Wednesday, May 18, 2011

Cash Discipline

I asked my sister, with years of experience in the food industry, what the biggest challenge for people entering the workforce is.  Answer: cash discipline.  Well, not in those exact words, but basically, tracking what you earn.  Why is this important?  If you don't know what you are taking home, you don't know what you have and hence can't; effectively budget, pay taxes accurately or save.

Don't get me wrong - you could *guess* at these things and probably do alright, but would you want to wing it all the time? (sure - makes life more exciting).  Would you want to OVER pay your taxes or fritter away your money in an unstructured fashion and have NO savings?

Being wait-staff means highly variable income, much of it paid in cash.  While it's tempting to put that in your wallet or purse and just live off of it, it is a very shaky way to manage.  The suggested solution is to pick up a Ledger book at Staples or Office Max or Office Depot or whatever you've got. They can run from  $5 on up.  All you need is a simple tabular format where you can write the date and the amount of your take home.  At the end of the month, you know what you made and what you have to work with and you can start budgeting, saving, setting aside for your taxes, etc. 

The trick is to do this at night when you get off your shift and have the money in hand.  Don't put the money in your stash till after you've recorded it.  Trusting it to memory later will certainly lead to error.  Get in the habit of doing this and you'll take a lot of guesswork out of your future and reduce your long term stress.  Sometimes the IRS will ask you to pay quarterly or monthly taxes depending on your income.  Sometimes you don't have to come up with it till the end of the year.  Fact of the matter is, these days, the IRS is going after not just more of the big fish but ALL the fish.  So if you keep accurate records and hold your projected owed taxes back on your cash take home, you'll be prepared to pay that tax bill instead of struggling to come up with it. 

You might be tempted to not report cash.  Consider the liability this presents.  The IRS likes to find out about this stuff WAY down the road and assess penalties.  With interest.  Trust me, I speak from experience (one time!) when I say that this is no joyful bit of news to receive. Pay what's due when it's due as, unfortunately, our overlords demand it and will make us pay pay PAY later if we don't.


Wednesday, May 11, 2011

The Law of Unintended Consequences

If you've been reading along, you may have caught the fact that individual spending habits are what drive the spending habits of a society.  This applies to borrowing and savings.  We tend to tolerate, as a whole, that which most of us accept on our own account.  So if I'm OK with maxing out my credit card and paying the minimum, I'm likely to view government spending on borrowed money as "normal" or "acceptable".

So, our views of money as a society tend to influence the way our governments handle money.  This is more or less true depending on the amount of influence the populace has over its government.  The reverse is true as well, however, and often not in the same way.  Let me explain.

Government use of public funds influences private money use in often unforeseen ways.  Two recent news stories caught my attention.  One was a proposal to levy a tax on parents of overweight children, presumably due to the increased public health burden these children would come to represent during the course of their lives.  The other was a plan by the Irish government to tax private pensions in order to, ostensibly, grow jobs. 

Now - being cost averse as a rule, what do you suppose the reaction in the general public would be in these two seemingly disparate cases?  Well, I suspect the intent of the first proposal is to induce parents to provide better nutrition to their children and take an active responsibility for the health of these kids.  In practicality, though, many children were set on a path to obesity from the start due to their genetic sugar thriftiness.  Our western diet is packed with sugar.  Many Latino and other children with Native American or Mezo-American heritage have a thrifty gene that makes optimal use of low glucose food sources and defaults to storing as fat the over abundance of high-glucose sugary foods.  Obesity and diabetes are common in these population groups as a result.  Nothing short of a whole-sale diet change to now hard-to-obtain, low-glucose and slow burning glucose foods will help these kids.  For a low income family, that option is going to be hard to come by.  Taxing them is less likely to produce a healthy diet choice and more likely to see parents unintentionally mal-nourish their children in an attempt to avoid the tax.  Income level apart - I think that would be the unintended consequence in this case.

To the Irish proposal to tax private pensions in order to fund job creation spending on the part of the government, there seems to be a bit of a competing interest here.  Ireland, in the 80's and 90's made itself a choice technology center for manufacturers via tax incentives.  This worked fabulously well but resulted in a tech-heavy economy which suffered with the periodic down-turns in the economy.  So, now the plan is to spend money, probably on enticements or special programs, to try to stimulate more job growth.  That alone may well succeed.  However, funding it via a tax on private pensions has an obvious souring effect.  If you live in the EU and can easily choose from among many countries to work in, would you choose Ireland if you know your private pension will be taxed?  The unintended consequence here is likely that jobs, at least those with private pensions as a part of their compensation, will not be grown but will in fact be repelled or driven away.

So to, on an individual level, we are faced with the often painful law of unintended consequences with the power money has to serve as incentive towards or away from a behavior.  Have a coupon for $10 off your purchase of $100 or more?  Well, that's a nice 10% off (or less).  But it's 100% more than you are likely to spend when you are not presented with the enticement of a coupon.  Signing up for coupons or club memberships is nice - you can find good deals.  But if you're susceptible to the sway of coupons, having more coupons at your disposal may mean you spend more money on things you didn't really need or want in the first place, just to "save" 10%.

Two take home points to consider then.  One, be aware of the power of money to persuade, both positively and negatively.  Two, when you hear an offer or proposal, think through all the possible unintended consequences.