Financial Education: How the Sausage Is Made Vol. 1 (transcript) (Patreon)

By Sam

Several months ago, I asked the Southpaw community what questions they wanted answered as far as financial education. The reason I asked this question is that thinking about your finances is an unavoidable reality. We are subsumed by capitalism. To be able to AVOID thinking about capitalism or your own personal finances takes extreme privilege. However, the only resources for personal finance are rightwing or ultra far-right. This makes sense in that capitalism itself is rightwing, so of course, rightwingers will be the ones to talk to you about your finances as well.

Also, for baby lefties who aren't committed socialists, they've already shown a massive interest in technology and new financial products, and with the ease of access to gambling like trading, they've been lowkey turning to the far-right for knowledge, which has unfortunately influenced their overall political analysis. This trend is what finally pushed me into doing this series because socially conscientious people were getting indoctrinated.

So going along with the theme of the Southpaw network, giving people an alternative, this will be an alternative to rightwing financial education. What do I mean by education? Defining terms and explaining how things work but from a bottom-up perspective.

What makes something rightwing regardless of the topic? Victim-blaming and prescription. Prescription being what you should have done or ought to do now as if everything is within your control, which connects back to victim-blaming.

This is going to be free of blame and prescription. This is why I'm emphasizing education rather than literacy because literacy already comes with judgment. This is not any different from how I teach martial arts. I have no idea what situations you'll find yourself in or how you'll have to use this knowledge, so instead of creating fantasy scenarios plagued with my own personal biases, I teach you the art. You decide how to best use it for your life, what you want to get out of it, and what your own scenarios look like. So that's how I'll approach this, especially since both are about self-preservation and the protection of others. Both existing because we are subsumed in harm. And by both, I mean martial arts and financial education, but we can even include weapons training; we wish we didn't need this knowledge, but we do.

So I've compiled all the questions, and unsurprisingly, there ended up being a lot. This was definitely something socially conscientious people were interested in because money is a concern for most people.

However, there's no good way to order this many questions, so I will answer them like an old advice column in the newspaper when newspapers were still a thing. First, I'm going to have Comrade Eden read the questions, then I will answer them.

Let me also add the disclaimer that this will be US-centric because that's the personal finance world I know. Still, finance, in general, tends to be similar in capitalist countries.

Let's begin:

Rob writes; Dear Sam

How do socialists, communists, lefties rectify the moral problems of saving and working within a capitalist system while maintaining their values? For instance, in the current system, I feel motivated to provide security for my family, and it's hard to reconcile that within capitalism when all you want is to be a lefty.

Dear Rob,

How do you reconcile? You don't. Karl Marx predicted that capitalism would force us all to live in contradiction, even the good eggs. You understand it for what it is, as an unavoidable contradiction, because actually reconciling it with morals that advocate for equity and equality would require galaxy brain. This is why reading any online justification of capitalism is both funny and horrifying.

It's like reconciling living in white supremacy culture while trying to be a good white person. There is no reconciliation. You, as a white person, will benefit from white supremacy, but you can also understand that white supremacy is wrong. It is what it is. As a good person, you may want to dismantle white supremacy, but that doesn't mean you still won't benefit from the harm of others. It's actually in reconciling and thinking there is no contradiction is when you get colorblind racism, silence, and complicit cooperation. It's in thinking you can be wholly good or all your actions can be wholly good in an unjust system that causes erasure and denial of harm. Being a good person in capitalism is messy. Period. That's it. That's what you're signing up for as a socialist. You're saying you are recognizing this reality. Denying all the harm is what makes a reactionary.

Evan writes; Dear Sam

How do I financial plan for end times?

Dear Evan,

It depends on what you mean by end times. There are two ways people mean end times. One is the tongue-in-cheek meaning, the other is literal.

Let me answer the literal, we are headed for the end of the world definition rather than just meaning things will get worse. After all, investing for future bad times isn't any different from investing in general.

Investing first assumes you have money to invest. Secondly, it assumes things will get worse, which is why you're told to invest before it gets worse.

So the world is ending; what's the best use of your energy and resources? Building and participating in community. Having a network of people you can trust, people with your same collective morals, a mutual aid network.

Developing a network of people with different useful skills for end times while developing your own helpful skills. Being a part of community gardens and seed banks. Stocking up on water, canned goods, medicine, and first aid kits. Not to mention taking first aid training and CPR. Having material supplies for yourself and your family but also for others. Investing time in community-based organizations and perhaps even things related to tenants and the unhoused. This could also mean firearms training, but you can't talk about firearms without also thinking about depression and suicidal ideations, which is why community is also essential for support as well as having people who can hold your firearms if you are ever in crisis. If you're a part of a community you trust, it doesn't necessarily have to be you who is armed. 

Planning for end times means getting to know your neighbors, not just the ones next door but also throughout your local community, including local businesses. Make as many allies as possible.

Take as many free classes as your community offers, take advantage of your library and community centers. Borrow and read as many books as possible, not only for useful knowledge for end times but also because memory might be the only way to pass on some of this knowledge. Then it's also essential to speak to and learn from elders.

Also volunteer your time, support the community. If you have things to teach, teach the community. Read to kids, invest in future society.

Suppose the end is related to environmental causes. In that case, having masks around doesn't just protect you from COVID and other airborne diseases but also against air pollution. 

This isn't everything, but it's a start. If there is a disaster coming, retirement accounts won't matter. Money won't matter. Hiding in a shelter and having all the guns just makes you a threat to yourself and everyone else. It's about community and mutual trust.

T writes; Dear Sam

What is dollar-cost averaging?

Dear T,

Dollar-cost averaging isn't a product or a type of investment vehicle but an investment strategy. It means you are committing to putting the same amount of money into the market in regular intervals. If a percentage of your paycheck goes into a retirement account, you are doing dollar-cost averaging. It makes investing automatic and takes timing the market out of the equation. Timing, in this case, means looking for the perfect opportunity to buy. Since you're committing the same amount of money every time, you buy less when the market is expensive, more when the market is cheap. Timing doesn't matter. You're maximizing thrift. This allows for small increment investing and works best the earlier you start.

George writes; Dear Sam.

What is compound interest?

Dear George,

Compound interest means interest that builds upon itself. It's something that happens automatically with anything that earns interest. This can apply to savings but also debt. The interest gets added to the principal, then the principal grows. Because the principal is larger, the interest is larger. This is how a small debt grows into a big debt, and likewise, how savings grow.

So with debt, time is your enemy. In savings, time is your friend. However, the interest you pay in debt is almost always higher than the interest you make in savings, so paying down debt is typically a priority even over saving UNLESS you are rich.

If you are rich, you can get loans with lower interest rates, which might be less than what you're earning in your investments. Then it doesn't make sense to pay it down quickly, which is why rich people, even though they have the money to pay loans back, carry around debt because debt benefits rich people and hurts poor people. The whole system is rigged for the rich.

People who can afford high interest for debt pay the least in interest. People who can't afford high interest get the highest interest. People who have money can get loans; people who don't have money can't get loans. This is capitalism.

Inversely, people who don't need the money earn the most on their dollar. People who need money, make the least on their dollar. Poverty and wealth compound. Capitalism is not an equalizer but a steroid that strengthens what already exists. If you're already rich, it makes you richer. If you're poor, it makes you poorer. People who defend capitalism, whether conservative or liberal know this, but believe poor people can't be trusted, so this is just. But capitalist trust is racialized, just as poverty in America is racialized. This is why trust is not based on social metrics but a credit score.

Compound interest is a friend to savings and the enemy to reducing debt. Therefore it's a friend to the rich and the enemy of the poor.

Sarah writes; Dear Sam

What is time in the market?

Dear Sarah,

This goes to George's question about compound interest. The longer you leave your principal alone, the more it can grow. Time is the friend of growth. Not always, but in general. This means, the longer you leave your debt unpaid, the more it'll grow. This is a guarantee. However, the longer you leave your investment alone, the more it CAN grow, but it's not guaranteed like debt. Another fucked up thing is, some loans penalize you for paying it down or off early.

Furthermore, though you understand leaving your investment alone will make more money, sometimes you need that money, so you have to take it out. Therefore poor people lose out not just from mounting debt but also in opportunity cost. Opportunity cost being the money they could have earned if their poverty didn't force them to constantly cash out their savings.

Reed writes; Dear Sam

What is Robinhood or TD Ameritrade?

Dear Reed,

Those are what are known as broker-dealers. They act as your agent in buying and selling securities. Without a broker-dealer, you would have to buy or sell securities directly with those companies. Which people also do, usually with their employers. However, those securities are usually still held at a broker-dealer, which is to say broker-dealers are now unavoidable. 

Broker-dealers will hold your securities in an account under your name, just as a bank would with money. Accounts are different legal entities recognized by the IRS. Broker-dealers will help you create these legal accounts, such as retirement or custodial accounts, acting as your lawyer and planner.

However, the ability to do so many things conveniently can get people in over their heads. This is not a bug but a feature. Since they don't charge any upfront fees, they make their money from you on the backend.

Suppose you're ever in need of actual financial advising. In that case, you're better off paying for a fee-based service rather than something that has no upfront costs but makes their money off of you based on your behavior. Then it is in their incentive to manipulate your behavior.

Terry writes; Dear Sam

What is a trust fund?

Dear Terry,

Despite what you've heard from the media or popular culture, a trust fund isn't all that fancy, though it can be. A trust fund is a fund that belongs to a trust. So it's two things, the trust and the assets within the trust. If you've had a parent or grandparent die or dealt with estates, you might already be familiar with trusts.

It's a legal entity that protects assets. It can be created for yourself or for someone else. So I can be a trustee for my own holdings like in a living trust, or I can be the trustee for someone else, like my child. This connects back to broker-dealers as they can create simple trust accounts for minors. That's what people most often mean by "trust fund," money someone's had in their name since they were a kid: a trust fund kid. Any custodial account for a minor is a type of trust account. After a certain point, they stop being a trust because the ownership transfers over to the minor when they become of age, either 18 or 21.

You can also create more sophisticated trusts that allow for more customizations, such as a lifetime allowance, stipulations on how the money can be used, and when the assets become fully available to the beneficiary.

Unfortunately, the legal fees for more sophisticated trusts can be a barrier for some families. Still, it can make sense for even nonwealthy families based on the circumstances. For example, I have a friend who is the trustee to his adult sister's trust account because she has Down syndrome. So his parents set up the trust to take care of their daughter even after they've passed. If something happens to my friend, there are instructions for a new trustee. If something happens to everyone, the money will go to a charity.

A trust can also offer more protection than a will, make splitting up assets to multiple people simpler and neater, allows you to be much more precise in what happens to the assets, and is more challenging to dispute than a will. 

Another way someone can be a trust fund kid is if they inherit money. Which is to say, lots of people are actually trust fund kids, which doesn't necessarily mean they're rich. Also, just because a lot of money was passed down to someone doesn't mean it happened through a trust either. However, all ultra-wealthy people will set up trusts, usually to hide money and avoid taxes.

The IRS also can't win cases against rich people. The law favors whoever can afford the best lawyers and accountants, so the IRS often won't bother and randomly audits working people instead.

The recent Pandora papers have revealed how the US is that shady country where money goes to hide. It's a combination of our secrecy laws that protect the wealthy, IRS tax laws that favor the rich, and our trust, foundation, and corporate tax laws. Unfortunately, US politicians have no incentive to fix this problem—it's not something their constituents will even care about. Moreover, US politicians are incentivized to make it worse—and they do.

Every US accusation is a confession.

Dave writes; Dear Sam

As a freelancer, what's the smart way to handle your income and plan for taxes?

Dear Dave,

Since I can't or don't feel comfortable giving anyone tax advice, I'll only provide general concepts.

Freelancers still have to pay self-employment tax. Unfortunately, some freelancers don't know this, which can get them in trouble. Depending on your situation, it may make more sense to pay taxes quarterly. This can save you from a giant bill at the end of the year and help you plan your budget.

Based on how much you're making, what type of personal assets you have, and the line of work you're in, it may also make sense to incorporate. This can protect your personal property from liability and give you more options as far as retirement savings. Of course, incorporating may mean more taxes to prepare and more in tax service fees, but it's worth it if you end up saving more than you spent.

In discussions about who pays the most taxes, what's not discussed is how accountants are no different from lawyers. The more expensive the accountant, the more you can get away with. So rich people can and do pay more for tax services to avoid paying taxes. Just as they can pay for expensive lawyers to avoid going to jail.

So along with expensive accountants, trusts, and business entities, including nonprofits, there are many ways for rich people to avoid paying taxes. In contrast, the rest of us don't have that luxury unless we earn so little or nothing at all that there's nothing to tax. At this point, we have bigger problems than taxes, such as our existence being criminalized.

Gloria writes; Hey Sam

What is fractional investing?

Dear Gloria,

Fractional investing is relatively new and is part of how small investors have been able to pump expensive stocks. It leveled the playing field to allow more investors to participate in the market. It also made stock prices more volatile because it made the unit of exchange smaller.

Let's say a company releases 100 shares into the market. Every buy and sell of each one of those shares affects the stock price. If we split up each share into another 100 shares, you now have that many more units to affect the price.

Cryptocurrencies since inception allowed for fractional shares, which is a part of why the prices are so unstable. We are now seeing similar price action in the stock market. 

But on the flip side, dollar-cost averaging, which used to be only available for retirement accounts and funds can now be applied to stocks and ETFs. ETFs are exchange-traded funds, like a stock version of a mutual fund or basket of assets. What made dollar-cost averaging difficult before fractional investing was that you couldn't automate it. If you wanted to spend 100 dollars a month on a stock or ETF, 100 dollars might not be able to buy whole units. You might end up with 4.2 shares or 3.5 shares. So that means you would have to manually decide how many whole shares to buy each month. But now you can buy 3.5 shares. So you can budget a dollar amount to automatically buy at your set intervals without having to worry about whether it's a whole unit or not.