What’s wrong with an interest-free loan to the government?

U.S. Capitol

Every year, amid the discussion of taxes and rebates and the like, there is usually a talking point that goes like this:

“Getting a rebate of any amount is a bad idea, because all you’re doing is giving the government an interest-free loan.”

I’d like to unpack that, and see how that argument holds up.

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Is it possible to pay in advance exactly the amount of tax you owe?

Cluttered desk

Welcome back to tax season! It’s an interesting time that can seem extremely fraught to some, and a little exciting to others. For some: so much work to do. For others: big rebates!

I’m fortunate to be young enough that I never needed to know the situation my parents knew: that of a dining room table covered with papers, spending multiple evenings filling in forms manually, calling help lines to get more information, worrying about getting everything right.

I’ve pretty much always used an online service for filling out the forms. I know I’ve heard that professional tax people can somehow magically find ways to get more of my money back, but I have yet to really try. The one time I went to a tax person, I was, shall we say, rather underwhelmed by the experience, and I guess I haven’t moved to try it again.

But with the year end reconciliation starting up, a question worth asking is whether it’s possible to get it exactly right, to pay exactly what you owe such that you get neither a refund or owe anything.

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Why everything is like a regressive tax

Toll booths

With all the talk on how to fund our government and the various projects we need to undertake, it’s made me think about that phrase “regressive tax”. As in, “there was no support for that initiative, because it was seen as a regressive tax on the poor.”

For example, in the inexorable push to widen highways, many jurisdictions have realized that, well, they’re broke, and have no money for upkeep, even if they’re given the money to build something new.

This has led to the idea of tolling roads, especially in some places that have never had them before. Close to home, tolls may be coming to Portland soon.

Tolling roads is nicely self-contained: if you use a road, you pay for the road. If you don’t, you don’t.

The money you spend goes to fund road improvements (which we now know aren’t otherwise paid for), and also it has the side benefit of reducing traffic (since people like teenage me will avoid tolls where they can).

A common argument against tolling roads is that it’s a “regressive tax” on the poor. The idea there is that the cost will be more burdensome to those with lesser incomes.

I’ve been rolling this around in my head for a while. And I’ve arrived at a question:

Isn’t, well, everything, a regressive tax?

And if everything is a regressive tax, than isn’t that not a good argument to use in opposition?

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That time I almost tried to time the market (but didn’t)

Roller coaster

At the beginning of the year, the news reports started piling in: the stock markets were overvalued. P/E ratios were at highs not seen in years. Some people even used the curious phrase “melt-up” (which, correct me if I’m wrong, is kind of an odd thing for something that is melting to do).

I watched all this, and it brought to mind my continual nagging feeling like I really need to revisit my asset allocations in my investments.

I’ve written before about my ambivalence about rebalancing a portfolio. With a long timeline, and the long term potential for overweighting of stocks and equities (being more risky but more rewardy, if you know what I mean), this doesn’t seem like a problem, at least until you’re getting within the event horizon of retirement.

But with every market indicator referencing a market peak, I looked at a particular investment that I had wanted to adjust for a while. It was weighted pretty aggressively. Wouldn’t now be a good time to dial it back to a lower risk, lower return product?

Feel free to yell it out: No!

I believe dodged a bullet there. Can you see why?

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Another way to track cash expenses

ATM withdrawal

People have very widely varying attitudes toward cash. While some people feel money more when they spend cash, other people don’t feel it at all. In fact, the way some people have explained it to me, if the transaction doesn’t hit their checking account, it feels ?like it never happened”. These people only feel money when it’s accompanied by a card.

While this is a little odd to me, I accept that people can have a difference of opinion of these topics. To me, using a debit card and paying cash aren’t that different. You’re still using money and you still need to track it.

And since I don’t recommend using apps or other services to do the tracking, it’s not much more work to log a purchase from cash versus a debit card. Okay, it’s slightly more work, in that there’s a record of the specific transaction in your checking account that you wouldn’t have if you used cash, but you can get a receipt in most cases.

So to be honest, I haven’t always known what to recommend for people in the “cash isn’t real” category.

But here is something I’ve recently come up with that I think could help in the expense tracking area. A way to make cash expenses as easy and ephemeral as some people feel they are.

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How having more money can make you anxious

Anxiety

People think that money can solve all of their problems. Yes, there’s the old saw about how “money can’t buy happiness”, but usually people see past that and think, “yeah, but it would certainly help“.

And that’s true. When you’re at the lower end of the income scale, more money can certainly help. If you are barely treading water financially, and you get a raise, even a small one, that money will likely go to making your life a little easier. Once you start piling on a bunch of “easier”s, pretty soon you can remove a lot of stress from your life.

But from the vantage point of those with low incomes, it can seem like that’s the end of the story.

It’s not.

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Failure to backup: Why I’m paying hundreds of dollars because I didn’t follow my own advice

Hard drive spindle

I’m not always the best at taking my own advice. There are many examples on this site. Like the time I went $500 over budget. Or my foot-dragging on getting a will.

“Be prepared” isn’t quite up there on the top of my catchphrase list, but it is true that a little preparedness now can save you a lot of money later.

I’m learning this the hard way right now, because of a dead hard drive.

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Pay less now, or pay more later, your choice

Street collapse

There are lots of ways to spend more money than you have to.

One of the easiest ways to do that is to buy something before you have the money for it. And there are oodles of ways to do this.

The most obvious one is the credit card. You can buy pretty much anything today, right now. I’ve had credit cards with over $25,000 in credit limit. I could go buy a new car before the day was out.

You can do all this, of course, because the companies that actually pay when you buy it (the credit card companies) are banking that you will not pay the balance off quickly, and will incur finance charges, potentially over many months and years. They make lots of money on this.

There are retail stores that do something similar. You see this in the phrases “rent-to-own”, or “90 days same as cash”. What they mean is that you can take home the item right now, and then pay a certain amount each month until it’s paid off, or not pay anything for a period of time.

That last case is particularly dangerous, because if you don’t pay for the item in full in the allotted period, you can be charged all the interest you weren’t charged originally. Yikes.

These types of situations can all be avoided. You just need to pay for things when you buy them. (This means not using credit cards for everyday spending. And yes, I know this means you’ll earn fewer points. You’ll be fine. Earn points other ways.)

But there’s another way to spend more money than you have to. It involves not being prepared.

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Warren’s wisdom, or on being greedy and fearful

Waves crashing

One of the more famous—and certainly eerily relevant—quotes about financial self-awareness is from Warren Buffett, the “Oracle of Omaha”. The quote generally is rendered as:

“Be greedy when others are fearful and fearful when others are greedy.”

Warren Buffett

This guy is neither of the above. Photo courtesy of Javier

It’s a great slogan, and while it can be a little bit of a Epimenides-esque knot to untangle for oneself, I try to employ it as often as I have the presence of mind to do so.

But it occurred to me that I never once looked into the backstory behind the phrase. Where did it come from? What was its context? Does it hold greater lessons for all of us?

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This time it’s different, or not

Opulent house

If there’s one thing we are biased toward, it’s the sense the present is somehow different from everything that came before. This can refer to financial affairs, sure, but it also refers to anything: education, technology, social interaction, you name it.

But it’s just a feeling. It’s actually never different. Or rather, it’s always different but in the same way.

Here’s what I mean:

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