The Amateur Financier

‘Money can’t buy happiness’ – Leo Rosten

You’ve probably heard this quotation tossed around at some point in your life.  Usually, it’s trotted out when you are complaining about not getting a big enough raise, or not getting much money in your Christmas cards when you were a kid, or simply struggled to make ends meet.  Then, someone you loved, a parent, sibling, or romantic partner trotted out this old chestnut to try to cheer you up, reminding you that money isn’t everything.

Of course, as with many things in life, that’s far from the whole truth.  As the Financial Samurai notes, only those who have all the money in world really believe that more money can’t bring increased happiness; for those of us who aren’t rubbing elbows with the Hiltons and Buffets of the world, the amount of money we make has a big impact on how happy we are.  Even Leo Rosten would likely agree; the whole quotation, what he actually said, was:

Money can’t buy happiness, but neither can poverty. – Leo Rosten

Where did this notion of money being unlinked to happiness come from, then?  Well, there are studies showing that happiness and money aren’t linked (or are less strongly linked than we might assume from casual existence), like this one from Princeton or the ones cited by Barbara Rose.  But is that the whole story?

The Truth about Money and Happiness

It’s worth remembering that money is, at its core, simply a method of simplifying the exchange of goods and services.  You have extra goats and want a cow; rather than search the land for someone who is willing to swap a goat or two for a cow, you sell the goats, get money, and exchange the money for a cow.  That’s it in a nutshell; money is not good nor evil, neither magical nor supernatural, it’s simply a medium of exchange.

Money buys puppies, and puppies bring happiness. Therefore, money CAN buy happiness!

More money, then, allows you to get more stuff (or have more services provided).  It gives you more options, allows you to do more of whatever it is that you want to do.  Someone with one million dollars can do much more than someone with one thousand dollars; the former could take deluxe vacations, buy impressive cars, or invest it, live off the interest generated, and retire early to spend the rest of her life on a tropical beach, while the latter has none of these options at their disposal.

As Gretchen Rubin of the Happiness Project notes, ‘money can’t buy happiness, but it sure can buy lots of things that contribute mightily to happiness.’  That’s similar to the conclusions of other researchers, like Gardner and Oswald and San Francisco State University (although, the latter carries the caveat that money makes people happier, if they spend it on life experiences).

The Source of the Myth

Why is the idea that money can’t buy happiness so embedded into our culture?  Well, as mention in the San Francisco State study (and by Financial Samurai), that idea has been a major driving force behind much research over the past few decades, and we humans have a tendency to remember what we hear repeated often enough.  There’s also anecdotal evidence to back up the belief, from poor but happy monks who practice the simple life to millionaires who have immense unhappiness and give away all their money.  (Let’s not forget the tabloids that bring us weekly stories of the rich and famous, all of whom seem to have more problems than the average poor families combined.)

But there’s another reason, namely the main source of money for most of us: work.  As Richard Easterlin notes (first paragraph on the seventh page), ‘most individuals spend a disproportionate amount of their lives working to make money, and sacrifice family life and health’.  In other words, it’s not that money doesn’t make happy, it’s that the need to work for money saps away more happiness than the increased money can provide.

So, what have we learned today?  Money may not be able to buy happiness, but it can buy things that help to make us happy.  More important, though, is to have a balance in your life, pursuing what will make you happy (money, family, health, and whatever else brings a smile to your face).  Keep that in mind, and you should end up quite happy when all is said and done.

It seems that everywhere I look, it’s not enough to be a plain old millionaire anymore.  The Financial Samurai asked earlier this week if becoming a millionaire was now the rule, rather than the exception, Evan of My Journey to Millions has to argue that one million is still a pretty healthy amount of cash, and to get Forbes to acknowledge you as one of the one thousand richest people on the planet, you need a net worth in excess of one billion dollars.  Speaking of Forbes, they get a prominent mention in the new song ‘Billionaire‘, which starts with the singer declaring “I wanna be a billionaire, so f%&$ing bad”.  With all this focus on billions, it seems like millionaires have simply been overlooked as a goal; you seem to need billions before people even aspire to imitate you.

Of course, overlooked in all this is that for most people, even getting to one million dollars is quite a feat.  The World Wealth Report for 2007 puts the number of millionaires in the world at 9.5 million (a number that, given the global downturn in 2008, is probably lower now), meaning that with a world population of roughly 6.8 billion, there’s only a 0.139% of choosing someone randomly in the world who has a net worth of seven figures.  In spite of its apparent downgrade in status, becoming a millionaire is still a rather lofty goal.

How to Become a Billionaire

Even though a million dollars is still a pretty sizable amount (which, if properly invested, will allow you to safely withdraw $40,000 at a 4% ‘safe’ withdrawal rate, effectively allowing you to make nearly the median US salary indefinitely without having to do any more work), you might still have your mind set on becoming a billionaire.  There’s just too many things you’d want to do that a million dollars just isn’t enough to suffice.  Fair enough; we all have goals and visions.

Unfortunately, there’s no sure way to get to a billion.  If you go through the Forbes list and start to check on how the billionaires made their money, you’ll see a variety of methods.  Investment is a popular one (say hello to Warren Buffet) as is starting a company that grows into a powerhouse (Hey, there’s Bill Gates).  Inheritance is possibly the easiest one, although if your parents aren’t already sitting on a billion dollar plus fortune, that’s kind of out.  Even crime can pay; Forbes has caused a bit of controversy in recent years by including on its list people who’ve made their fortunes through the drug trade or other illicit activities (not that I, or presumably Forbes, would recommend such actions).

But what if you’re just a run of the mill, average Joe (or Jane, or a couple we’ll call ‘Joe and Jane Fictionale’), not a financial wizard, an incredibly successful entrepreneur, a crime boss, or the offspring of one of the first three; is it still possible to become a billionaire?  Well, I have good news and bad news.  The good news is that yes, it is possible to become a billionaire through simple saving and investing.

The bad news is that it might take much longer than you have available; some back of the envelope calculations show that saving $10,000 a year (about 20% of the median US income, not an impossible amount for many earners) and earning a 12% annual return (a bit high, but not impossible to achieve) yields a total sum of one billion dollars after a mere eighty-three years.  If you start investing when you’re twenty, you’ll reach this mark by the time you’re blowing out the candles on your 103rd birthday cake!

How to Become a Billionaire Millionaire

Alright, so reaching billionaire status might be a little out of reach.  How about we lower your sights a little bit, and focus on becoming a millionaire?  A million dollars still puts you near the top of the global economic pile, it should, if properly invested, throw off enough money for you to lead a satisfying, if not awe-inspiring, life style, and you might actually do it before you qualify for AARP membership.  If you can invest that same ten thousand dollars a year, this time earning a much more modest eight percent yield, you’ll end up a millionaire in a mere twenty nine years.  Start at twenty, and you’ll be part of that (still pretty elite) cadre by the time you’re fifty (sooner, if you can invest more or have some good luck with your investments).  Even if you can only save five thousand dollars each year, you’ll still reach one million in thirty seven years, still plenty of time (if you start young enough; yes, you, Mister (or Ms.) ‘I’m just out of college, and I want to enjoy ALL the money I earn) to retire early and beat the rush to a tropical beach to spend your golden (and some of your silver) years.

It might not seem quite as impressive as being a billionaire, but you’ll be able reach it a lot sooner, and enjoy your money that much quicker.  (Really, which would you rather have: a million dollar nest egg when you’re young enough to enjoy it, or a billion dollars when your biggest indulgence leaving your teeth in when you go to sleep?)  So, the next time you see or hear someone talk about being a billionaire as if simply having million(s) of dollars was old hat, think of just the level of time and energy it would take to reach that point, and be happy to trying to become a plain, old (multi) millionaire.

Ah, the Fair Tax.  It seems hard to argue with a Tax that has ‘Fair’ right in the name, doesn’t it?  It also isn’t a half bad idea; taxing spending rather than income, greatly simplifying the labyrinthine maze of taxes that currently exist, and making taxes more transparent and obvious are all arguably good goals.  Heck, in my early days as a blogger (almost a year ago to the day, actually), I was pretty strongly in favor of the Fair Tax, and I’m still more in favor of it than I am of our current tax system.  (Not that that’s saying much; there are few tax systems that would NOT be an improvement on our current situation.)

In the time since I first published that post, though, I’ve become more disenchanted with the tax; the flaws (included some I mentioned in that initial post) are shining more brightly while the advantages seem to be tarnished.  So, when Joe Plemon asked if the Fair Tax was too good to be true, I had to respond with a resounding YES, and provided several points that I’ve yet to see addressed by the Fair Tax supporters.  Here’s three points I raised in my comment, ones which I’d love to see addressed by Fair Tax supporters:

1) The Fair Tax is more complicated than it looks: One of the major selling points of the Fair Tax is that it’s much simpler than the current tax system; just a single flat tax rate on all purchases (with some exceptions; see below for more on these), a ‘prebate’, or monthly check to everyone in the country, (which is equivalent to the Fair Tax on income up to the poverty level), and that’s it.  No complex forms to fill out every April, no need to wade through piles of old receipts to maximize your return, and no (or a greatly reduced in size) IRS!  It sounds like a dream, right?

Well, it’s not that simple; even the Fair Tax has its complications.  For example, it exempts corporate spending from taxation, as well as the sale of used goods.  These exemptions do make logical sense; corporate taxes are passed along to the consumer (corporations, being legal fictions, can’t truly pay taxes), while taxes on used goods would be a form of double taxation, on the original sale and on the used product.

But in order to track all of this, you end up having to make things more complicated.  How are purchases for businesses going to be distinguished from personal expenses?  Won’t we see the same sort of abuses of ‘business expenses’ as we see under the current system?  (For example, luxury airplanes considered as business necessities.)  Used items represent another problem; the need for the seller to keep receipts (or have some other way of proving that the item is used) in order for the buyer to save on taxes.  Given the difficulty people have keeping receipts when it saves them money on taxes, why would they be any more responsible when it’s not their money they need to worry about?

2) The Fair Tax tax rate would need to be higher than claimed to generate enough income: Proponents of the Fair Tax maintain that the tax rate of 23% they tout will be adequate to (more than) generate the current level of income from all the taxes it would replace (not only the income tax, but corporate taxes, Social Security Taxes, estate taxes, etc.).  That number is little bit odd; it’s tax inclusive, meaning it incorporates the amount of tax in the total from which the percentage is derived.  If you read it as a normal sales tax (which is tax exclusive), it would be 30%.  A $100 item (before Fair Tax) would have a $30 Fair Tax added; $30/$130 gives us 23%

All of that said, in order for the Fair Tax rate to be as low as proponents maintain (whether you consider it a 23% tax or a 30% tax), the number of goods that fall under the tax has to be significantly larger than those currently subject to sales taxes.  As FactCheck.org notes, for the Fair Tax to provide the income amount it claims at the noted tax levels, many things we don’t currently pay sales taxes on would have to be taxed.  These include things like purchases of new homes, rent, doctors’ and lawyers’ fees, and interest on credit cards and mortgages.  If you start exempting any of these items from the Fair Tax, you’ll have to make up the income in some way, likely by increasing the rate of taxation on everything else.  (FactCheck, in that same link, also makes a decent case that the rate would have to be higher than the 23%/30% being discussed in order to make everything revenue neutral anyway, in part because people would inevitably cheat on the tax as they do on taxes now.  They found research suggesting a 34-39% tax exclusive rate would be needed for revenue neutrality.)

3) How will foreign nations react to the Fair Tax?: This, more than any of the my issues so far, seems to be something that nobody has answered.  The Fair Tax website makes quite a few claims about how the Fair Tax will boost US competitiveness in the global market; it’ll make US exports cheaper to other countries, foreign imports will become more expensive (since the Fair Tax will add on top of the taxes the foreign manufacturer paid in their own country), and jobs and investment money will flow into the United States.  It’ll be a golden time for Americans!

But the problem is, changes like this don’t occur in a vacuum; other countries will react, perhaps badly.  Imagine for a moment that the shoe was on the other foot; say the European Union decided to switch over to a Fair Tax style system, and all the predictions the Fair Tax supporter are making come true to benefit them.  The EU becomes a competitive dynamo; their exports are cheaper in our stores, our products are more expensive over there, and businesses start to uproot to relocate in Europe, taking jobs with them.  Heck, even sales of American items to tourists declines, since all goods purchased in a foreign country are subject to the Fair Tax on being imported.

Given this situation, you’d expect the US to respond in some fashion, possibly imposing tariffs on imported goods, possibly insisting that US made goods be sold Fair Tax free, possibly by switching over to the Fair Tax ourselves to negate the competitive advantage.  As America goes in this little example, so goes Europe (or possibly some of our other major trading partners) if America opts for the Fair Tax.  At best, the advantages of the Fair Tax would be blunted (if the Europeans enact their own version), at worst, it could spark a tariff war that leaves everyone worse off.  Without having some idea of how the other major countries of the world will react, it’s impossible to say whether switching to the Fair Tax will be a net benefit to the country.

Those are the three big issues I see with the Fair Tax; but there are some other ones to consider.  While not as potentially harmful to the case for the Fair Tax as those mentioned above, they could change some opinions if people knew the Fair Tax:

• Can be regressive.  For a short example, consider this: you and I spend the same amount, paying the exact same amount in Fair Tax.  But if you earn twice as much money as me, your tax rate (as a proportion of your income) will be lower than mine.  (For a longer example, FactCheck’s article (near the end) notes that people who earn between $15k and $200k will pay more under the Fair Tax, while those who earn above $200k will pay less.)
• Could encourage ‘under the table’ spending.  Taxes on income lead people to hire workers off the books, so as to avoid paying said taxes; in the same way, sales taxes, particularly one as sizable as the Fair Tax (however you want to calculate it) can drive purchasers to the black market.
• Would devastate the tax preparation market. There is a fairly sizable market out there devoted to helping people prepare their taxes each year, covering computer programs, accountants, and any number of tax guides.  If the Fair Tax is passed, there’s much reshuffling of these businesses (and the IRS, for that matter) which will need to be done.

Readers, What’s your take on the Fair Tax?  Am I being too critical of a great tax plan?  Did I miss any flaws in the system?  Any non-Americans who can give me more insight into how foreign government would react to the US enacting this tax plan?

(Inspired by this post from Punch Debt in the Face, wherein he writes a note to his future self, I’ve decided to do the same, and address myself ten years into the future.  The Fuuuuuu-tuuuuure!  *Waves my arms around to indicate that we’re traveling into the future.*)

Hey, 37 year old Roger,

Look at you, rocking middle age.  Or have life-extending treatments advanced so much that you’re still considered a young whippersnapper? Regardless, you’re probably married, with children, hopefully with a well-established career and free of all the worries and doubts that seem to plague me, your younger self.

I have so many questions I wish I could ask you…What kind of job do you have?  What kind of house do you live in?  Are you still blogging?  Is anyone still blogging, or  did blogging get replaced by some other method of communication, like live Internet ?  What are the computers like?  Have you become part machine?  Did the machines take over?  (It already seems that way, although if you remember back to 2010, they were largely idiotic.)  Has ANY of the cool technology that sci-fi writers have been promising us since the 1950′s come to pass, or am still waiting on my flying car, fusion generator, and vacations to Saturn’s rings?

I could go on, but unfortunately, this is probably going to be a one way communication.  (Although, if you got your hands on a time machine, you could send me a list of advice; or better yet, come back, pick me up, and we could visit my seventeen year-old self and give him some food for thought.)  Just because I can’t get messages from you, though, doesn’t mean I can’t share some thoughts with you.  So here’s my advice to you, my ten-years-into-the-future self:

1) Love Your Wife: If all goes according to plan, you should be gearing up to celebrate your eighth wedding anniversary with Sondra in 2020 (on Halloween, if she has her way on the wedding date).  Remember to love her and cherish her every day, and be sure to tell her whenever possible.  Be sweet, loving, and kind, just as you always wanted to be.

2) Love Your Children: Again, if all goes according to plan, you should have had the one or two sweet little girls you and Sondra are hoping for well before 2020.  Of course, given your luck and the tendency for unexpected things to happen, you’re probably raising an entire basketball team’s worth of rowdy, sports-loving boys.  In any event, I hope that you remember to love and cherish them as the wonderful gifts that they really are.  (No matter how crazy they may drive you some of the time.)

3) Enjoy Your Work: I’m not sure at all what kind of work you’ll be doing.  Maybe you’re continuing to work in the Quality Control field I got into; maybe you’ve managed to turn The Amateur Financier into a financial dynamo and excellent source of money; maybe you are a successful businessman in some other field.  So many different possibilities to explore; that’s why I have to remind you that if you aren’t enjoying your work, you shouldn’t keep doing the same old thing.  Life is too short for you to do something you hate; there’s plenty of opportunities, and you should take advantage of them.

4) Give to Charity: It’s probably too much to hope for that in a mere decade or so, all forms of human and animal suffering have ceased to exist.  (Although, I’m perfectly willing to be pleasantly surprised on this point.)  If not, I hope that you’ve been steadily giving to those who need the money more than you.  You are very, very lucky, although it might not always seem that way, and giving what you can, when you can, is good for yourself as well as others.

5) Lead a Happy Life: This should, I hope, go without saying, but sometimes the struggle and hassle of day to day life is such that we forget to enjoy ourselves along the way.  No matter what the future looks like, you have plenty to celebrate and enjoy, from good friends to loving family.  Just take a few moments every day to reflect on how fortunate you are, and remember to laugh as often as possible.

That’s it, my future self.  I hope that all of this advice is stuff that you’ve already been doing for the past ten years and have committed to heart half a decade ago, but even if so, it’s worth repeating them to remind yourself (or myself, I suppose) of how good life actually is.  Good luck, my future self, and keep working well!

Roger (Age 27)

P.S. If you want to show your gratitude for all the helpful tips, a return note with next week’s lottery numbers would be appreciated.  You know, just a friendly thank you between two versions of the same guy, that kind of thing.

P.P.S. Unless doing so would get you in trouble with the Time Police; I don’t want you to spend time (heh!) in a time jail because of something I will have had done in the future.

P.P.P.S. Unless the Time Police don’t give a care (or don’t exist); in that case, send those numbers on back!