Common Cents # 27

 

Coins

 

An interesting current topic of conversation is about a “cashless” society and what that means to the average consumer.  We’ve heard during this time of Covid-19 about coin shortages that have made cash transactions challenging for buyers and sellers alike.  The government has not stopped minting coins, but people have not been using currency in person at the same rate as before.

Almost immediately after humans began trading with one another, there was a need to keep track of who had done what for whom. The idea of using rare metals such as gold, silver, and copper to keep score soon surfaced as ideal. Since it was hard to weigh and check metals for purity with every transaction, people in authority, such as a king, began stamping the metal, verifying the weight and purity. That is an extremely abbreviated history of coins.

Since the beginning of civilization, every culture has used some sort of coins. Today, all of the coins used in the United States are stamped in either Philadelphia or Denver. We visited the Denver Mint last summer and learned that it costs about two cents to make a penny and about ten cents to make a nickel. The mint sells the coins to the Federal Reserve Banks at face value. Fortunately, there is more profit in dimes and quarters, so the mint basically breaks even in the coin business. If the mint were a regular business, they would be getting out of the penny and nickel business and begin pushing for dollar or even five-dollar coins where there is more profit to be made.

We know that maintaining small denomination coins costs the government billions, but I have not seen any studies that try to understand how much money businesses could save if we rounded all transactions to one decimal place instead of two. Many other countries have dropped their small value coins with good success. In some countries, the smallest coin is worth about twenty-five cents.

Paper money has a different history and traces its roots to bank notes, certificates issued by banks that say that they have the money that the paper represents.

Today, the vast majority of financial transactions are done without coins or currency, but with direct transfers using debit or credit cards, electronic funds transfers, direct deposits and so forth. Checks are just another way to authorize direct transfer of money. When businesses accept plastic for merchandise, the funds are automatically deposited in their bank accounts, they then pay suppliers, employees, and the rent with online transfers and direct deposited payroll. This is a much safer and quicker method than handling cash. Few business owners enjoy carrying a bag of cash to the bank while watching over their shoulder for someone who has learned their routine. Hitting a button on the cash register or computer and seeing the number appear in their bank account is much less stressful.

In the current era of a highly contagious disease, handling paper or metal currency appears to be an unnecessary risk compared to just inserting a piece of plastic in a machine. The need to carry around pictures of dead presidents and worn out pieces of metal is rapidly declining. The downside of electronic money is the need to keep track of how much we have. As individuals and families, we need to have good record keeping habits to know how much money we have made, how much we have spent, and how much we have left. That was probably easier in the old days when we could just reach in our pockets and count out the cash.

We also must consider, though, that many people in our county still rely strictly on cash for their daily lives and they must not be shut out of this economy by businesses who refuse to accept cash as a method of payment. 

Even though the physical ways we get paid and spend money are changing, the fiscal ways of handling money have not changed. We still need to spend less than we make and invest the difference. That is all there is to it.

 

 

Common Cents # 26 Insurance

 

 Insurance

 

Edward Lloyd had a coffeehouse in London. His clientele included a lot of merchants and seaman. In 1686, due to a large number of ships being lost at sea, they began writing the names of vessels at sea along with the names of merchants who had cargo on board on a blackboard. They would put money in a fund that would be used to reimburse some of the losses from ships that were lost, sunk, or looted by pirates. This is generally considered the start of the modern insurance industry, though this idea of pooling funds to cover unexpected losses had been around in some form for a few thousand years.

Today we can buy insurance to cover just about anything from our house and car, to a business, or even our voice if we are an opera singer. The idea is the same, a large number of people pay in money that can be used to reimburse a small number who have a major loss.

It is best to think of insuring things we can’t afford to lose. For example, if our house burns down, we still need a place to live and at the same time that we would still be making payments on the house that burned down. The solution is homeowner’s insurance that would pay for the house and other property in this type of emergency.

There is a wide variety of insurance solutions for about every purpose, but the bottom line should be, is the premium reasonable for the risk of losing the property. Should I pay for earthquake insurance if there has not been an earthquake in my area for a hundred years? How about flood insurance? If earthquakes are rare, the insurance will be cheap, but if we live in a flood zone or along the coast, flood insurance will be very expensive or unavailable.

Real world questions come up about auto insurance. The difference in cost between insuring a $50,000 car and a $500 car may not be that much, but does the old car really need insuring at all, especially if we can afford another car if something happens to this one? Obviously, we would likely want insurance on the expensive car and maybe not on the cheap car.  Insuring the person’s car we ran into in the form of Liability Insurance should not a decision.  We must have that in the event that we are at fault.

Should we buy travel insurance for our vacation? I think the question should always be, what’s the worst that can happen? If the worst thing is the airline cancels the flight and won’t refund our money, or the country we are going to refuses to admit Americans, can I afford to lose the airfare, hotel deposits and the price of the activities to which we had purchased entrance?  If not, then travel insurance that covers the loss would be important.

How about our life? If I should die today or in ten years, would it present a severe financial hardship on my spouse and family, or will they be financially secure without me. The answer to that question tells us if we need life insurance and if so, how much.

The United States is a very litigious society with lawyers advertising on billboards and television, looking for people to sue. Anyone can suddenly find themselves owing thousands of dollars for seemingly insignificant things like somebody tripping on a garden hose. For that reason, everybody needs liability insurance. If we get sued, the insurance company will step in, handle it and pay the claim if it is covered. Without liability insurance in today’s culture, we would be held accountable personally for the outcome of the lawsuit.

Insurance is one of those odd things where the people who need it most can afford it least. Very wealthy people probably don’t really need insurance but probably have plenty. People with resources that are stretched or minimal need good insurance because any loss can be significant.

We need to stay aware of what insurance we really need and what risks we face everyday to protect ourselves and family from financial setbacks. It’s a bit of a tightrope, but worth the effort to evaluate often.

 

 

 

 

 

Common Cents #25 - The Tortoise and the Hare

 

The Tortoise and the Hare

Everyone is familiar with Aesop’s Fable of the Tortoise and the Hare. The humble tortoise challenges the arrogant hare to a race. The quick rabbit jumps to an early lead and then decides to take a nap. He awakens to find the tortoise has trudged pass him to win the race. The supposed moral of this story is that slow and steady wins the race, but often when children are asked their interpretation, they say that the hare is clearly faster, but he shouldn’t have stopped for the nap. Nobody really wants to identify with the slow and steady turtle.

I like to think of financial security as a long, steady, and sometimes boring race, a marathon not a sprint. To me, having financial security means not being awake at night worrying about money or paying the bills. It is not about being rich, but about being able to think about other things and make plans without being constrained by a lack of financial resources.

Among my friends are several millionaires. None of them won the lottery, made a brilliant invention, had a hit record, or made some kind of big business deal. They all just spent less than they made and invested the rest over a long period of time. Proverbs 28:19-20 says, “Those who work their land will have abundant food, but those who chase fantasies will have their fill of poverty.  A faithful person will be richly blessed, but one eager to get rich will not go unpunished.”

Warren Buffet is one of the wealthiest people on the planet. He freely gives financial advice to anyone who asks. A reporter once asked him why so few people take his advice. He quickly answered, “No one wants to get rich slow.” Accumulating wealth the “Buffet Way” is not hard, it is just not glamorous.

The key to financial security, millionaire or otherwise, is to put a little money back every time you get paid, starting as young as possible. We started putting money in an IRA when I was 25. That was the first year they were available. The simplest and safest investment in the long-term is the stock market, specifically a mutual fund. Or better yet, a group of funds for the maximum diversity.

Since the stock market is hardly consistent in the short term, watching for deals or dips in the price of stock is seldom a good strategy. The best idea is “dollar-cost-averaging.” In other words, if I invest the same dollar amount every month, I am getting more for my money when the prices are low, and I am buying fewer stocks when the prices are higher. I don’t have to be concerned about the daily fluctuations because the dollar-cost-averaging system balances that out. The key is to think “long-term.”

According to Bloomberg, 48% of Americans over 55 have saved nothing for retirement. This looks like a looming disaster for too many people. Social Security is a safety net to keep older people from being destitute, but it is hardly a living wage for most people.

Defined benefit pension plans are mostly unavailable now, except for government workers. Only about one in five of the total workforce can expect some sort of retirement benefit from their employer. Those are mostly military or government retirees. Currently, we are truly on our own to prepare for the days when we do not or cannot go to work every day. IRAs and 401(k) programs make it easy to get started. Regular and consistent contributions are the key to long-term financial security.  See you at the finish line of the race! 

Common Cents #24 - Withholding

 

Common Cents – Income Tax Withholding Strategies

 

The U.S. Tax system is a “Pay-as-you- go” system. In other words, Uncle Sam wants us to pay tax today on the money we made today. This is accomplished by having employers withhold part of our salary and send it in as income tax.

Of course, the tax system is complicated with credits and deductions for all kinds of things. There are varying tax rates depending upon married status, and many of us have multiple sources of income. The solution is to file a tax return sometime after the first of the year and before April 15 that reconciles what we have paid with withholding with what we should have paid based on all of those variables. We may owe more if we haven’ t paid in enough, or we may have a refund coming if we overpaid. Ideally, we should come out about even, neither owing more nor getting a refund.

For some reason, tax season has become “refund season” with about 80% of Americans getting a refund because they had too much money taken out of their paycheck. The IRS would like to reduce this problem and get that money back in people’s hands each month instead of waiting until the next spring. For that reason, the W-4 form was redesigned for 2020. The W-4 is the form you fill out that tells your employer how much money to take out for your taxes. It stays with your employer; it is not sent to the government.

Incidentally, if you started your current job before January 2020, you do not have to fill out new W-4, though some employers are asking their employees to do that.

The new form asks a lot more questions, some of which you may not want to share with your employer, like your extra job, rental income, or the trust fund or lottery check you get each month. Fortunately, everything except your name, address, and Social Security number is optional. You can leave everything else blank if you choose to do so.

If you answer all the questions or go to the “Estimator” app on the IRS.gov web site, you will likely find that your paycheck has grown because there will be considerably less withholding. But you will be quite surprised next April when you not only do not get a refund but have a big tax bill instead.

In a few case studies we have done, a typical taxpayer went from getting a $1,000 refund using the old W-4 to owing over $3,000 with the new W-4. That is because each monthly paycheck received by the employee was over $300 more using the information on the new W-4 to calculate their withholding.

Ideally, assuming your situation hasn’t changed from last year, look at your total tax bill from last year, divide by the number or times you got paid and have your employer deduct that much from each check. You can do that by going straight to Step 4c on the W-4.  It will prevent the surprising amount that would become due next April 15 if this strategy is utilized.