and the questions, so that the actual test seems similar to what you’ve already done.  You won’t know the questions ahead of time, but at least you’ll know what they should look like.

2) Use the Process of Elimination: Another advantage of the standardized test format to test takers is that most of the questions are multiple choice; the answer is listed right there on the test, you just have to determine which one is correct.  Even if you can’t come up with the right answer immediately, take a moment to eliminate ones you can obviously identify as wrong, and pick one of the remaining answers.  If you can eliminate three of the five choices on most GRE questions, for example, you can more than double your change of guessing correctly (from 1 in 5 to 1 in 2).

3) Pace yourself…: It’s easy on a timed standardized test to try to rush through the questions, moving as fast as you can to get everything answered.  Don’t.  You’ll do much better (and leave the test much less stressed) if you try to pace yourself, taking the time you have available to give yourself the time to think about the questions.   (This is especially true at the beginning of computer adaptive tests like the GRE; the early questions affect your final score more than the last ones, and the difficulty of the final questions depends on how you did on previous questions.)

4)…But don’t go too slow: If you’re a perfectionist (as I tend to be on tests), you might spend more time than you have available trying to answer a single question.  It can be hard, but sometimes the wisest course of action is just to take a guess, especially if you can easily eliminate a few of the answers to boost your odds.  You’ll score higher by finishing all the questions than by spending five minutes to get one right and either not answering or making completely random guesses on the last five questions.

5) Use the preparation material available to you: ETS, the company that does most of the standardized tests in the US (including all the ones I have listed above) has a pretty snazzy website that includes prep material, practice tests, and other resources to help you, the test taker, prepare for your exam, all provided for free.  In addition, there are any number of for profit test centers that put out guide books, practice tests, flash cards, and a wealth of other material to help you prepare.  (I’ve had good luck with the material from Princeton Review, but there are other groups as well.)  The more you practice, the better prepared you’ll be when the actually test comes around.

6) Relax: One of the most important, but hardest things to do when it comes to standardized tests.  Just take a deep breath, exhale, and remember that even if you don’t do as well as you’d like (knock on wood), you can retake the test at a later date.  It’s not the end of the world.

That’s enough advice to get you through most standardized tests; if you’re taking a test like this in the future, please drop a comment to let me know.  If there are any tips or tricks that I’ve missed that have worked especially well for you on these types of tests, please share them with me and my readers so we can learn from your experience.

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Today is going to be a shorter than normal collection of my thoughts, because most of my thoughts have been about things other than blogging this last week.  I am going to be taking the Graduate Record Examination (R), better known as the GRE, on Wednesday.  I’ve spent a lot of the past week studying various test prep materials, unfortunately spending less time than I would like on other things in my life, like blogging, spending time with my fiancee, and sleep.  (Just kidding on those last few, although not nearly as much much as I would like.)

Anyway, by this time tomorrow, I’ll be on my way to take the test.  I plan to do very well on it, then after spending the night attending my fiancee’s gallery opening, I’ll come home, relax, recover, and start tomorrow on blog posts for the coming week.  It’ll be nice to be able to search for jobs and work on my blog without worrying about how this test will turn out.

With all of that out of the way, I hope you’ll excuse the smaller than usual selection of quality articles from this past week; when I no longer have an upcoming test (and flashbacks to standardized tests from high school), I should have longer lists, filled with all the good articles I’ll catch up on in my spare time.

Good Yakezie Articles This Past Week

Should You Pay Off Your Mortgage or Your Credit Card? – At one time, this might have been an easy question, but changes in ethics (foreclosure is no longer a red mark) and the broader financial picture (many houses are underwater; why put more money in when you’ll never get any out?) have changed the answer for many people.

What Are The Definitions of Liberal and Conservative? – While not directly related to personal finance, it’s good to know these terms, which get tossed around rather loosely (particularly in an election year) really mean.  There’s also a link to a short quiz to find out where you stand.

Would You Sell Yourself for One Million (British Pounds)? – An interesting question, inspired by a British entrepreneur’s offer to sell 10% of his income from this point on in exchange for 1 million pounds up front.  (I would do so in a heart beat, although I doubt I could fetch anywhere near that amount; although, from what I gathered, neither could he…)

The Best Superbowl Commercials for 2010 – It’s probably already been well hashed out around the water cooler, but here’s a bit more fuel for the ‘Best Super Bowl Commercial’ Discussion.  (Although, I defy anyone to tell me that the beaver commercial for Monster.com was not absolutely hilarious.)

The 5 Worst Superbowl Commercials of 2010 – On the other, more horrifying side of the coin, we have th five worst commercials during this year’s Superbowl.  Sadly, there were many more that could be up for this reward…

Alright, that’s about it from me; it’s back to hitting the books (and the practice test screen).  Have a great day, and wish me luck!

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It’s Valentine’s Day once again, the time of year when everyone who currently is in a relationship does what they can to celebrate, while everyone without a special someone tries to do what they can to find someone.  Luckily for me, I have a sweet girl who happens to pretty easy to shop for on birthdays, holidays, and other gift-giving occasions.  She’s basically a female version of me (that is, a huge, gigantic geek), so I can usually just find something that would strike my fancy and get it for her.

Case in point, this year, I got her the complete Yu Yu Hakusho series on DVD.  For those of you who’ve never heard of it, it involves a guy who dies and is brought back to life in order to fight demons with newly acquired supernatural powers.  It’s filled with action, fighting, violence, and supernatural themes; this is what my girl wanted for the most romantic day of the year.  That’s true love there, being able to spend time with my beloved doing the geeky, dorky things that appeal to us both.

Alright, that’s enough for me.  I hope you all had a wonderful, fantastic holiday, preferably spent with the ones you love (romantically or otherwise) and had a wonderful Sunday.  Remember to keep love in your heart, and have a great day!

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Imagine working only one day each week.  Further imagine that during that one week of work, you aren’t putting in a full eight hour (or more) day, but instead, you’re only working four hours, max.  To top off, rather than going into the office, dealing with a horrible commute, gossipy coworkers, and bland coffee, you’re ‘working’ by checking into your business from an internet café in Paris, fitting it in between a tour of the Louvre and your weekly tango lessons.  Sounds like a dream, right?

Living that sort of life is the main point of The 4-Hour Workweek.  Timothy Ferriss writes about redesigning your lifestyle to ‘Escape 9-5, Live Anywhere, and Join the New Rich,’ as noted by the book’s subtitle.  He promises to help us design the lifestyle of our dreams, and make a decent profit at the same time.  But is it just hype, or can he really show us how to remake our lives?  Let’s read on:

Summary

The book starts with a short FAQ to quell some of the questions that likely popped into the readers’ heads upon reading the title and learning the purpose of this book.  The book then opens with a story of Ferriss preparing for a dance competition as an introduction to the main goal of the book: allowing the reader to design their own ideal lifestyle as a member of the ‘New Rich’ (NR, as it’s frequently abbreviated).  He introduces his method of lifestyle design, DEAL: D for Definition, E for Elimination, A for Automation, and L for Liberation.  Before getting into the details for all these steps, he provides a short chronology of his life, how he built a successful business that started to consume his life, and how he finally learned to automate it and escape.  Then we get into his plan for us:

D for Definition

The first part of the book sets up Ferriss’s definitions of New Rich, and how they compare to ‘Deferrers’, those who follow the typical plan of working, saving, and eventually retiring.  He stresses that though wealth is possible (even likely) following the NR plan in the book, the more important issue is having regular cash flow without needing to work long to obtain it, and using that money to fund your dream lifestyle.  The second chapter is about changing the standard rules regarding work and retirement, particularly when ‘Retirement is a worst case scenario’; that half a lifetime of work in exchange for the possibility to enjoy life when you are old is a poor deal.  There are a total of nine other principles Ferriss attempts to challenge, from asking for forgiveness rather than permission to money not being the answer.

The third chapter chapter is all about dodging bullets, defining the worst that could happen if you follow this plan, and how to get your previous life back if something fails.  It asks you to imagine the worst situations you could find yourself in if you followed the advice in the book, in an attempt to show how easy it would be to recover.  The fourth chapter is called ‘System Reset’, and is all about reorienting your perspective to achieve the (seemingly) impossible.  It introduces ‘dreamlining’, the process of writing down your dreams and creating time lines with actionable goals in order to meet those dreams.

It’s also the first chapter than ends in a comfort challenge, where Ferriss encourages the reader to do a number of tasks that most people would find uncomfortable, in order to help them ‘develop the uncommon habit of making decisions’.  The rest of the chapters in the book end with a comfort challenge, ranging from making eye contact on the street (Chapter 4) to asking for the number of several attractive strangers (Chapter 6) to laying down randomly in the course of the day (Chapter 11).

E for Elimination

The next part of the book covers how to eliminate unnecessary activity from your life.  Chapter five focuses on Pareto’s law, the concept that twenty percent of your effort will result in eighty percent of your results.  The recommendation is to cut out the less productive portion of your effort (the 80% of your efforts that result in only 20% of your results).  It also brings up Parkinson’s Law, where tasks swell to fill the time allotted to complete them; the suggestion is to cut down the time allotted to the minimum in order to increase productivity.

Chapter six is rather short, which is appropriate for its subject: limiting information intake.  The message is to cut down on the amount of information absorbed, whether from books, newspapers, magazines, or the internet.  Chapter seven is about cutting down the number of interruptions and pointless tasks you have during the day.  It suggests ignoring unproductive information (meetings, phone calls, and email) as much as possible and dealing with vital information in batches.  It also suggests empowering employees so they can make decisions on your behalf without needing to contact you for relatively minor issues.  If you don’t have any employees, don’t worry, we’ll cover that next…

A for Automation

The next section of the book is all about automating your life and your income, allowing you to enjoy life without as many worries or troubles.  Chapter eight is all about outsourcing your life; it highly recommends getting a virtual assistant (VA), someone who can manage many aspects of your life via the internet.  The chapter expands on the concept of VAs, creating a step by step description of how to find a VA (or a team of VAs), whether to choose someone in a Western country or the developing world, and what sort of tasks they can handle.

The next three chapters cover the steps of how to create an ‘Income Autopilot’.  Chapter nine is about finding your muse; finding a niche to which you can sell and then choosing a product to sell.  You could resell a product, license a product, or create a product of your own, as long as it meets the need of your market.  In chapter ten, you microtest the product to ensure that is a demand, building websites, testing ads, and otherwise using low cost methods to test the waters to see if there is any desire for what you intend to sell.  Finally, chapter eleven focuses on how to remove yourself from the equation; when and how to shift management of the daily function of your operation onto others.  It also provides tips on how to smooth the transition and minimize problems as you work to make the business self-sustaining.

L for Liberation

The last section of the book focuses on how to escape from the office.  Chapter twelve covers how to slowly get your boss to allow you to telecommute, starting with a day or two each week (or a one or two week trial period), and gradually increasing your time out of the office until you never step foot in the office, and instead do everything remotely.  The focus is on using your improved productivity (from the Elimination part of the book) to get your boss to agree to the remote working arrangement.  If that doesn’t work, there’s always plan B: chapter thirteen is about killing your job, and mainly provides counterarguments to some of the major reasons that people don’t want to lose their employment.

Chapter fourteen provides one way to use your new found freedom from the office: mini retirements.  These are short periods (one to six months) of relocation, usually to another country, with the goal of living life to the fullest while you’re still young, and making them a regular part of your lifestyle.  The rest of the chapter covers the details of how to make such a trip work, including a countdown of how to get your finances, household, and important documents in order for an extended stint away from home.

Chapter fifteen provides more information on how to fill your time and feel fulfilled when you no longer have to work.  The suggestions range from learning for the sake of learning to helping various service focused charities.  The sixteenth chapter is a list of 13 mistakes made by the New Rich, including working for the sake of work and losing sight of your dreams.  The final, unnumbered chapter is a poem by David Weatherford, reminding us to slow down and enjoy life.  The book ends with a list of some recommended reading material and a list of further content provided on the accompanying websites (some of which seems a bit racy, but that’s a separate issue).

Pros

-Interesting, Unique Perspective: This book has a very refreshing perspective on money.  Rather than the typical money book, which makes the assumption that you’re going to be working for many decades before retiring to live off your savings, Ferriss tries to create a method by which you can retire much earlier, while still maintaining a standard of living as high (if not higher) than you had before.  It’s nice to see a fresh approach to personal finance, one which may appeal to those who feel ill served by traditional personal finance books.

-Good Sets of Resources: Each chapter provides a great deal of information to be used to complete the goals set out.  They all end in a ‘Questions and Actions’ section that provides next steps toward achieving a 4 hour work week.  There’s also a list of other resources (almost all online) at the end of nearly every chapter.   Even if you aren’t completely sold on the lifestyle described in the book, many of the suggestions could still be useful, from eliminating extraneous information to hiring a virtual assistant.

-Humorous and Entertaining…: The book is very entertaining, and makes a rather easy read.  It’s interesting and involving, drawing you into the methods and means with a gripping tone.  There’s also a strong element of humor (much of it Ferriss poking fun at himself) running through the book, making it read more like an entertaining biography than a how-to manual.

Cons

-…But Sometimes Annoying: At times, the stories about his exploits get annoying.  Yes, given the point of the book, trying to design your ideal lifestyle, it does make sense to show what he’s done with his own lifestyle.  Still, it doesn’t stop me from wanting to hit him at various points in the books, usually after he’s described one of his adventures traveling the world.

-Most Applicable to White-Collar Workers or Entrepreneurs: The techniques described in this book, from enhancing your productivity in the office to telecommuting as a lifestyle, are virtually limited to those who work in the office, and frequently to those who have underlings to whom they can delegate responsibilities.  If you are in a position where your presence is physically required (anything from blue collar work to quality control), or at the bottom of the totem pole at your company, there’s a limit to what you can get out this book.

-The Lifestyle is Not for Everyone: Not just because you may not want to gallivant around the world or create businesses with the goal of automating them as quickly as possible (although, that certainly could be true).  But there’s a more basic reason: the lifestyle design espoused by the book requires a large support staff; at one point, Ferriss notes that his company requires 200 to 300 people to keep it running.  Simple math tells us that, even taking outsourcing into account, only a small portion of the population (a few percent, at most) can join the ‘New Rich’ before society ceases to run.  Just something to consider as you read through the rest of the book.

Overall

The 4-Hour Workweek is a bit like an overstuffed buffet.  There’s a great deal of information to be considered, much of it stuff I’ve never seen mentioned elsewhere.  Even if the overall buffet does not seem quite to your tastes, there’s probably something worthwhile to consider, from eliminating some of the distractions in your life to hiring a virtual assistant, that you probably haven’t considered.  It’s worth a read through, just to see the variety of ideas and new concepts that are suggested, in order to see if any can apply to your situation.

(Note: The version of The 4-Hour Workweek that I read and used for this review was the 2007 edition.  Recently (in December 2009) a new version, The 4-Hour Workweek, Expanded and Updated, was released, which touts over one hundred pages of new material.  I haven’t read this new edition as of the time of this post (although it’s on my to-read list), but as long as the general concepts are the same, I imagine this review will still be applicable.  Still, fair warning that there is a newer, potentially significantly different version out there.)

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