Financial Genome Project – Chapter 2

Chapter 2 – Newton’s Third Law

For every action, there is an equal and opposite reaction.[1]

Before we begin our adventure through the genome, we should take a look at the most important piece to the entire complex system—you. You are a laborer and you are fueled by your income. Governments siphon part of your income in taxes for their engines. Then you consume by spending money, fueling businesses’ engines. You can also save part of your income which fuels other businesses through investment. The entire complex system that we’ve built as humans relies on laborers earning an income, getting taxed, and then spending or saving the rest. We keep this entire complex system running.

The engine of the genome starts with you receiving an income from a company or a government (local, state, or federal). The taxes go to a government and a part of that goes to salaries to generate government worker incomes. When you spend your money, it represents sales for a company, part of which goes to employees’ incomes. And something different happens in the genome when you choose to save money. We’ll discuss in a later chapter. Governments can only operate with taxes, and companies can only operate with sales. By working and generating an income, you’re keeping our current genome alive.

After reading that, does it seem so farfetched that in the movie, The Matrix, we are being used as batteries to keep the “machines” alive? We think we have control. We can simply stop working right?  Without government assistance, most couldn’t survive very long without relying on primitive skills. Additionally, once too many people stop working, then government assistance wouldn’t be available either. So without you working, the government, companies, and people surviving on government assistance would be unable to operate. By working and earning an income, you create a feedback loop that enables you to generate an income, while simultaneously supporting the governments and companies within the loop.

Income Feedback Loop

In the Income Feedback Loop above, check out that little blue arrow between Salary and You. Have you ever thought about all the connections that happen before receiving your paycheck? Let’s look at just that arrow in this chapter, before we address all the components of the feedback loop. Gone are the days when you worked and your employer gave you your earnings in cash at the end of the day. Now you must wait for two weeks, to a month, before you receive a paycheck. Also, you no longer receive your paycheck directly from your employer. Your employer probably uses a contracted service for distributing payrolls. Finally, your paycheck no longer comes directly to you—now it goes to your bank.

Your paycheck is purely electronic, and we continually drift away from paper money—known as fiat money, or paper money which has no intrinsic value, but is made legal tender through government decree. [2] Nearly every working person in a developed country receives an electronic paycheck directly deposited into a bank account. Only in undeveloped countries do people typically receive daily earnings or receive income in cash or goods. The whole electronic transfer process is nearly transparent to most of us. We check our bank accounts on “pay day” and if all went well, we have money in our bank accounts. Isn’t that convenient?

But this transparency and convenience comes at a cost and it is hidden in dark places of the genome. In these dark places, people are building businesses designed to make the genome appear transparent. By making it transparent, they have the ability to make microscopic changes that may negatively impact you—without you knowing it. In our busy world, where people typically check their online statements only to find out the balance after pay day, we often miss these miniscule disruptions to our paychecks. Our first dark spot in the genome is the “bank fee”—like small, hidden sand bars in a muddy river slowing speed boats down.

Until about 2008, before financial operations were in the negative spotlight, it cost you money to keep money in a bank account even though it was, and still is, mandated by employers in developed countries for payroll processing. Unfortunately, some banks still have a lot of fees just for having a bank account: checking account fees, minimum balance fees, and no direct deposit fee. Then banks charge when you spend your own money with ATM withdrawal fees and annual credit card fees. The banks are even gracious enough to let you spend more money than you have with overdraft and insufficient funds fees. In 2015, the nation’s 628 biggest banks made $11.16 billion from just overdraft and insufficient funds fees alone, according to the Consumer Financial Protection Bureau.[3] Since banks are “environmentally friendly”, they’ll also charge you a hard copy statement fee forcing you to go online to check your statements. If you want to travel outside of the country to spend your own money, you can expect to see foreign transaction fees. Even if it’s something that you can’t control like someone writing you a bad check, you may receive a returned deposit fee.

Genome – Fee Connection

Some fees have gone away as hard-pressed banks had to reassure people that keeping your money in banks was safe after the 2008 financial “collapse”. If you’re reading this, go through your last three statements and check to see if you are being charged any fees. If you are being charged multiple fees, you need to change your bank. I’ve shined the light on this genome dark spot specifically to help you receive 100% of the paycheck that you’re supposed to be earning. As you can see from the image above, these fees prevent you from earning 100% of your salary. Eliminating fees improves your “fuel efficiency” in your financial engine as we travel through the genome.

Do you ever find it unsettling that your paycheck doesn’t actually come directly to you, but goes to your bank and then you are charged fees for accessing it? Keeping your money is how banks make money. Banks with more than $115.1M in liabilities (i.e., loans to other banks, companies, and individuals) only have to keep 10% of it on hand.[4] Have you ever heard of a “bank run”? This is where many people want to take out their money from their accounts and the bank doesn’t have enough in reserve. Banks saw this happen in 2008 and, more recently, in 2016 when the “Brexit” (Britain’s departure from the European Union) happened. There’s been multiple times where people have tried to get their own money and were denied. Not having access to your own money is part of the modern genome that we must live with, but by eliminating fees, we improve our position in the genome.

My intent is not to demonize banks, but I do want to introduce to you that almost everywhere in the genome, there’s an equal, yet opposing force to everything you do. Sir Isaac Newton’s third law states, “For every action, there is an equal and opposite reaction.” We find this is true in the financial genome. For every dollar you make, there is a part of the genome trying to pull that money away from you. Some of it is voluntary, like with our spending habits; some of it is involuntary, like taxes, and some of it is voluntary only if you know about it—like fees.

This is only the top surface of the connection of your income between your employer and you. The Income Feedback Loop shows the aerial view of what the genome connections look like, but as you’ve just read, there are many connections in between only one aspect of that loop. The Genome Fee Connection exposes one dark connection that you need to be aware of and change if it applies to you. There are more connections between your employer and you, regarding your salary. In the next chapter, we’ll discuss payroll taxes.

[1] http://www.physicsclassroom.com/class/newtlaws/Lesson-4/Newtons-Third-Law

[2] http://www.investorwords.com/1928/fiat_money.html

[3] http://files.consumerfinance.gov/f/201602_cfpb_variation-in-bank-overdraft-revenues-and-contribution.pdf

[4] https://www.federalreserve.gov/monetarypolicy/reservereq.htm

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