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:

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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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