LivingCheaply.net » Economics

Reader Story: Social Capital and the Microeconomic Recovery

LivingCheaply — Sun, 20 Jun 2010 10:00:50 +0000

This guest post from Kimberly is part of the Reader Stories feature here at Get Rich Slowly. Some reader stories contain general “how I did X” advice, and others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity, and with all sorts of incomes. On May 27th, J.D. published an article title entitled “Social Capital: More Valuable Than Money?” . In the article, he wrote: You create social capital — mutual goodwill — when you volunteer at a soup kitchen, help your neighbor move a piano, have your Sunday School class over for a barbeque, or join a softball league. Any time you participate in your community, you’re generating social capital, both for yourself and for the other people involved. People with lots of social capital can find help when they need it; those with little social capital can spend a lot of time frustrated and alone. I’m from a small community in Ohio with about 16,000 people. In small communities, social capital is just a way of life. Everyone helps their neighbors and expects nothing in return. This way of life, that many from large cities may not have experienced, has actually been saving my community — one favor at a time. A giant sucking sound At one time, our area was saturated with manufacturing companies. We’re the original home of some of the largest companies in the world. I say the “original home” because during an economic recession, manufacturing is the first thing to suffer. Unemployment is very high in my community, and has been for much longer than most. When many people picture the town squares in small communities, they see a clock tower, a gazebo, and flowers. When I go to my town square I see The Hoover Company . Well, actually it’s 2010, and now I see a huge manufacturing building that says “The home of Hoover Appliances”, but which locked its doors in 2007. The closure of the original Hoover plant had a huge economic effect on my community: Thousands of people were laid off. The city was no longer collecting the taxes from the company. The main sponsor for the local schools disappeared. So, what does a community do when they suffer this kind of economic crisis? They pull together and make it work by making use of social capital. Social capital is money Social networking within your own community could be one of the most powerful ways you have to save and earn money, at least if my own town is any indication. Around here, more and more small businesses are beginning to pop up, bringing jobs and lost taxes back to the community . But they’re bringing so much more. When you invest in your community, it will invest in you. How much does it is cost you to have four tires mounted and balances at a large chain tire shop? Well, Pete up the road might do it for you in his garage for $20. How much does it cost you for an oil change at Valvoline? $39.99? Pat’s small business may do it for you for $10.00 if you buy the oil and filter. Do you need your house cleaned, your lawn mowed, your dog poop scooped, or a baby-sitter? If you take the time to ask your neighbors, your friends, or your family, you’re likely to find someone who’s knowledgeable in the task you need completed, and they might offer to do it for less, saving you thousands of dollars a year. Social capital in my own life A few years ago, I was deep in debt. When I started my repayment plan, the first thing I did was look for ways to make more money. I got a second job through my neighbor. I dog sat for my boss while she was on vacation. And I did work for my landlord. By using my social network, I was able to boost my income so that I paid off over $8,000 in credit card debt in less than a year while making just $10 per hour. Now I work for a large manufacturing company, and I earn a very comfortable salary. I still work at my second job a few nights a week just for fun. I pick up dog poop for my landlord for $35 month off my monthly rent. Every Thursday, I go see “Geno the Pizza Guy”; if I run the counter for him for a couple of hours, I get free dinners. Due to my neighbors’ generosity, I can have almost anything I need done for much cheaper than a large company would charge. When I need extra money, I do extra work for someone in my community. Although the industry I work in is not secure, my financial future is secure because of my social network, because of social capital . Reminder: This is a story from one of your fellow readers. Please be nice. After nearly a decade of blogging, I have a thick skin, but it can be scary to put your story out in public for the first time. Remember that this guest author isn’t a professional writer, and is just learning about money like you are. — Related Articles at Get Rich Slowly: Social Capital: More Valuable Than Money? Daily Links: Great Comments Edition It’s a Wonderful Life and the Value of Social Capital Socially Responsible Investing 84-Year-Old Social Worker Saves $1.4 Million

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Reader Story: Social Capital and the Microeconomic Recovery

Is a Weak Euro Good for U.S. Travelers?

jos — Thu, 03 Jun 2010 10:00:32 +0000

It had to happen eventually! A GRS staff writer has finally submitted an article on a topic I was planning to cover. This post from April Dykman is stronger than the one I’d put together, though, so I’ve just tacked an addendum to the end. Europe’s financial crisis is leading to a weaker euro and more travel deals designed to attract American tourists. According to media reports, the state of the euro might make a trip to Europe more affordable in 2010. In the summer of 2008, the euro traded for about 1.58 U.S. dollars. This week, one euro traded for $1.22. With both the euro and the British pound falling to new lows, experts are saying it might be the best time in recent years to travel to Europe. Financial troubles in Europe are expected to continue through 2010, leading to favorable predictions for American travelers, and a slew of reports that Europe is becoming more affordable. But not every travel cost is predicted to be lower this summer. Here’s where you might save, and where you’ll probably pay more: Lodging and shopping CNN Money reports that travelers can expect to find heavily discounted hotel rates meant to attract tourists: If you traveled to Europe six months ago, a 5-night stay in a hotel room at a rate of 100 euros per night would cost 500 euros or about $750. But if you travel there now, that same stay would cost you only $620. With the uncertain euro-zone economy, would-be travelers are likely to cut discretionary spending, forcing hotels to reduce prices to attract tourists. This, combined with the strengthening dollar, should make hotel stays more affordable for U.S. travelers. Similarly, European store owners have started to discount prices to stay competitive. In 2007, Europeans shopped in major U.S. cities for the “laughably” low exchange rate , but now deals are looking better for Americans shopping in Europe. Flights One area travelers aren’t likely to save is on airfare. Airlines are increasing surcharges to offset higher oil prices, bumping the cost of a round-trip ticket by $80+ over fares from 2009. Most airlines have also added surcharges for peak domestic flights. In addition to surcharges, airlines have scaled back on the number of tickets sold per flight to offset reductions in travel, according to USA Today Travel : Delta and American, for instance, cut the number of seats this April by 21% and 14.2%, respectively, from April 2008. On the flip side, U.S. airlines say the number of leisure travelers has nearly returned to 2008 levels. Business travelers also are returning, though not back to pre-recession levels. Fewer seats means more expensive tickets. Though the airlines are charging more, many in the travel industry predict that with a stronger dollar, the total cost of the trip will still be a bargain compared to 2009. Don’t bank on a weak euro Despite the positive predictions from the travel industry, it’s still wise to be cautious. The euro has been unstable, and Dr. Chris Hughen, professor of finance at the University of Denver’s Daniels College of Business, advises travelers not to count on a stronger dollar : I think anybody who tells you to have a lot of confidence in what’s going to happen over the short run is probably lying to you. What has changed, though, is that people are starting to question the viability of this European monetary union. What that means is, over the short run, we could have enormous fluctuations. Basically, there’s a lot of speculation. Nothing is certain. If you’re thinking about going to Europe this year, it’s not a bad idea to see what deals are out there. When you travel overseas, does the state of the dollar affect your plans? Have you ever delayed a vacation or chosen another destination based on the exchange rate? J.D.’s note: As I’ve mentioned, Kris and I are saving for a trip to France and Italy later this year. We have our itinerary planned, our flights and lodging booked, and our deposits paid. We have several months to save for the rest of the trip. Lately, we’ve been wondering: Should we take a chunk of cash and buy some euros now? Or should we just wait until we’re ready to travel? Why don’t I jump on this right now? Because I understand the futility of trying to time the stock market — yet here I am tempted to time the currency market. What would you do? — Related Articles at Get Rich Slowly: How to Track Travel Expenses and Stick to a Vacation Budget Survey: The Best Personal Finance Books? Financial Tips for Overseas Travel Life Without Credit Cards Finding Frugal Fun with Board Games

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Is a Weak Euro Good for U.S. Travelers?

What Do Ancient Spice Traders and the Modern Financial Industry Have in Common?

cheapo — Sat, 27 Mar 2010 16:00:36 +0000

This is a guest post from Chett Daniel , who writes about improving your life through personal fitness and personal finance at 5k5k.org . Last year, Chett shared what fourth-graders “know” about money . What role do financial professionals have in our personal finance lives today and in the future? Are they still the gateway to understanding financial info that’s too difficult for the common person to grasp? Or have they created a profit-producing “need” that is slowly slipping through their fingers? I asked myself these questions recently while listening to a recent Planet Money podcast episode called “When Cinnamon Moved Markets” . The podcast had nothing to do with financial professionals or their current need; it discussed a time when spices were currency, and the Arabs controlled the spice trade to much of the known world — and the knowldge about exactly how to get the spices. Here’s a synopsis of what I learned: He who controls the spice… In the ancient world, the Arabs controlled most of the spice trade. They ran secret trade routes from the Indies and other eastern countries. The spices they gathered were then sold and traded for extremely high prices to the Greeks and Romans in Alexandria, the Wall Street of its time. The Europeans knew many of the spices came from the Indies, but they weren’t exactly sure where the Indies were and how to find the actual spices. This allowed the Arab traders to capitalize on the lack of information. According to Herodotus in some of his fifth-century B.C. writings, the Arabs led the Greeks and Romans to believe gathering cinnamon was a matter of life or death. The story was told that Arab traders and merchants had to dress in full body suits of ox-hide to protect themselves from terrible winged creatures. They would have to leave a sacrificial cow to lure the winged monster bird off of its nest made of, wait for it…cinnamon. As the Arabs told the story, the winged creature would inevitably knock portions of their nest on the earth below as it flew to claim its offering. The merchants would then risk their life to grab the few pieces of cinnamon stick nests they could gather before the winged creature attacked them. Herodotus also recorded stories of the Arabs regarding frankincense and ginger. According to the legends, frankincense grew in the tops of trees and was guarded by flying snakes. Arab traders would then cheat death by driving the flying snakes from the treetops while other merchants would quickly gather the frankincense they could. Ginger supposedly washed from the Garden of Eden. …Controls the universe What was the purpose of these ridiculous fantasies? Not only did the Arabs control the supply, they also manipulated the perceived value of their product and services by controlling all of the information of their origins. But the barriers of information in the spice trade began to fall around 120 B.C. According to Tom Standage, business editor at The Economist , here’s how it went down: In 120 B.C., a ship wrecked in the Red Sea. One survivor was found and taken to the court in Alexandria. He told them he was on a ship traveling between India and the Red Sea and it went off course and wrecked. The court sat speechless because as far as they knew, there was no direct route from the known western world to India. (Common belief at the time was that to reach India, ships would have to hug the shore, sail all the way around the Arabian Peninsula, up the Persian Gulf, and back down towards India, past Persia and Pakistan.) The stranded Indian trader bargained to show the Alexandrian court this “secret” direct route if they give him a ride home. Within a few years the new, shorter routes are known to all of the Europe, and the fantasy stories were found to be nothing but myths used to inflate prices and scare away those who may want to find the spices themselves. In time, the Romans industrialized the spice trade and flooded the market with spices. This changed peppercorn from a spice you could pay a month’s rent with, to something that is given away free is small paper packets in fast food restaurants today. Is this a metaphor? As I listened to this story, my mind drifted back to a little over a decade ago when most stock trades had to go through brokers who earned hefty commissions on each transaction. Today, those same transactions cost less than $5 on most websites, and can be executed with the click of a mouse. Investors who used to receive most of their information about the value of an investment from an “expert”, can now research for themselves which investment choice is right for them. Companies like Vanguard have reduced their fees and made their prospectuses so user-friendly that even a financial novice like me can select an investment choice that works for my goals. In this Information Age, does the financial industry look anything like the Arab spice traders? Are the markets (and the products sold on the markets) really as complicated as they’ve been made out to be? Or have they simply been constructed to funnel money into the coffers of the brokers and advisers? Has the financial industry profited from a system that looks strangely similar to the secrets of the Arab traders? And what do you think the role of the financial professional will be in the future? Spice photo by Sudhamsu . Market board photo by Katrina Tuliao . — Related Articles at Get Rich Slowly: Buying Cheap Spices: Unit Pricing in Action Cinnamon Spice Muffins: An Easy, Frugal Recipe for March What to Consider When Opening Your First Brokerage Account A Brief History of Money Snake-Oil Salesmen? Debating the Role of the Financial Media

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What Do Ancient Spice Traders and the Modern Financial Industry Have in Common?

Is the Economy Improving? Views from Everyday Folks

cheapo — Mon, 01 Feb 2010 10:00:25 +0000

On Friday night, we had some good frugal fun. Kris and I got together with a group of my old high school friends to go bowling and eat pizza. It was just like the good ol’ days — but with a bunch of grade-school children added to the mix. Over pepperoni pizza and root beer, the conversation turned to the economy. I asked my brother Jeff how the family box factory is doing. “To be honest,” Jeff said, “we’re about to finish our best month since October 2008. And if you look at actual daily sales, this will be our best month since February 2008. It’s our best month in two years .” “That’s great,” I said. “Maybe this means the economy has finally turned a corner.” We’ve believed for years that sales at Custom Box Service are a fairly accurate barometer of the economy’s overall health; our sales always reflect where the country’s economy will be six months down the road. Sales at the box factory started to erode in autumn 2007, for example, before falling off a cliff in March 2008. Things bottomed out last February, with our lowest sales since the company incorporated in 1995. So, if the company’s sales are finally improving, we take that as a sign that the U.S. economy is on the road to recovery. “How’s your business been doing?” Jeff asked our friend Ron. Ron’s family owns a wholesale nursery , and their sales have been down too. “Rotten,” Ron said. “Last year was awful.” “I think the economy’s been bad all over,” Kris said. “I just spent a week in eastern Oregon for work. It’s been a while since I was in Pendleton, and I was shocked at how many empty storefronts there were. A lot of places have gone out of business.” “I keep waiting for things to turn around,” Ron said. “Just today we got a huge order, which is a relief. It’s an order we expected last fall. I’m just glad it finally came through. ” “Yeah,” said Jeff. “I think a lot of people put off ordering because they were letting their inventories run low. But that just made things worse. Our sales were down so much last year that we couldn’t fund employee pensions and Christmas bonuses were a lot smaller than usual. At least we didn’t have to lay anyone off.” “But January was a good month,” I said. “That’s a good sign, right?” “Yeah,” Jeff said. “And another good sign is that some of our suppliers are raising prices. In fact, we think some of them will be going up 15%!” — Fifteen percent is a huge price increase for paper — “So maybe that means things are turning around. Or maybe it’s just a sign that there’s inflation in the future that’ll make things worse. I guess if you were optimistic, you could say these are signs of an improving economy. It’s definitely a step in the right direction, but it could just be a brief peak on the roller coaster of the Great Recession.” I, for one, am an optimist. (Not just about the economy, but all things.) I think things have finally turned a corner. Unemployment is still lagging behind (as it always does and always will), but from my perspective, the economy seems to have hit bottom, and is finally beginning to show some signs of improvement. When I got home from bowling Friday night, I dug out the numbers for the most recent poll from Get Rich Slowly and MoneyRates . Since mid-January, visitors to both sites have been answering the question, “ Where do you think the economy sits right now? ” Here are the results based on more than 1200 responses: 2% — Strong growth. Full Steam ahead! 15% — On solid ground and growing some, thank goodness. 43% — Stagnant. Not growing, but at least not getting worse. 20% — Not horrible, but looks like it’s going downhill. 21% — Free falling. I’m bracing for the worst. In general, GRS and MoneyRates readers aren’t yet optimistic. Many of you think things are stagnant still, and nearly as many think conditions are getting worse. Fewer than one in five believe that the economy is actually improving. A poll is one thing, but I’d like to hear your actual thoughts. How do you feel about the current economy? Do you think we’ve finally hit bottom? Or are things still getting worse? How has the recession affected you and your family? What do you think it’ll take for things to get better? — Related Articles at Get Rich Slowly: 25 Everyday Things I’m Doing to Save Money What to Do If Your Identity is Stolen Steve Pavlina: The Power of Now Will the Credit Crisis Cost YOU Money? Advertising

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Is the Economy Improving? Views from Everyday Folks

Economica: Women and the Global Economy

cheapo — Tue, 27 Oct 2009 20:00:04 +0000

In his book Banker to the Poor: Micro-Lending and the Battle Against World Poverty [ my review ], Nobel Peace Prize-winner Muhammad Yunus argues that one of the most effective ways to reduce poverty and overpopulation is to boost the economic status of women. When you empower women — especially poor women — their communities are improved in many subtle ways. The International Museum of Women has just launched their new global online exhibition, Economica: Women and the Global Economy . Economica features slideshows, interviews, podcasts , and more. Here’s a sample of what’s available: A slideshow highlighting microfinance in South America . An article about the food crisis in Egypt . A variety of topics, including business leadership , marriage and money , and family and fertility . The exhibition includes lists of books and films that explore the role of women in the global economy. (There’s also a discussion forum , though it’s a little barren at the moment.) Finally, if you’d like to contribute to the Economica exhibition, you can. The Your Voices section allows visitors to share their stories with the community. — Related Articles at Get Rich Slowly: Women’s Institute of Financial Education 12 Financial Tips for Women Daily Roundup: Christmas Eve Edition A Working Woman’s Guide to Financial Security Investing as a Couple: Draw on Your Differences

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Economica: Women and the Global Economy

Warren Buffett Has No Regrets About the Past Year — Do You?

LivingCheaply — Fri, 02 Oct 2009 11:00:24 +0000

This article is GRS staff writer Adam Baker. In addition to his work at Get Rich Slowly, Baker blogs over at Man Vs. Debt, where he maintains a list of every single item his family owns . It’s no secret that J.D. loves him some Warren Buffett . Honestly, though, who doesn’t? Financial wisdom seems to ooze from his pores. Previously on Get Rich Slowly, J.D. has touched on Buffett’s philosophies , well-known frugality , and charitable efforts . Buffett was born, raised, and still lives in Omaha, Nebraska. Even as a child, Buffett constantly tinkered with business concepts. He filed his first income tax return at age 13, including a $35 work expense deduction for his bike and watch. These days, at age 79, Buffett is one of America’s most respected business minds and constantly jockeys with Bill Gates and Carlos Slim Helu for the position of richest person in the world . A couple of weeks ago, CNBC ran a special “One Year Later” interview with Buffett marking the one-year anniversary of the height of the financial crisis. The interview is relatively short (just under twelve minutes), but manages to touch on everything from specific phone conversations to the state of healthcare reform. The video below is courtesy of CNBC , which has also provided a downloadable PDF of the full-transcript . Lehman and AIG call on Buffett for help For me, the most intriguing part of the interview is when Buffett discusses his call from Bob Diamond, the head of Barclays . The venerable investment bank Lehman Brothers was in a desperate state, and Barclays, a British financial services firm, was looking to step in and take over the operation. Because of the size of the deal, though, British authorities were requiring a vote of the shareholders, which would take several days to organize. Knowing Lehman’s time was extremely limited, Barclays wanted Buffett to insure the transaction, effectively providing a short life-line to Lehman Brothers while the Barclays shareholders could be organized for a vote. Buffett admits that during the initial phone call, he couldn’t understand the details of what would be required in the transaction. He laughs at how he received the first call just before heading into a dinner party on Friday night. Ultimately, Buffett requested additional information, but the inevitable meltdown started only hours later. To this day, Buffett still isn’t completely clear on what they wanted him to do. This was only one of a couple phone calls Buffett received that weekend last September. Buffett’s recollection of the events couldn’t have been more entertaining if Hollywood had written the script itself. Ultimately, though, none of the transactions that were discussed came to fruition. When asked directly if he has any regrets about the decisions he made (or rather didn’t make) during that weekend, Buffett responds, “No.” He adds with a chuckle that “it was a movie to see, but not to participate in.” Buffett’s endorsement of government intervention Ultimately, though, Buffett praises the government intervention that occurred in the weeks and month after the events. He even used the word “heroes” to describe: Federal Reserve Chairman, Ben Bernanke Former Treasury Secretary, Henry Paulson Current Treasury Secretary, Timothy Geithner Buffett says that without their actions, “it would have gone further than anybody would have wanted to see.” The public has been quick to criticize much of the government response over the last year. The approval ratings of Bernanke, Paulson, and Geithner aren’t exactly at all-time highs, so I find it interesting that Buffett provides such a strong endorsement of the actions of both Presidential administrations. The state of the recession and the future of the economy When pegged for his opinion on whether the recession is over, Buffett opines that “it’s sort of plateaued…” and that, barring any single catastrophic event, things should start to improve. “We’re past the critical point,” he finishes. Strong words of hope from one of America’s most trusted sources of investing wisdom. But, what do you think? Do you see evidence that we’ve “plateaued”? Is the worst behind us? Do you feel the government intervention over the past year has helped the recovery — or delayed it? For a more complete picture on Buffett’s responses, be sure to watch the full video interview . It’s well worth twelve minutes of your time! — Related Articles at Get Rich Slowly: Win Lunch with Warren Buffett What Would Warren Buffett Do? links for 2007-03-13 links for 2007-01-11 The Billionaire Next Door: The Wisdom of Warren Buffett

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Warren Buffett Has No Regrets About the Past Year — Do You?

The Truth About Taxes

LivingCheaply — Mon, 31 Aug 2009 11:00:26 +0000

Note: Although I try to keep GRS a politics-free zone, today’s topic is inherently political. I’ve stayed as neutral as possible in the article, but I know that there’ll be some political discussion in the comments. Please keep conversation civil, as always. Because I was frustrated with my own ignorance about the U.S. federal budget and our tax system, I recently spent twelve hours researching a variety of tax topics. From my research came two articles: last week’s short guide to the federal budget and today’s post, which answers some of my personal questions about taxes. Note: Though I’ve done my best to be accurate, I’ve sure there are errors in this post. As they’re caught, I’ll make corrections. Last week, we tried to take a few small steps toward understanding the federal budget . We looked at where the U.S. government spends its money. But where does it actually find the cash to spend? Of the $2.333 Trillion dollars in U.S. government receipts: $1050 Billion (45.0%) comes from Individual Income Taxes $939 Billion (40.2%) comes from Social Insurance/Retirement Receipts $221 Billion (9.5%) comes from Corporate Income Taxes $76 Billion (3.3%) comes from Excise Taxes $20 Billion (0.9%) comes from Estate and Gift Taxes $28 Billion (1.2%) comes from Federal Reserve Deposits $16 Billion (0.7%) comes from other miscellaneous sources As you can see, nearly half of government receipts come from individual income taxes. Naturally, taxes are a hot-button issue. They have been since this nation was founded. (To be fair, though, the driving force then was “taxation without representation”. Modern complaints are against taxes in principle, I think.) During my research, several questions about taxes occurred to me. In today’s article, I’ll do my best to share the answers I found. Is it true that X% of Americans pay no federal income tax? In a recent discussion about taxes at The Simple Dollar , Kevin wrote: Roughly half of all Americans don’t pay any income tax at all. I’m sure those folks feel the current tax levels are just fine and dandy, no complaints. Those of us who DO pay taxes, however, are buckling under the weight. Kevin’s comment left me wondering: Are there really that many Americans who don’t pay income tax? And are those of us who do pay income tax really “buckling under the weight”? I was unable to locate government data on people who don’t pay taxes. Instead, I found a March 2006 article from the Tax Foundation , a nonpartisan tax research group based in Washington, D.C., which calculated that 43.4 million tax returns resulted in zero (or negative) tax liability. Another 15 million households file no tax return at all. Based on these numbers, the article concludes: Roughly 121 million Americans — or 41 percent of the U.S. population — will be completely outside the federal income tax system in 2006. This total includes those who pay no tax, and those who pay some tax upfront and are later refunded the full amount of the tax paid or more. So, according to this study, 41% of the U.S. population lives outside the federal income tax system, and 32% of U.S. tax returns resulted in zero or negative liability in 2006. This 32% number is relatively high. Previous peaks were at 28% in 1950 and 26% in 1978. Lows were 16% in 1968 and 18% in 1984. In general, the percentage of tax returns with no tax liability is between 20% and 25%. Note: As several commenters have noted, although some people pay no income tax, that doesn’t mean they pay no federal tax at all. Linear Girl writes: “The second largest source of funds for the federal government is payroll tax, aka Social Security and Medicare. All employed people who aren’t paying any income tax do pay payroll tax of 7.65% on all earned income (their employers also pay and additional 7.65%; if you are your own employer you pay both sides). “ The Tax Foundation sees these numbers as a call to “broaden the tax base”, but admit that nonpayers tend to be younger and earn lower incomes. (Here’s a past GRS article about people who live on low incomes in order to avoid paying taxes .) If there are a large number of non-payers, does that mean the rest of us are “buckling under the burden”? Let’s look at more numbers. How do current income tax rates compare with those from the past? In the United States, the federal individual income tax went into effect in 1913 . The top marginal rate was 7% — and that’s if you earned over half a million dollars. (According to the Bureau of Labor Statistics inflation calculator , that’s equivalent to an income of nearly $11,000,000 today!) Note: The difference between marginal tax rates and effective tax rates can be confusing, even for those who know better. Here’s an explanation of how marginal tax rates work . The Tax Foundation has published a handy viewer that allows users to explore U.S. federal individual income tax rates from 1913 to 2009 . (They offer PDF and Excel versions of the data, too.) Using their data, I created a graph that shows the history of U.S. marginal tax rates. This graph shows the lowest marginal rate in red and the highest marginal rate in blue. At any one time there are many other rates in between. (The tax tables are simple right now, believe it or not.) Based on this information, it would be easy to conclude that tax rates are low in the United States right now relative to past history. While I believe this is probably true, it’s impossible to know this for sure without copious data regarding average incomes and effective tax rates. Still, the answer to the next question provides a bit of a response. What tax rate does the average person pay? Because the United States has a system of progressive taxation , it’s difficult to know exactly how much each person pays for income tax. We all know our marginal tax rates — the rate at which the last dollar of our income is taxed — but our effective tax rates (or average tax rates) fluctuate from year to year. I don’t know a source for comprehensive data on this question. The IRS does provide some statistics (and may, in fact, provide all the data one needs), and other parties have taken the time to collate some of it. For example, the Tax Foundation has produced several pages of summary tables . From this info, I built the following chart: This chart shows the average federal income tax rates over time for a variety of income levels. The red line shows the average tax rate from 1980 to 2007 for the top 1% of the population based on Adjusted Gross Income (AGI). The black lines hows the top 10% of earners based on AGI. The blue line shows the overall average federal income tax rate for all U.S. citizens. In 1980, Americans paid 15.31% of their AGI in income taxes. In 1990, that number was 12.95%. In 2000, it was 15.26%. In 2007 — the last year for which there is data — that number was 12.68%. Based on this, I’d say that the average American has an effective federal income tax rate of 13-15% . (And top earners pay about 22%.) Note that these numbers don’t exactly match the statistics for effective tax rates that are available from the Congressional Budget Office . (Which show, for example, an effective individual income tax rate of 11.7% in 1980, 10.1% in 1990, 11.8% in 2000, and 9.1% in 2006.) I’m almost certain it’s a matter of methodology, but I don’t have the time to dig in and discover the details. That last link, by the way, contains loads of great data, some of which is analyzed in this piece at The New York Times . Note: This graph shows something else, too. Contrary to some arguments, high income earners do pay more in taxes than low-income earners. The bottom half of American wage earners pay an average of about 5% to the federal income tax. The top half pays about 15%. The top tenth of American wage earners pay nearly 20% of their wages in federal income taxes. Again, I’m not saying this is right or it’s wrong, but those with high incomes do pay more in taxes. So are Americans “buckling under the burden” of taxes? I’m not convinced. Taxes seem to be moderately low right now based on our past history. But maybe we pay more than the rest of the world? Let’s find out. How does the U.S. tax burden compare with that of other countries? Though I was unable to locate comprehensive statistics for every country in the wold, the Organization for Economic Co-operation and Development (OECD) does collect data on its 30 member nations . In fact, you can view 18 years of OECD tax data all on one page. These numbers represent each country’s tax revenue as a percentage of GDP ( gross domestic product ). These figures include all taxes: federal, state, and local. (Note that you can export the data from this page in a variety of formats! Fun for statsgeeks and taxgeeks alike.) Here’s a graph of the data from 2006, the most recent year for which complete stats are available: In 2006, tax revenue in the United States was 28.0% of the gross domestic product. Put another way, the average American paid 28% of her income to taxes (state, federal, and local). Of the 30 OECD member countries, only four had lower taxes (Japan, Korea, Turkey, and Mexico). The highest tax burdens were in Denmark and Sweden, where tax revenue was 49.1% of the GDP. The lowest tax burden (by far!) was in Mexico, where tax revenue was only 20.6% of GDP. These numbers indicate that relative to other countries , the United States has a low tax burden . How much is this all costing me? Social Security, Medicare, Medicaid. Food Stamps, Unemployment Compensation. The Army, the Navy, the Air Force, the Marines. And the interstate highway to grandmother’s house. How much does this all cost you? Well, Jess Bachman (the Death and Taxes poster guy) has done the calculations for you: The average U.S. taxpayer has an income of $43,650. For every billion dollars of government spending, this taxpayer is on the hook for five bucks. These numbers scale up or down depending on your income. If you earn $100,000 a year, for example, you pay $15 of taxes for every billion dollars the government spends. Ouch. Conclusion Based on my research, U.S. taxes actually seem relatively low, both historically and in relation to other countries. I am not arguing that we should have higher taxes. Nor am I arguing we should have lower taxes. I’m just relaying the facts. In fact, I don’t really have a purpose behind my research other than education. With all of the recent national discussion about taxes, I felt woefully under-informed on the subject. When listening to people argue about taxes, it’s difficult to know whom to believe. I wanted to do my own research and then share the results with you. For more exciting information about taxes, check out the following: Internal Revenue Service: Tax statistics U.S. Treasury: A history of the U.S. tax system FedStats provides easy access to tons of statistics collated by the U.S. government. Tax Foundation: State and local tax burdens (by year) and State and local tax burdens (by state) Congressional Budget Office: Data on the distribution of federal taxes and household income (with thanks to Dan, a commenter at The Simple Dollar, who shared this info with me) After all that, how would I balance the budget if I were dictator of the United States? Easy. I’d cut all programs across the board by 10% while increasing taxes on everyone by 10%. Yeah, that sucks, and every citizen of the U.S. would be unhappy. But you know what? If I were dictator, I wouldn’t care. I’d be sitting in a cozy room reading comic books while eating chocolate chip cookies with milk. Update #1: As with last week’s post, I’ll post updates here at the end of the article as readers offer clarifications or important points. For example, although I focused exclusively on federal income tax for individuals in this article, several readers noted that this is not our only federal tax in the United States. Linear Girl provides a succinct summary: “The second largest source of funds for the federal government is payroll tax, aka Social Security and Medicare. All employed people who aren’t paying any income tax do pay payroll tax of 7.65% on all earned income (their employers also pay and additional 7.65%; if you are your own employer you pay both sides). “ So, if you want to include the complete federal tax burden in the above conversation, you need to add 7.65% to all figures — 15.30% if you’re self-employed. Update #2: For those requesting a second part to this article about how this money is spent…that was actually the first part, last Monday’s short guide to understanding the federal budget . Graphs courtesy of me. Images courtesy of Jess Bachman, creator of the Death and Taxes poster . Bachman is generously offering a deal for GRS readers. Order two or more posters and get 50% off when you use the code ’slowly’ at checkout. “It’s basically buy-one, get-one-free,” Bachman says. Thanks, Jess! — Related Articles at Get Rich Slowly: Priciest Places to Smoke and Drive Loan.com: A New Site for Mortgage Info Ask the Readers: Should I Prepare My Own Taxes or Go to an Accountant? Last Minute Tax Tips links for 2007-02-18

Understanding the Federal Budget

cheapo — Mon, 24 Aug 2009 11:00:43 +0000

Note: Although I try to keep GRS a politics-free zone, today’s topic is inherently political. I’ve stayed as neutral as possible in the article, but I know that there’ll be some political discussion in the comments. Please keep conversation civil, as always. Recently at The Simple Dollar, Trent posed the question, “How much do taxes matter to you?” As might be expected, his readers responded with passionate comments from both sides of the political spectrum. The discussion frustrated me, though. There’s just too much misinformation, and people offer their opinions as if they were facts. I’m as guilty as anyone else. Because my own education on this subject is weak, and because I want GRS readers to be informed, I spent twelve hours last week researching a variety of tax topics. From this research, I’ve written two articles: this one about the U.S. budget, and a second part about taxes, which I’ll publish next week. These posts are meant simply to be educational. There’s no takeaway other than knowledge. We cannot have informed discussions about taxes and government spending if we don’t have the baseline information. These two articles record my attempts to discover that baseline information. Note: Though I’ve done my best to be accurate, I’ve sure there are errors in this post. As they’re caught, I’ll make corrections. To begin our discussion of taxes, let’s examine the state of the U.S. budget. The U.S. Budget The U.S. budget is complex, and it’s the source of much political debate. Some argue that we should cut our military spending and use the money to fund a national health care system. Others argue that nationalized health care is the road to socialism, and that we should reduce our current government health programs. Others simply want to cut all government spending. But how much is actually spent where? The U.S. Office of Management and Budget (OMB) provides a website devoted to the budget of the United States government . You can download the entire budget in PDF form (~2mb file), or browse only for the sections that interest you . There are a variety of supplementary materials available, too. All of this information is overwhelming. To make the numbers easier to understand, Jess Bachman produces an annual Death and Taxes poster , which attempts to visualize the entirety of the federal budget. The poster contains over 500 programs and departments. The size of each item on the poster is proportional its budgeted amount. The Death and Taxes page allows you to zoom around and look at sections of the poster from within your web browser. There’s even a “quick find” feature that allows users to look up the sections that interest them. You can also order the poster, of course. It’s $24. When I asked Bachman for permission to use excerpts of the poster in this article, he went above and beyond for GRS readers: Order two or more posters and get 50% off when you use the code ’slowly’ at checkout. Yes, that’s essentially a “buy one, get one free” deal. Order one for yourself, and give the other to your local high school history department. From the “Death and Taxes” poster, here’s a glimpse of the total U.S. national budget: Although this says “2008 federal budget”, it’s actually for 2010. Even though this image simplifies things, it still took me a couple of minutes to understand it. The penny in the middle represents receipts — from taxes and other sources. The big black chunk missing from the penny is the budget deficit. The government has to borrow this money to stay afloat. The colored circles around the outside edge represent where the government is spending money. Again, the area of each circle is proportional to the expense. (I have no idea why the equation [Outlays = Receipts + Deficit] doesn’t balance. Can someone explain?) Looking over the budget, here are some datapoints that interested me: The Department of Defense has a budget of $534 Billion, which is 37.5% of the overall $1421 Billion discretionary budget. (What does “discretionary budget” mean? See the next section of this article.) I’ve always thought the Department of Homeland Security was a sort of boondoggle. Looking at its $41.383 Billion budget, however, I see that it was basically created by shuffling agencies from other departments. Customs and the Coast Guard are a part of Homeland Security now, for example. The Department of the Interior, which is home to programs like the National Park Service, etc., has a budget of only $12.007 Billion. That seems really low compared to some other parts of the budget. NASA’s budget seems low, too. Is $18.686 Billion per year really going to provide a manned mission to Mars in my lifetime? We’ll need to raise that budget if this geek is going to have a chance of dying happy. (I can dream, can’t I?) The United States Postal Service has outlays of $78 Billion, most of which are covered by fees. About 5% ($3.776 Billion) of the agency’s budget comes from tax dollars. This is much less than I would have guessed. The Department of Education has a $46.69 Billion budget. Of this, $29.64 Billion (63.4%) is for Special Education and Education for the Disadvantaged. The Financial Literacy and Education Commission (which falls under the auspices of the U.S. Treasury) is far, far too small to be listed here. If looking at the budget poster online is overwhelming, you can scan the spending on various departments in this data-only list of budget spending (it’s just a blog post, so it’s not too daunting). As someone who has served on a small-town budget committee, I guarantee you that each of these government organizations — both the ones you support and the ones you don’t — can provide rationalization for every penny they receive. In fact, they probably wish they had more money to work with. But as a taxpayer, I wish I had more money to work with, too . There’s a balance to be found here. And it’s arguments over this balance that create divisions among our political parties and lead to tirades about taxes. Discretionary Spending You may have noticed that the U.S. budget is divided into discretionary spending and non-discretionary spending. What’s the difference? In my personal budget, non-discretionary spending (or mandatory spending) includes things like the mortgage and utilities and essential food. Discretionary spending includes videogames and comic books and restaurant meals. But what does it mean for the government? Mandatory spending (or “direct spending”) is required by law. Social Security, Medicare, Medicaid, and other federal programs (such as Unemployment Compensation, Food Stamps, Student Loans, etc.) are mandated by law. Our elected officials must change the laws before they can change spending on these items. These programs are sometimes referred to as “entitlements”. If you meet the requirements for a particular program, you’re entitled to receive benefits. Each year, as a part of the budgeting process, the President and Congress negotiate discretionary spending . Whereas entitlement programs are ongoing, most discretionary expenses require annual renewal. Requests for discretionary spending are made via an annual appropriation bill , which authorizes the government to spend money. Discretionary spending covers programs like the U.S. Forest Service, the Department of Agriculture, the Food and Drug Administration, the Peace Corps — and the military. Using data from the Congressional Budget Office , I was able to create a graph that shows that discretionary spending as a percentage of the U.S. GDP ( gross domestic product ) peaked in 1982, and then fell under Presidents Reagan, Bush, and Clinton. It jumped under President George W. Bush: The Congressional Budget Office data breaks discretionary spending down further. In this chart, I’ve retained the mandatory spending line, but split discretionary spending into three categories: defense spending, domestic spending, and international spending. Again, these numbers are graphed as a percentage of GDP: Both defense and domestic spending increased under President Bush. I suspect they’ll both increase under President Obama, as well. How much of this is due to each man’s political philosophy? How much is due to the political and economic exigencies of their time? I don’t know. “That’s great,” my wife said when I showed her these charts. “But what about total spending. You need a chart for that.” Right. After finding some false info , I managed to find actual data from the U.S. Office of Management and Budget . Here are total U.S. government budget outlays as a percentage of GDP over the past 80 years: To me, it looks like President Clinton is the only one to systematically reduce spending. Despite fiery rhetoric from both sides, no one political party can honestly claim to be anti-spending . I think that most of us understand that some government spending is necessary — we just worry about the degree of spending that occurs. It’s a fine thing that citizens want to keep government spending in check, but it’s important to note that just because you don’t want or need a program doesn’t mean that there aren’t other citizens who want or need it. (I was raised in a “peace church” , for example, and so am naturally opposed to military spending. Yet I recognize that for most U.S. citizens, this is a high priority. I’ve learned to temper my upbringing with the knowledge that mine is not the majority opinion.) Although this is a long article, it provides only a cursory glimpse of the U.S. budget. It doesn’t even begin to touch the subject of where this money comes from! Tune in next week for the second half of my research, in which I try to uncover the truth about taxes. Postscript: Here’s a new New York Times editorial from Warren Buffett , in which he writes that recent deficit spending was justified to save the economy, but cautions that government needs to be prepared to pull back on spending or risk making things even worse. In order to ward off inflation, Buffett says, “Once recovery is gained…Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.” Update #1: Several people have requested info about the relationship between national debt and GDP. In the comments, Joshua points to this national debt graph . He also suggests cross-referencing these graphs with info on party divisions of the U.S. Congress . Graphs courtesy of me. Images courtesy of Jess Bachman, creator of the Death and Taxes poster . Bachman is generously offering a deal for GRS readers. Order two or more posters and get 50% off when you use the code ’slowly’ at checkout. “It’s basically buy-one, get-one-free,” Bachman says. Thanks, Jess! — Related Articles at Get Rich Slowly: Understanding Money Federal Student Loan Consolidation Primer Are Mortgage Rates Tied to the Federal Funds Rate? Stand Up to the IRS: Free Guide to Tax Audits (and More!) Free Comics from the Federal Reserve

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Understanding the Federal Budget

The Spending Habits of the Average American

cheapo — Tue, 14 Jul 2009 11:00:46 +0000

Last week, Diane dropped a line asking for information about the spending habits of the average American. She wrote: I am trying to find sites that will provide average spending habits — such as how much an average person spends on food per week or how much a family spends on entertainment, that sort of thing. I am hoping to see where my habits line up with someone of similar means in the same part of the country. I’m not sure of how to obtain regional information, but I know where to find national figures for comparison. Last week, a site called Visual Economics posted a chart showing where the average U.S. consumer spends her money . Here’s the chart in question, which has been making the rounds of the internet: Click to open at full size in a new window. Because I’m a skeptic by nature, I tracked down the source material used to create this chart. The data is drawn from the U.S. Department of Labor Statistics Consumer Expenditure Survey for 2007 . Most writers seem to be missing this point (probably because the chart itself has a date of April 2009), but it’s an important one. This chart represents consumer behavior before the market meltdown — not after. ( Here’s the source data [297k PDF].) Note: The Bureau of Labor Statistics website is amazing. It’s filled with data from government reports on everything from inflation to unemployment to pay and benefits . If you want to cut through the mass media crap and get to the heart of the matter, visit this site to obtain raw information. The U.S. government does a great job connecting with citizens on the web. Some of the interesting bits from this survey: The average “consumer unit” surveyed had 2.5 people, of which 1.3 were wage-earners. This consumer unit earned $63,091 and had 1.9 vehicles. Exactly two-thirds owned their homes. This average consumer unit spent $49,648 in 2007. Average food spending was $6133, of which $3465 was spent on meals at home. Based on this data, one can conclude that the average consumer unit spends roughly $300 per month on meals prepared at home and roughly $225 per month on meals away from home. Average spending for housing was $16,920 for the year, which was way up from the $15,167 average for 2005. That’s an 11.6% increase in housing costs over just two years! Can you say “housing bubble”? I was surprised by the transportation costs. The average consumer unit spent $8758 on transportation, or about $725 per month. Holy cats! That’s insane. The average household could save big bucks quickly by optimizing their transportation costs. Several readers asked for my opinion about this chart, including Sarah M. , who wrote via Twitter : “I’d love to see your thoughts comparing the average annual consumer’s spending breakdown to what it should be!” I don’t think it’s possible to say what the average consumer’s spending should be. There are too many variables. What works for me may not work for you. Each year, the average American spends $1881 on “apparel and services”, for example, but only $118 on books. My spending for these categories is nearly the opposite. In 2007, I spent $702.73 on books and $425.94 on clothing. I actually think the source data [297k PDF] could be a great basis for a budget. I always have trouble deciding which categories to track in Quicken. If I opted to use the same category structure that the government uses when tracking consumer spending, I could easily compare my habits with the “average” American. (Too bad the government doesn’t track spending on comic books!) Also, I’m puzzled as to why taxes aren’t included in this information at all. The chart doesn’t include taxes because the government survey doesn’t include taxes. If the average consumer unit earns $63,091 but spends $49,648, there are $13,443 unaccounted for. The personal saving rate in 2007 was less than 1%, so I’m guessing that most of the unspecified money goes to taxes. Finally, I should note that last year we took a glimpse at the spending of the average American as revealed by The New York Times and the Consumer Price Index . In my recent reader survey, there were many requests for more content aimed at non-U.S. readers. It’s unlikely I’ll devote entire articles to foreign issues, but when possible — such as today — I’ll try to find resources to help you do your own research. Here are similar surveys in other countries: Statistics Canada: Spending Patterns in Canada Australian Bureau of Statistics: Household Expenditure Survey, Australia U.K. National Statistics: Family Spending, Expenditure and Food Survey How do your spending habits compare to those of the “average” American? I’m especially curious to hear how much GRS readers spend on books. The average of $118 per year doesn’t buy a lot of reading material. On the other hand, maybe people are using their public libraries! (One can dream, right?) — Related Articles at Get Rich Slowly: Manage Your Finances Like a Professional Gambler: Small Things Add Up A Glimpse at the Spending of the Average American Survey: How Much Do You Spend on Food? links for 2007-03-10 Long-Distance Phone Tax Repealed

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The Spending Habits of the Average American

The Ascent of Money

cheapo — Wed, 08 Jul 2009 19:00:58 +0000

Beginning tonight, public television stations in the United States will broadcast a four-part series from economist and historian Niall Ferguson, The Ascent of Money . This is an expanded version of a documentary that first aired in January. Here’s a description of The Ascent of Money from the official site: For millions of people, the recession has generated a thirst for knowledge about how our global economic system really works, especially when so many financial experts seem to be equally baffled. In THE ASCENT OF MONEY, economist, author and historian Ferguson offers insight into these questions by taking viewers step-by-step through the milestones of the financial history that created this system, visiting the locations where key events took place and poring over actual ledgers and documents — such as the first publicly traded share of a company — that would change human history. Ferguson maintains that the history of money is indeed at the core of our human history , with economic strength determining political dominance, wars fought to create wealth and individual financial barons determining the fates of millions. Apparently, PBS will also be posting each episode online for free. The first installment, “From Bullion to Bubbles” , is already available. I watched it this morning. It’s fascinating. Geekiness: For 20+ years (since high school), I’ve wanted to know why most of the world uses Arabic numerals. Nobody has ever been able to give me an answer. In this show, Ferguson explains the source of this standard ! Ferguson suggests that financial history is the fundamental background to all history. “From Mesopotamia right down to day, the ascent of Money has been an indispensable part of the ascent of Man,” he says, adding: “Without the invention of credit, the entire economic history of our world would have been impossible.” What I find especially interesting about The Ascent of Money is the way in which it ties together bits of history that are largely unrelated in my mind. It’s sort of like Connections , but solely about money. (I knew some of these things from The Four Pillars of Investing , but The Ascent of Money paints a broader picture.) The first part of The Ascent of Money was interesting enough that I plan to watch the other three episodes as they’re made available online. To be honest, though, I felt like the narrative wandered at times. I’m curious if the original two-hour version ( already available on DVD ) might not be more effective. If you’re interested in this show, you can check the PBS website to see when it airs on your local public television station. (Here in Portland, the four parts air Wednesday nights at 9pm starting today.) You might also try to watch some similar shows from the past, including: Frontline: The Farmer’s Wife ( my review ) — This program is excellent! Nova: Secrets of Making Money (where “making” means “manufacturing” in a literal sense) The History Channel: The History of Money in the United States Frontline: The Secret History of the Credit Card ( my review ) Did anyone catch The Ascent of Money when the original version was broadcast in January? What did you think? And am I the only one around here fascinated by the history of money ? — Related Articles at Get Rich Slowly: No related posts

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The Ascent of Money