Is there someone at the IRS who’s a math lover?

Plant Spiral

I love math. You know this. I think math is one of our world’s ways of expressing beauty. To me, there are few things more pleasing to the eye than a elegant mathematical statement. (People tend to agree on this.)

And so, if for no other reason than we all need more beauty, I want to show you how our effective tax rates are a practical approximation of a beautiful and fundamental mathematical curve.

No, seriously.

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Don’t fear moving to a new tax bracket

Bracket

Do you know your tax bracket?

I’d say a good number of people do.

But do you know what happens when you jump up to a new tax bracket?

I’d say a good number of people do not.

Tax season is over (unless you pressed the IRS snooze alarm filed an extension), but as your income can change all the time, it’s never a bad time to understand what exactly how tax brackets work.

And if you think it’s a boring topic, I would urge you to reconsider. Anything that has the ability to lop off a significant portion off each and every paycheck you get is probably worth your while to understand, right? Right.

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How much is that cheap thing costing you?

Umbrellas

I’m a big fan of purchasing responsibly. I’m not profligate with my spending, but I do feel like it’s important to spend a little extra on certain things that provide a significant return, be it personally or financially.

But I also have learned over time to take a longer view of purchases. It’s not just what something costs now, it’s what something costs over the long term.

We see this most obviously with credit cards or “no money down” schemes. Sure it’s cheap (or free) today, but over the long term it will cost more than if you had just paid for it.

But it’s not just debt. Sometimes we cheap out and it ends up costing us more.

To give an example of that, I give you the New York City umbrella.

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The moment I learned that dollar stores aren’t a good deal

Dollar Store

In 2003, I was living in New York City, working a retail job where I made around $13 an hour. (That’s a $26,000 salary equivalent.) My rent was $675, which meant that I was spending 50% of my take home pay just to live and keep the lights on.

It wasn’t quite “result misery”, as Wilkins Micawber might have put it, but let’s face it, it was kind of dire.

This was a time in my life where the quality of the food I ate wasn’t nearly as important to me as the price. Even if I had cared, I wouldn’t have been able to care; I just didn’t have the money. A typical meal I ate was reheated frozen chicken nuggets on toast with ketchup.

Oh, those were the days.

As you can imagine, I was looking for food deals anywhere I could find them. This is not an easy thing in NYC, I might add. I recall buying three days worth of groceries at a local Gristede’s on a previous visit there, and it cost $65. In 2003 dollars. Ouch.

The dollar store

One day, while on a walk nearby my new place of employment, I spotted a large store called “Jack’s 99 Cents”. It was a dollar store, or rather a dollar superstore.

Jack's 99 Cents

Jack’s 99 Cents. It’s still there, and appears to be thriving.

Now, let me admit my privilege here. I had never been into a dollar store before. A place I worked at in college was replaced by a dollar store, but they weren’t a part of my orbit.

But now, in my first, non-dorm-room experience living away from home, the dollar store immediately called to me. I could buy things for a dollar! I could buy food for a dollar!

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The past and future of home prices, or how no one remembers history

In many areas of the country, home prices are going crazy.

Or at least that’s the narrative.

I just discovered an amazingly engrossing interactive chart by The Economist where they show home prices in various U.S. cities as a function of time and other metrics. The picture it paints with home prices is one that matches people’s feeling: prices are going up and up.

From 2010 to 2016, median home prices in Portland rose by over 20%.

Sucks to be in San Francisco.

I’m not here to dispute those numbers. What I’m here to dispute is how short people’s memories are.

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How to potentially double your money’s impact via lump sum debt reduction

$20 bill closeup

It can be hard to visualize how paying a debt off works.

There’s an interplay between principal and interest. You pay money to reduce the principal, but during that time, interest on the debt has piled up, reducing the impact of your payment and adding to the amount you owe.

You might think the a debt payoff plan is like this:

A smooth line

But it’s actually more like this:

More of a jagged line

(Downward for principal paid, upward for interest accrued.)

The goal is that the amount you pay is greater than the interest you accrue during the same time period. That way you make progress. And as you pay off principal, the amount of interest you accrue becomes less and less.

This means that when you pay extra now, it will positively affect (increase the power of) every other payment you make for the life of the debt.

I think this is worth your attention.

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If you’re still unsure about what method to use to pay off your debt

Monkey face rock

If you’re like most people, you’ve got some form of debt. It could be a car loan, it could be credit cards, or it could be “good debt” like student loans.

No matter, it’s got to go. You need to get out of debt if you’re ever going to build any kind of wealth. Seriously. The money that’s going toward your debt is the same money that will go toward wealth.

And you want to be wealthy right? Or at least wealthy enough to have choices and to feel secure?

Then it’s time to get focused.

However, your immediate roadblock is figuring out what to focus on. After all, you probably have debt from more than one place.

There are two primary methods to paying off debt: focusing on the debt with the lowest interest rate first, versus focusing on the debt with the smallest debt amount first.

The latter, called the debt snowball, is by far the method I favor. Increased simplicity and more visible progress are the main reasons.

The other method (which doesn’t have as snazzy a name), will enable you to pay off your debts slightly faster, so you’ll save a little bit of money.

I’ve talked about how this works out in practice, but I want to revisit it, not because my views have changed, but because it’s so important.

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Do you want to invest in a target date fund?

Crosshairs

In 2006, Congress passed the Pension Protection Act. It’s a scintillating read.

Pension Protection Act

Click the image to see more.

Among much else, it provided statutory authority for employers to enroll workers in retirement plans automatically, and also established criteria of “safe harbor investments” to protect employers from liability that comes from automatically enrolling employees.

Prior to this, people weren’t automatically enrolling in their workplace retirement plan, and Congress, in a rare moment of caring about working folks, decided that it was best for everyone to have an “opt-out” plan as opposed to an “opt-in” plan. If people were going to be lazy, let them be lazy in a way that benefits them.

But you can’t just put someone’s money just anywhere. (Enron stock?) So the bill establishes the idea of a Qualified Default Investment Alternative (QDIA) as a vetted fund that employers could be protected from liability if they used.

And target date funds were just such a plan.

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Captain Obvious Reports: How not to have more credit card debt

Sometimes I like to get deep into the rabbit role with details. The post I wrote immediately before this detailed the ins and outs of rebalancing your investment portfolio. An important topic to discuss, but it’s hard not to be too wordy about it.

But everyone’s busy and has a short attention span. So I’ve decided to start a series of short, actionable posts. Nothing fancy, just a good tip for you to take with you as you go.

And I’m calling it: Captain Obvious Reports.

The tagline: “But is it really that obvious?

Today we’re talking about credit card debt.

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Am I making a mistake by not rebalancing my portfolio?

Balanced rocks

I believe that investing is a crucial step in your plan to become financially secure. So I recommend putting as much as you can into an investment portfolio like a 401(k) at work, or (especially) a Roth IRA that you create yourself. 15% of your pay is a good round number.

But allocating money is only the first step. Once the money is in there you have many options on what to invest the money in.

Those who recommend these things recommend a mix of stocks and bonds (which remember can all be in mutual funds; you’re not picking individual stocks here). The most famous of these adages says something along the lines of “own your age in bonds“. So if you’re 30 years old, you should own 30% of your portfolio in bonds.

Personally, I think that’s garbage advice. We need all the growth we can get, and bonds just ain’t gonna cut it.

Regardless of what allocation you’ve decided on, one suggestion that everyone seems to make is to rebalance your portfolio periodically.

I’m not doing this. I haven’t rebalanced pretty much ever. Am I making a mistake?

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