Financial Education: How the Sausage Is Made Vol. 4 (transcript) (Patreon)

By Sam 

Brandon writes; Dear Sam

My main question would be that I don't know anything about investing or the history of how it's evolved. So even just a basic explanation to then jump off from would be good.

Also, how would we invest for retirement in a perfect world cause I have no idea what that looks like? Pensions or something?

Dear Brandon,

How would we invest for retirement in a perfect world? You wouldn't need to invest in a perfect world because housing would be a right, and money wouldn't exist.

As far as the history of investing, it all started with colonialism. In 1602 The Dutch East India Company became the first public stock. Capitalism is really a modern version of colonialism and slavery. So yes, you can make a direct link between the harms of colonialism and slavery with capitalism.

Capitalism is the end-product. To not connect capitalism with colonialism and slavery is disingenuous or, if nothing else, dangerously ignorant. Prior to even the first public stock, the capital for capitalism was being accumulated through colonialism and slavery. Old money is money from colonialism, feudalism, or slavery. Usually, all of three. New money means the kids of people who made their money the old ways.

The Dutch East India Company was one of the most ruthless and successful colonizers. This is why there is Dutch influence and settlers throughout the Global South. Even the name of my home country, Korea, was an invented word by the Dutch East India Company.

The history of investing parallels the history of the US military. BIPOC were first drafted then later manipulated into enlisting in their own exploitation. This goes back to the racialized poor being shut out of the system. The military was one of the only ways Black people could go to college or buy a home.

Similarly, investments and the ability to trade equities became a way for exploited workers and people of color to invest in their own exploitation. That means part of the money that these exploiters pay to you recirculates back to them. Really all of it recirculates back to the big companies because when you live check-to-check, it means all your money is being spent. If you no longer have that money, who has it? The owner class. What is a company town when you live in a company world?

But if you try to remove yourself from this system, the system will penalize you. Capitalist supremacy is absolute, so you are forced to play. If you have money to invest, but you don't, you will be punished.

Defeating capitalism doesn't mean not playing this part of the game. Otherwise, we lose outright. We have to play the parts we have to play. Even as revolutionaries, we have to play along, or we won't survive long enough to revolt. Minimize what you can, maximize what you can maximize. Then fight with strikes, unions, organizing tenants, protests, organizing for the unhoused, mutual aid, and local politics. Fight anti-worker and anti-poor narratives, protest war, protest the US military-industrial complex. There are too many causes to list where you are needed.

You are not going to cause a revolution through personal finance. Literally, no one has ever said that but unconsciously, some of you weren't sure about it, so let me tell you that ain't it. That's not a collective movement. That is the idea of voting with your dollar, that it's all about individual actions rather than solidarity. No, it's gonna have to be about collective and mass solidarity.

If the world is really going to end soon because of climate crisis, then it's not about avoiding Amazon or your retirement account. It's about taking to the streets and taking part in a mass general strike.

Madelyne writes; Dear Sam

I just got a full-time job that pays $16.60 an hour. I take home about $2050 a month after taxes and health insurance. My rent is $800 a month. My cell phone/electric/internet is about $100 a month. I have $400 a month in credit card minimum payments from maxing them out during the pandemic and moving for the job. My car payment is $185 a month. Car insurance is $50 a month. I have $80,000 worth of student loans that are in temporary forbearance but will start coming to collect eventually. What should my budget look like?

Oh, I also owe $1500 to friends who helped me pay my first month and security deposit to get here, so that needs to get paid before paying down more than the minimum on my credit cards.

Dear Mads,

If your numbers are accurate, you have 515 bucks for food and other unaccounted for expenses. That's not a lot and leaves very little for emergencies.

For your friends, create a payment schedule rather than trying to save and pay them back in one go. Paying them back ASAP might leave you worse off. Instead, see if they're okay with a fixed payment plan. Making it fixed also makes accounting more straightforward. Then all parties know exactly what's been paid, what's left, and when everything gets paid off.

Next is to pay down your credit cards as quickly as possible because the interest rate on your credit cards will be higher than your student loans and are non-tax-deductible. This makes credit card debt twice as bad as student debt. Mortgage interest is also tax-deductible, which is why the type of debt rich people accumulate benefits them.

Student loans are on pause until 2022, beginning of February, as far as I know. I'd still double-check, especially if you have private lenders. Meanwhile, pay whatever extra you can into credit cards. After that is the car, unless the car has a higher interest rate, then prioritize that first. You can also look into balance transfers for credit cards to reduce your interest. Do as much as you can before student loans start.

After that is saving money. If and when your student loan repayments start, stick to the payment schedule and refinance if it makes sense.

Katie writes; Hey, Sam

My question is more theoretical and even existential. Given that market-based retirement plans (401ks) are only a phenomenon of the last 50 years (or something like that), I don't have a lot of faith that it's a system that won't fail me. I hate that it's been largely foisted on me as the only means to save for retirement. I'm not sure what other alternatives there are, like bonds.

Self-styled TikTok experts have pitched me life insurance plans without qualifying how complicated that can be too.

When I was forced to attend some neocon-hosted financial planning meeting, the thing she could not answer was my coworker's question about where to even start for retirement savings when you're in your mid-forties and confronted with large sums of unpaid student and credit card debt.

Hi Katie,

Can retirement accounts fail? Yes. But what does that mean? It doesn't mean what's in those accounts gets destroyed. It means the tax savings you had either become nonexistent or grandfathered. The latter we've seen with many pensions. These accounts are not products themselves; they're just accounts that promise to follow the IRS tax rules that they're named after. If the IRS abolishes that rule, you either have to pay back the tax savings you previously had, or you will be fine, but no one after you can get this same product.

So alternatives are anything outside of these IRS tax-sheltered plans. But that doesn't necessarily mean different financial products. You can own a bond or a stock in your retirement account or outside of it. Being in or out of a particular account does not make them any safer, it just changes how they're taxed. Similar alternatives would be annuities, but can companies providing you the annuities fail? Yes. 

This goes back to the complexity and breadth of insurance products when there are only a few use cases. Then the vast majority are unnecessary and predatory. However, even the necessary ones can be sold to you in a predatory way.

Capitalism is not socialism. It offers no basic protections or human rights. Since the risks of financial products are the same in or out of a retirement account, the advantage to the retirement account is the tax savings. This is why retirement accounts are recommended first before other investment accounts. Same downside, more upside.

As far as the financial expert not answering your coworker's question, people who get paid on commission don't like to tell you to pay down debt because they won't make any money off of you. This goes back to how things can be sold to you in a predatory way. Yes, you need a retirement plan, but that might not be the priority when you have mountains of debt. Selling you a retirement account anyway makes the transaction predatory because it wasn't in your best interest. The product itself doesn't have to be predatory to be sold to you in a predatory way. It becomes predatory if it's inappropriate for your circumstances. For example, a truck can be necessary for some people's jobs but unsuitable for someone who just needs a car to go to school.

This is why "free" financial advice that takes a commission is worse than one that charges a service fee. Going back to the car analogy, it's the difference between learning about a car from a car expert or a car salesman.

Your coworker is in a similar situation to Mads. You can't really start anything with punitive debt. There are different types of debt, but the ones with high variable interest rates that are non-deductible are the worst. Rich people have the luxury of differentiating good debt that makes them richer from bad debt that does nothing for them. Whereas it's bad debt to worse debt for everyone else because debt won't make them rich.

Jimmy writes; Hey, Sam

I feel like such a late bloomer to learning personal finance. I've been struggling to learn budgeting and finances with my wife over the years. I'd definitely like to understand strategies to pay off debt and understand APR, interest calculations, and the differences between paying only the minimum vs. paying off early.

I'd also like to learn how to better approach savings and emergency funds so that they are not just "extra money" accounts, especially if I know I have debts they could be going to. 

Even basics of figuring out tax withholding. I owe $2k this time because I withheld too much. It's only W2 income I ever need to report, and I thought I read the right guides on it, so I'm stumped and embarrassed.

So budgeting, savings, managing debt are the three areas I struggle most with. I'd love to learn more about investing but have no idea where to start and how to fit that into budgeting and savings. Even just understanding what and how to use the 401k my work offers me.

Hi Jimmy,

Paying off early is dependent on the type of loan you have. Some will penalize you for paying off early or outright might not allow it. But if you can, the penalties might be worth it based on the interest rate and the loan amount.

Minimum can mean lots of things. It can be an arbitrary minimum, just the interest, or a fixed schedule of payments meant to pay back the loan. The longer it takes you to pay back a loan, the more you end up paying.

APR means the annual percentage rate. It's a representation of how much interest you'll be paying per year. If it's something like a credit card, you won't pay a percentage rate if you pay off your debt before it carries over to the next payment period. This doesn't apply if your credit card comes with a 0% introductory promotion, but you still have to make payments. Why they offer 0% interest is in hopes that you'll only make minimum payments until you've racked up a large principal before the interest starts. Since most people have no savings, they will accrue credit card debt just to live. Living for most folks means borrowing to live.

Whether APR is compounded daily or monthly depends on the type of loan. But what's more important is to see if you're interest is fixed or variable. Variable means subject to change, so it can skyrocket on you.

As far as your tax question, you're talking about allowances. You qualify for allowances, but that doesn't mean you have to max them out. The more allowances you take, the less you pay in taxes every paycheck. Fewer allowance means paying more taxes every paycheck. Either way, you can't overpay or underpay because it'll all even out when you do your taxes. The question is: would you rather pay your taxes in a fixed schedule or as one lump sum when you do your taxes? For some people, the lump sum really messes up their budget, especially if they're not prepared for it. This relates to Dave's question about self-employment tax.

This is why to avoid a big tax bill, many people won't max out their allowances. Paying something in installments is easier on the budget than paying it all at once. It also makes budgeting long-term more predictable. A tax refund is literally what it means, getting a refund for what you temporarily overpaid. The refund makes you even.

Not maximizing your allowances might mean you overpay every paycheck, which is how you get a refund. Is a refund always better? It depends on whether you need the money now or later. But that has to be a conscious decision rather than an unintentional one. For example, suppose Jimmy had known he would get a big tax bill because he was keeping more of his paycheck. In that case, he could have set money aside for the tax bill while also using that extra money to pay off other debts, prioritizing predatory debts first. In a best-case scenario, he could have earned interest on that money before paying his tax bill. However, all that takes foresight which is tricky with taxes.

Through experience, working people figure out the right number of allowances to take to balance their tax bill with their paycheck.

Once predatory loans are gone, along with your tax liability, start putting money away into your retirement. Try to maximize matching contributions for your 401(k) if your company offers it.

Paul writes; Dear Sam

I have several questions:

How useful is a 401k compared to a Roth or Traditional IRA?

How much should I be putting in, realistically, if I want a decent retirement?

What's the biggest money trap people fall into?

What is the best tax-saving method that's underused?

Dear Paul,

Let's take this one at a time.

If you can get retirement from your work, that's better than an individual retirement account. An individual retirement is more of a supplemental rather than a primary if you have the option to do both. Many end up with a traditional IRA when they roll over their 401(k) from a previous employer.

Someone presenting an individual retirement as being better than a 401(k) goes back to my previous explanations about commission-based advisors. They make nothing from you if you contribute to your 401(k), but if you open an IRA with them, the more you contribute, the more they will make.

Not only can you put more away into a 401(k), your company might also offer company matching, but even if they don't, you not only get tax advantages, but the money you put into your 401(k) reduces your taxable income. Lower taxable income means you pay less in taxes. This is why there are limits to how much you can put away into retirement accounts because rich people will use it to avoid paying any taxes. This is also why rich people might have multiple different types of retirement accounts, not because they need so many or a retirement account at all, but just to max out each one to avoid paying taxes.

As far as Roth vs. traditional, it depends on whether you need tax savings or not. First off, not everyone can qualify for a Roth. It's based on income. Secondly, whatever you put into a traditional retirement will either fatten your refund or reduce the taxes you owe. A Roth will do neither. What a Roth IRA does do is give you more flexibility in withdrawing money before retirement age.

The other advantage to a Roth IRA is that you won't pay taxes on withdrawals when you reach retirement age. In a traditional IRA, you get immediate tax savings but not when you withdraw. However, that's not necessarily disadvantageous because you'll likely be in a low tax bracket if you're retired.

Roth is ideal for someone poor who retires rich. It's the American Dream. You won't need tax deductions because you're in a low tax bracket when you're poor. But when you retire rich, you'll need those tax savings. This is why Roth IRAs are pushed in a predatory way to young people who are most susceptible to American Dream mythos. The pitch is: "When you're rich, do you want to be paying half of your hard-earned money to Uncle Sam?"

Traditional retirements assume you'll be in your highest tax bracket while you're working and your lowest when you're retired.

How much should you be putting away for a fat retirement?

The more you can put away, the bigger it will be. Sounds simple enough, but if you're starting retirement savings later in life, that's when people start putting away as much as they can to catch up. This is also why the IRS allows for bigger contributions after 50.

As previously mentioned, this is where rich people have another advantage. They can create business entities and start putting away large amounts, reducing their annual income, putting them in a lower tax bracket, and hiding the bulk of their wealth from taxes. This is why billionaires will actually tell you they pay less in taxes than their secretaries. The more you understand how taxes work, the more you'll realize how it favors the rich and is rigged against the poor.

The rich only complain about taxes to fool poor people into thinking they're all in the same boat. But it's like, bruh, you paid yourself a salary of nothing, put all your money into tax shelters, and expensed everything else. How are we the same?

You asked about money traps people can fall into. The biggest one is the one you have no say in, being born poor.

The second is for poor people to take advice from rich people. If you do what they do without being rich, you'll become even poorer and make that rich grifter even richer by buying all their books and programs.

If you have all the money in the world, maybe your only constraint is mindset. If you're poor, your constraint isn't mindset—it's being broke. If you're Black, you're constrained by white supremacy, not your mindset. You're not imagining bigotry.

For the most underused method for tax savings: retirement accounts, especially when you're young.

Many people go through an early period where they could have put money into retirement but didn't. Perhaps it's a young person with few personal expenses still living at home or with roommates. Later they'll get into a period where all the bills are catching up, and they can't afford to put money away.

In your financial life, you may go through several peaks and valleys. If you never utilized this early period, you may have to play catch up from scratch. But, even if you can't make another contribution for decades, having something already in retirement is still better than starting from scratch. Especially since that money has had decades to grow. Not everyone can put money away into retirement every year, and that's okay. Saving in irregular intervals is still saving.

Ideally, you want to start early and be consistent. But if it's a question of which is more important, starting early or being consistent, it's starting early. So as a young person, don't wait to start putting money away into retirement until you think you can be consistent. Everything else in your life, consistency matters most. Retirement is more like calling dibs on something. The earlier you do it, the more secure you are.

Yo-yo dieting may not work, but it still works for savings.