Movie Monday: Economic Freedom matters.
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
Monday, December 17, 2012
Monday, October 29, 2012
Monday, October 15, 2012
MM: The American Dream
Happy Movie Monday. Entertaining view at the American Dream and the American Financial System.
Monday, October 8, 2012
Monday, September 24, 2012
MM: Supply & Demand: A Thug Story
Welcome to Movie Monday. Here is an educational rap about economics.
Monday, July 23, 2012
Monday, July 9, 2012
Monday, July 2, 2012
Monday, April 23, 2012
Monday, April 9, 2012
Wednesday, February 22, 2012
Why You Should Invest in the Stock Market
I've heard that everyone should be in the stock market because it gets, over the long haul, 12% returns. I've also heard that instead of trying to time the market and play games, you should get into an Index fund and just ride it out. Instead of just taking that advice at face value, I delved into it to see what is really going on.
I took the value of the Dow Jones Industrial Average as the basis for my investigation. I downloaded the full history available from Yahoo!.
I took the closing value of the Dow on the first of January of each year. The average gain from one year to the next was 6.55%. Not the 12% I've heard, but better than the around 1% rate on savings. The average inflation during that period was 3.23%, leaving our actual gains to be around 3.27%. Still, better than stuffing your mattress or putting the money in a savings account.
However, most of us do not have the luxury of going back 85 years to put our money in the stock market. This is why the phrase "past performance is not a guarantee of future returns" was invented. If we take a closer look at the average gains in each decade we can get a clearer picture of what might be going on.
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Imagine if you picked the 70's to get started investing in the stock market. By the 90's you'd be pretty impressed with yourself as an investing guru. So it really depends on when you get in and when you get out, timing the market.
Let's take another look at the Dow. Compare the chart below to the Dow chart I started out with.
Notice any similarities? The first chart was the entire history I got of the Dow from Yahoo!. This chart is the same data, just up to 1982. So what do the mid 60's and early 2000's have in common? War, specifically Vietnam and the War on Terror. If you look for the pre-Vietnam run up and the flatline afterwards on the first graph you'll notice that it doesn't even register. The ramp up in the early 80's and even more so the late 90's dwarf the "problems" in the 70's.
So is the trend that following a war flatline there are two decades of growth followed by incredible growth? I think it is more of a warning about government spending, especially war spending, and what it does to the economy.
There were three events I think led to the 80's (mild compared to the 90's) boom. The first is the baby boomers (those born between 1946 and 1964). They have changed the rules at every stage of life. In the mid 80's baby boomers started turning 40. They were past the arrogant years and starting to worry about retirement. That alone would not have had that much of an impact on the stock market if it had not been for the other two events, women entering the workforce and the invention of the 401(k).
From 1970 to 1990 the percent of women working jumped over 30%. In 1970 around 1/3 of the female potential workforce was employed. By 1990 over half of the female potential workforce was employed. This increased the household income (but was in large part needed to keep up with inflation, but that is another story entirely) and added to the 401(k) boom.
The 401(k) gave companies an incentive to help their employees invest in the stock market with pre-tax money. Given that baby boomers were starting to think about retirement and taxes and companies were given incentives to help them put their money in the stock market, this led to a large cash infusion in the stock market. This is what I think led to us leaving the post-Vietnam stock slump.
The 90's also had two events that helped accelerate the stock boom, the internet (and online trading) and more available housing. I am not referring to the dot-com bubble when I am referring to the internet, but the availability of information about companies and the ease with which the internet afforded stock trading (eTrade went public in 1996). Like the roaring 20's when the people caught the stock bug when they saw the large returns, more individuals had access to the stock market and it became popular to trade stocks online. This provided another infusion of cash into the market.
The changes to the Community Reinvestment Act in 1995 made housing available to more people. This increased the demand for housing, thus raising the prices (more people could buy homes but the number of homes did not increase as fast). This combined with the ease of online trading increased the cash available to infuse the market.
So now we look into our crystal ball to see what the future has for us. Just like the period around the Vietnam war we have a boom in the stock market, followed by some bouncy but overall flat years. Where are we going to get the cash infusion to the market for the next ride? Here are a couple of things to think about.
So, why do I think you should invest in the stock market? Here are my reasons:
I took the value of the Dow Jones Industrial Average as the basis for my investigation. I downloaded the full history available from Yahoo!.
However, most of us do not have the luxury of going back 85 years to put our money in the stock market. This is why the phrase "past performance is not a guarantee of future returns" was invented. If we take a closer look at the average gains in each decade we can get a clearer picture of what might be going on.
.png)
Imagine if you picked the 70's to get started investing in the stock market. By the 90's you'd be pretty impressed with yourself as an investing guru. So it really depends on when you get in and when you get out, timing the market.
Let's take another look at the Dow. Compare the chart below to the Dow chart I started out with.
So is the trend that following a war flatline there are two decades of growth followed by incredible growth? I think it is more of a warning about government spending, especially war spending, and what it does to the economy.
There were three events I think led to the 80's (mild compared to the 90's) boom. The first is the baby boomers (those born between 1946 and 1964). They have changed the rules at every stage of life. In the mid 80's baby boomers started turning 40. They were past the arrogant years and starting to worry about retirement. That alone would not have had that much of an impact on the stock market if it had not been for the other two events, women entering the workforce and the invention of the 401(k).
From 1970 to 1990 the percent of women working jumped over 30%. In 1970 around 1/3 of the female potential workforce was employed. By 1990 over half of the female potential workforce was employed. This increased the household income (but was in large part needed to keep up with inflation, but that is another story entirely) and added to the 401(k) boom.
The 401(k) gave companies an incentive to help their employees invest in the stock market with pre-tax money. Given that baby boomers were starting to think about retirement and taxes and companies were given incentives to help them put their money in the stock market, this led to a large cash infusion in the stock market. This is what I think led to us leaving the post-Vietnam stock slump.
The 90's also had two events that helped accelerate the stock boom, the internet (and online trading) and more available housing. I am not referring to the dot-com bubble when I am referring to the internet, but the availability of information about companies and the ease with which the internet afforded stock trading (eTrade went public in 1996). Like the roaring 20's when the people caught the stock bug when they saw the large returns, more individuals had access to the stock market and it became popular to trade stocks online. This provided another infusion of cash into the market.
The changes to the Community Reinvestment Act in 1995 made housing available to more people. This increased the demand for housing, thus raising the prices (more people could buy homes but the number of homes did not increase as fast). This combined with the ease of online trading increased the cash available to infuse the market.
So now we look into our crystal ball to see what the future has for us. Just like the period around the Vietnam war we have a boom in the stock market, followed by some bouncy but overall flat years. Where are we going to get the cash infusion to the market for the next ride? Here are a couple of things to think about.
- Baby boomers are going to start retiring (turning 65 in 2011 - 2030) and start pulling money out of the market instead of putting money in. Again, they are going to change the rules. If their investing started a minor boom, what will their withdrawals do?
- Is there some new mechanism (tax law like 401(k) or new invention like online trading) that will encourage more people to invest in the market? Given that our economy is hurting and people are paying more attention to immediate needs than investing I don't know how we are going to squeeze more money out of people to put in the market.
So, why do I think you should invest in the stock market? Here are my reasons:
- You want to support baby boomers with money you'll probably never see again (kind of like Social Security)
- You live in a warm climate and will not need the cash to burn to keep you warm
- Your Investment Advisor's children are getting ready to go through college
- You have more money than you know what to do with
- You'd rather pay 22% on your credit cards and throw your money down the stock market drain
Monday, February 20, 2012
Monday, February 13, 2012
MM: Debt Limit
It's Movie Monday with a discussion of Debt Limits. While this is satirical to the government, I've seen many households that operate about this way.
Monday, February 6, 2012
MM: US Debt Crisis
Movie Monday with a sobering point of view on debt. It's not good on a personal level. It's definitely not good on a national level. On a worldwide level, it's very bad.
Tuesday, April 12, 2011
Why Do the Rich Get Richer and the Poor Get Poorer?
Robert Kiyosaki first introduced the idea of the Cash Flow Quadrants in his book Rich Dad, Poor Dad, but fully expanded the idea in his book Cash Flow Quadrant
. The idea is that there are four ways of making money, as an Employee, Self-Employed, Business Owner or Investor.
Employee: Employees generate their income by trading their time for money, usually for someone else's business. If you get a W2 at tax time, and that signifies the majority of your income, you are an Employee. Employees generally get benefits, like health insurance, vacation, sick leave, etc. They usually work a certain number of hours a week and get a fixed income for that time.
Self-employed: The self employed is actually a very broad spectrum of careers. There are independent tradesman like plumbers and electricians as well as what many call professionals like doctors and lawyers. For tax treatment they can be a Schedule C, C-Corp, S-Corp, LLC or various forms of partnerships. They generate their money by providing goods and services to as many clients/customers as they can.
The Employed and Self-employed make up around 95% of the people, but they control only 5% of the wealth. They make their money by trading time for money.
Business owner: Business owners are often confused with the self-employed. The distinguishing factor is what happens to your income when you go on vacation. The self-employed are the business. A business owner's business is run by a system, that works whether he is there or not. For instance, if you spend millions to buy a McDonalds, go to Hamburger University and then hire your managers, you're pretty much done spending time on your McDonalds business. You can go on vacation and the McDonalds' system keeps the business running.
Investor: Many people think they are an investor. They way you can tell is how you react when you lose $200 million in a transaction. Investors aren't phased. Investor's generally do not invest in mutual funds, and generally not in stocks like that average person does. There are even laws that favor the Investor, which prevent others from investing in some of the riskiest (and highest return) investments.
The Business owner and the Investor do not trade their time for money, but trade their time for raises. We all have the same 24 hours in a day, but the Employed and Self-employed are limited in their income because they trade their time for money, while the Business owner and the Investor trade their time for raises. Same 24 hours, but the Rich get Richer for every hour they invest.
Now you might think that the Poor (and shrinking middle class) would just maintain. Well, there are two things that are against them: inflation and thinking. Inflation makes the money that you have worth less. That means each year you have to increase the value of an hour more than the increase in inflation.
Robert Kiyosaki describe the thinking of the Poor, Middle Class and Rich in this way:
Poor: Every dollar they get goes to expenses. They trade their time for money and then trade their money for stuff. Robert calls this turning their cash into trash.
Middle Class: While some of their money is spent on stuff (expenses), a large portion of their money is spent on taxes and debt. The Middle Class buy what they think are assets (houses, cars, etc.), and the debt ends up sucking the money right out of their wallet before they really see it.
Rich: The rich invest their money in true assets. Robert Kiyosaki considers a liability anything that takes money out of your pocket (mortgage, loan, expenses, etc.) and an asset anything that puts money in your pocket. It's a simple test to see if it is an asset or a liability, and doesn't head-fake you into think you are doing great because you have lots of "assets." The Rich also pay less in taxes, due to how they earn their income. The income tax structure favors them. The Poor and Middle Class earn, are taxed and then spend the rest, while the rich earn, spend and then are taxed. Some of those tax advantages are available to the Self Employed.
I hope I've challenged your thinking on income, debt, taxes and finance. I think the more we can improve our thinking about money, and then act on that thinking, the better off we'll be.
. The idea is that there are four ways of making money, as an Employee, Self-Employed, Business Owner or Investor.Employee: Employees generate their income by trading their time for money, usually for someone else's business. If you get a W2 at tax time, and that signifies the majority of your income, you are an Employee. Employees generally get benefits, like health insurance, vacation, sick leave, etc. They usually work a certain number of hours a week and get a fixed income for that time.
Self-employed: The self employed is actually a very broad spectrum of careers. There are independent tradesman like plumbers and electricians as well as what many call professionals like doctors and lawyers. For tax treatment they can be a Schedule C, C-Corp, S-Corp, LLC or various forms of partnerships. They generate their money by providing goods and services to as many clients/customers as they can.
The Employed and Self-employed make up around 95% of the people, but they control only 5% of the wealth. They make their money by trading time for money.
Business owner: Business owners are often confused with the self-employed. The distinguishing factor is what happens to your income when you go on vacation. The self-employed are the business. A business owner's business is run by a system, that works whether he is there or not. For instance, if you spend millions to buy a McDonalds, go to Hamburger University and then hire your managers, you're pretty much done spending time on your McDonalds business. You can go on vacation and the McDonalds' system keeps the business running.
Investor: Many people think they are an investor. They way you can tell is how you react when you lose $200 million in a transaction. Investors aren't phased. Investor's generally do not invest in mutual funds, and generally not in stocks like that average person does. There are even laws that favor the Investor, which prevent others from investing in some of the riskiest (and highest return) investments.
The Business owner and the Investor do not trade their time for money, but trade their time for raises. We all have the same 24 hours in a day, but the Employed and Self-employed are limited in their income because they trade their time for money, while the Business owner and the Investor trade their time for raises. Same 24 hours, but the Rich get Richer for every hour they invest.
Now you might think that the Poor (and shrinking middle class) would just maintain. Well, there are two things that are against them: inflation and thinking. Inflation makes the money that you have worth less. That means each year you have to increase the value of an hour more than the increase in inflation.
Robert Kiyosaki describe the thinking of the Poor, Middle Class and Rich in this way:
Poor: Every dollar they get goes to expenses. They trade their time for money and then trade their money for stuff. Robert calls this turning their cash into trash.
Middle Class: While some of their money is spent on stuff (expenses), a large portion of their money is spent on taxes and debt. The Middle Class buy what they think are assets (houses, cars, etc.), and the debt ends up sucking the money right out of their wallet before they really see it.
Rich: The rich invest their money in true assets. Robert Kiyosaki considers a liability anything that takes money out of your pocket (mortgage, loan, expenses, etc.) and an asset anything that puts money in your pocket. It's a simple test to see if it is an asset or a liability, and doesn't head-fake you into think you are doing great because you have lots of "assets." The Rich also pay less in taxes, due to how they earn their income. The income tax structure favors them. The Poor and Middle Class earn, are taxed and then spend the rest, while the rich earn, spend and then are taxed. Some of those tax advantages are available to the Self Employed.
I hope I've challenged your thinking on income, debt, taxes and finance. I think the more we can improve our thinking about money, and then act on that thinking, the better off we'll be.
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