Chapter 10 – Food Expenses

The latte factor is the unconscious spending on the little everyday things that do not add any value to our lives.” ~David Bach

* Personal Finance Tip: Reducing the amount we spend on snacks and dining out are usually the first places Certified Financial Planners will help you cut food expenses to save more money.

Before reading this chapter, please make sure you’re well aware of how much you’re spending on food costs. If you don’t know, you should start a 30-day Spend Plan challenge mentioned here (http://financialgenomeproject.net/where-to-start/) so you can see how much you’re spending on food in a typical month. Most Certified Financial Planners (CFP) or professional budgeteers recommend spending only 5 – 15% on food expenses. Food includes groceries, dining out, and even the $0.50 at the snack bar.[1] 5% is on the fiscally-conservative side, while 15% is at the top range of sound financial planning. People typically spend more than 15% on food based off my own experience with helping people with their personal finances. Unfortunately, 15% seems to be closer to the average instead of the upper bound.[2] Food costs, specifically dining out expenses, are a prime target for cutting spending.

Financial Genome Project Food Expenses

While doing a 30-day spend challenge or while reviewing your expenses, it’s important to separate out your food expenses as much as possible. For example, you should separate groceries, dining out, and random snacks. This helps you really focus on the areas you could possibly cut to save more money. Here are some tips to reduce food costs:

  • Snacks – This is probably the quickest kill to save money on food expenses. Impulse spending on random snacks can add up quickly. David Back, the author of The Automatic Millionaire, famously coined the phrase, The Latte Factor ™. His website allows you to see the cost of an expense at a specific interest rate. For example, a $5 weekly Latte at a 3% interest rate would cost you $20K in 40 years. This may not seem like a lot, but many people buy more than $5 worth of random snacks DAILY. $5 a day at a 3% interest rate is $142K in 40 years. Spend time playing with the calculator based off your current spending here: https://davidbach.com/latte-factor/
  • Dining Out – This is another place where most people can find easy ways to cut food expenses. For the first time, from 2015 to 2016, Americans spent more at restaurants and take out ($54B) than groceries ($52B).[3] This is concerning because there is up to a 300% markup on food you eat at a restaurant. An increase in dining out makes sense as we become busier and have less time to cook our own meals. In my own household, I started preparing food on the weekends to save time and prevent me from getting fast food. It seems counterintuitive, but income levels don’t impact whether we dine out. The poorest, or bottom quintile, dine out approximately the same amount as all other quintiles. The bottom quintile spends about 16.6% at restaurants compared to the 17.8% for the top quintile—and all other quintiles are in between.[4]
  • Groceries – For my household, choosing to eat healthier actually made groceries more expensive. A frozen burrito cost me $0.33, a small frozen pizza cost me approximately $1, and a packaged meal only cost me $3. The prices haven’t really changed. Once I switched to a serving of chicken and vegetables, the price-per-meal increased to $5 a meal—still less than a fast-food meal. If cutting out grocery expenses is necessary for you, I don’t recommend choosing an unhealthy lifestyle. You can focus on the “unit price” and make sure you’re buying the most affordable product. Also, there are thousands of articles and websites about eating healthy on a budget. Using coupons, taking advantage of sales, and buying bulk are ways to lower the unit prices of your groceries.

The Bureau of Labor Statistics (BLS) does a good job of tracking consumer expenditures. You can read a detailed 2016 report here: https://www.bls.gov/news.release/cesan.nr0.htm. In Table A., you can see “Food away from home” costs increased 7.9% from 2014-2015 and another 4.9% from 2015-2016. After doing a 30-day spending challenge, or if you use automated budgeting apps/software, compare your month-to-month expenses and see if you’re food costs are creeping up.

In this chapter we focused on food purely as an expense of your salary. As we get further into the financial genome, we’ll explore where our money on food goes to. Over the past 50 years of company consolidation, 10 companies own nearly all food production in the whole world (pictured below).

The 10 companies where your food expenses go.

[1] http://thedime.copera.org/2013/05/02/budgeting-utilizing-percentage-benchmarks

[2] http://thedime.copera.org/2013/05/02/budgeting-utilizing-percentage-benchmarks

[3] http://www.foxbusiness.com/markets/2017/01/01/here-what-average-american-spends-on-restaurants-and-takeout.html

[4] https://www.marketwatch.com/story/why-the-poor-spend-more-on-restaurants-than-all-but-the-very-rich-2016-06-10

Chapter 9 – Home Ownership

Chapter 9 – Home Ownership

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” ~Franklin D. Roosevelt, U.S. president

* Personal Finance Tip:  When buying a house, make sure you contact recent buyers about escrow increases.  In order to lure buyers into focusing on the affordability of the home, banks often focus their attention on the first year’s mortgage payments, which can be much lower than subsequent years.

Home ownership is widely known as a  cornerstone of the American dream.  Similar to first-world-countries’ healthcare, the real estate market is greatly complex with multiple genome connections transparent to the basic home owner.  Simply understanding the way home values and financing work escapes most of us.  We’ll discuss that more later, but understanding the entire process can help you maneuver through the complex system smartly.  Just like how we started exploring the entire genome, we’ll start with you, the home buyer.  We’ll explore how you purchasing a home, primarily by financing, creates this massive market in the financial genome.

As we discussed in Chapter 8, renting is a good option while you’re saving up for a down payment or when rent prices are a better return on investment than buying.  Once you have a 10-20% down payment, you can start looking for a home to buy.  Let’s be clear, though, you may own your home after paying off the mortgage, but the government still owns the land and property, plus there will always be maintenance costs.  Real estate owners will always owe property taxes to the government, and there is always the threat of the government using Eminent Domain to seize your property.  For more about Eminent Domain check out this site (http://ij.org/issues/private-property/eminent-domain/).

You usually start the process of buying a house by getting pre-approved for a loan at a bank of your choice.  This is where your credit score becomes incredibly important.  Your annual income and credit score determine the amount of financing you can get and your credit score determines your interest rate.  To make home ownership more affordable, Americans have created 30-year home loans.  Due to the amazing power of compounded interest, a home owner can end up paying close to 2-3 times the total value of the house in interest alone.  We’ll discuss credit scores in a future chapter.  It’s also important to note that banks are very “gracious” in loaning us money and will usually offer a pre-approval amount way above your means.  For example, I was pre-approved for $485,000 on my first house.  I found a house for $242,000—which was still above the price range I was looking for.  People who find confidence in having an expensive house, relative to their income, are referred to as being “House Poor.”

Let’s say you found a house selling for $200,000, and let’s also say you’re going to buy a house using a realtor.  In most cases, the seller of a house pays closing costs, yet there are plenty of other costs (e.g., title fees) the buyer will face.  The national average for realtor commissions is 6%[1].  If you, the buyer, use your own realtor, you’ll pay half, or 3% of the commission.  So, if the seller pays the commission costs, it will cost the seller $12,000 (6% of the $200,000 house).  Additionally, the seller will have to pay closing costs, which on average are $2,500 to $5,000 and are used to pay for the administrative costs for the banks and governments.[2]  The seller must keep in mind that the profit will be $200,000 less the $12,000 commissions (if paying both), less the closing costs (if seller pays for those), less the remaining balance on the loan.

Sell Price

$200,000
less Commissions – $12,000
less Closing Costs – $2,500
less Remaining Loan Balance – $125,000
Total Profit

$60,500

A recent trend, leveraging the internet, is the For Sale By Owner (FSBO, pronounced FIS-BOW) process.  Some states make the process easy, and this saves buyers and sellers quite a bit of money.  Some states make the process difficult, primarily to protect realtors.  I personally believe that realtors will be replaced with automation over the internet and the FSBO movement.  FSBO is also called “self-directed”, and is up 20% since the 80s.[3]

Once you and the seller agree on the price, you’ll need to secure the loan that you were pre-approved for.  After approval, you’ll enter the closing process.  The national average for closing on a house is 30 days[4]  and varies by state and the type of loan.  Your bank transfers the full amount of the loan to the seller’s bank.  The seller keeps the difference between the selling price and the amount owed on the original loan.  It’s important to note that if you’re a seller, you’ll have to pay capital gain taxes if you made a profit or you get to claim a capital loss if you lost money.  If you’re tracking, we pay property taxes every year and then capital gain taxes on profit when we sell.  Once escrow is completed, meaning, once a neutral party collects the funds (loan and fees) and ensures all the paperwork is completed accurately, the house is yours and you begin paying your mortgage.

Based on how much down payment you applied to the house, your mortgage payment is split it in many directions.  First, your payment goes to interest.  A 15- to 30-year loan is amortized with the total cost split into equal monthly payments.  Conveniently for banks, you pay the majority of the interest up front.  The interest is how banks make money immediately, so they can make more loans and earn more interest.  As many homeowners frequently experience, banks will often sell the mortgage immediately to another bank.  Banks will often sell the loan early and at a lower amount, to utilize the money now, than wait until the entire value of the loan is paid off.  For the first five years of a mortgage, barely any of your mortgage payment goes to the principal, and you’ll see your mortgage change banks  at least once, and sometimes several times.

The second direction your mortgage payment goes to is principal.  Most banks are required to allow extra principal payments.  Even small amounts of extra principal can reduce the life of your loan by several months or years.  Some certified financial planners often recommend paying one extra mortgage payment a year (13 payments instead of 12), to take off several years, and savings thousands of dollars in interest, on the life of the loan.  In the current low interest rate environment, you may find a better return on investment by investing your money instead of paying additional principal payments.  For example, if you have 3.5% interest on your mortgage, but your investments are yielding you 13% returns, you’ll get a better return on investment if you add additional money to your investments, versus paying additional principal payments.  Remember, you must completely pay off the principal to actually own your home.

Premium Mortgage Insurance (PMI) was described a little in Chapter 8 and is another portion of your mortgage payment.   Banks are allowed to use PMI to offset potential losses when buyers default.  It’s a massive drain for buyers since banks have many more protections against buyer defaults.  PMI is an outdated practice that started in 1930s by the federal government.[5]  Since PMI is pure profit for banks, there’s no systemic move to get rid of it.  Once buyers reach 78% Loan-to-Value (LTV), banks must automatically cancel the payment.  LTV is the ratio between the balance of your mortgage to the appraised value of your house.  Automatically cancelling PMI wasn’t always automatic.  Banks made it incredibly difficult to cancel PMI, so consumers made Congress pass the Homeowners Protection Act of 1998.[6]  To avoid PMI altogether, it’s best to save a 20% down payment, or if you’re eligible, using a government loan like a Veteran’s Affairs (VA) loan.

The next portion of your mortgage payment is the escrow payment.  Escrow ensures that you pay your property taxes.  Until you make your last mortgage payment, the bank actually owns your house and is ultimately responsible for the property taxes.  They prefer taking that money from you in an escrow payment and lump it into your mortgage payment.  Remember the finance tip I mentioned at the beginning of the article?  The majority of first-time home buyers receive a nice surprise the second year of their mortgage.  For some undocumented reason, your escrow never fully pays for property taxes, so the second year your mortgage payment increases significantly for the first year’s shortfall and for future tax payments.  This technique is to lure buyers into focusing on the affordability of the first year’s mortgage payments, and then Surprise! you get hit with a sudden, and sometimes significant, increase in your monthly payment.

Lastly, your mortgage pays for homeowner’s insurance.  Unlike car insurance, you can legally own a home without homeowner’s insurance.  That being said, nearly all lenders require homeowner’s insurance when granting loans to buyers.  This, plus PMI, protects banks against defaults and damage to the house while the bank still owns the property.  Homeowner’s insurance prices depend on potential damage to the house.  For example, along the Gulf Coast, homeowners can safely assume the insurance will be high due to the threat of hurricanes and floods.  But remember, flood insurance may not be automatically covered by your homeowner’s insurance.  We’ll go over insurance in much more detail in later chapters.

So, these costs  make up your monthly mortgage payment.  As in previous chapters, this was just a cursory look at your monthly mortgage payment.  This is not an inclusive list of all the financial genome connections that the housing market makes up.  In chapter 8 (LINK) we discussed renting and this chapter we discussed buying a home as two of the primary ways of paying for housing expenses.  After we get through all the normal expenses, we’ll circle back and really focus on the entire real estate market.

[1] http://www.bankrate.com/finance/real-estate/real-estate-agent-commission.aspx

[2] https://www.quickenloans.com/blog/closing-costs-and-fees-explained

[3] https://www.forbes.com/sites/steveudelson/2017/01/17/selling-your-home-by-owner-whats-really-happening/#6e26cef65fd7

[4] https://www.thebalance.com/the-home-closing-process-1798319

[5] http://faculty.haas.berkeley.edu/JAFFEE/Papers/094lRIO2006.pdf

[6] https://www.federalreserve.gov/boarddocs/supmanual/cch/hpa.pdf

Chapter 8 – Renting

Chapter 8 – Renting

“I’m a big believer in home ownership, but only if it makes financial sense.” ~Suze Orman[1]

*Personal Finance Tip: Renting is a great option if it’s short term, you don’t have money for a down payment, or the cost of renting is cheaper than the cost of a mortgage.

Renting is usually the first option we take for housing.  We usually live in a small apartment with few amenities.  Some utilities are usually covered.  Other times in our lives may make us rent a house.  When renting a house, we usually have to pay for most utilities.  As we discussed in Chapter 7  – Housing, you should try to keep your housing costs under 35% of your post-tax income.  Whether it’s an apartment or a house, renting is when you don’t own the housing and you pay someone else that does own it.  In terms of assets and liabilities, you have neither when renting.  Depending on the details of your rent agreement, you can simply walk away and choose another housing option.  This is an important benefit to renting.  First, let’s discuss why renting can make financial sense.

One of the first reasons why renting makes financial sense is when you need housing for the short-term.  You can rent an apartment in less than a day.  In most cases, you can’t buy or sell a house in less than 30 days.  I’ve had to rent several times in the military, knowing I was only going to be at a certain location for two years.  You don’t have to worry about short-term housing fluctuations or a home inspection with thousands of dollars of repairs, days before you plan to sell.

Another reason why renting can make financial sense is if you don’t have a 10-20% down payment for purchasing a house, but you have to find a place to live.  Once the sky-high interest rates of the early 1980s started to reduce, more people started buying homes.  Then in 1995, and in what some economists believe was the start of the 2007 housing financial collapse, President Bill Clinton rewrote the Community Reinvestment Act to “force” lenders to lend in low-income neighborhoods.[2]  Nearly two decades later, people without any financial knowledge were getting adjustable-rate mortgages starting at 50-85% of their post-tax income with zero down payment.  A 20% down payment eliminates the premium mortgage insurance (PMI), gives a safety cushion of equity, and potentially reduces the interest rate of the mortgage.  PMI is an insurance to protect the bank from defaults that you have to pay if you buy a home.

One of the last reasons, though my three reasons are not all inclusive, is if you have a low credit score.  Your credit score determines the interest rate you’ll pay when you get a mortgage.  If the interest rate is too high, you’d be unnecessarily paying too much interest.  You can Google free rent vs. buying calculators and quickly see how interest rates make renting a better option.  So, these are the reasons why renting can make more financial sense than buying.  Now, let’s look at how renting impacts the financial genome.

Approximately 37% of the U.S. rents (close to the same levels in 1965, though not indicative of anything).[3]  Home ownership and renting rates don’t drive an economy.  It is intertwined with so many connections in the financial genome.  For example, 57 % of Germany was renting in 2014.[4]  This trend is neither negative or positive.  Germany has a different financial genome than the U.S.  A potential reason for the difference is the U.S. provides a tax deduction for interest on a mortgage where Germany does not.

As discussed above, when you rent, your money goes to the entity that owns the property.  This could be an individual or a company.  The owner pays property taxes and is ultimately responsible for the utilities the unit consumes.  Some apartment complexes are owned by individuals as investment properties.  Some apartment complexes are owned by large companies.  The top 5 largest private companies own nearly 700K apartment complexes.[5]  On a larger scale, you have Real Estate Investment Trusts (REITs) that own a large portion of the U.S.’s apartment complexes.  The top 5 apartment REITs have a market capitalization (total stock outstanding times stock price) of $105B, owning nearly 500K apartments.[6]  In chapter 7 we discussed that the total world value of housing is $217T.  As of December 2016, the total US value was $29.6T.[7]  If you’re at the point where you are about to rent your first apartment, then you’re stepping into the exciting housing connection of the financial genome.

On a side note, REITs offer a unique investment opportunity.  REITs are governed strictly.  They must maintain at least 75% of their capital in the sector they registered with.  REITs must pay out 90% of their profits in dividends to shareholders.  The average yield for the REIT sector was 8%[8] compared to the 2.78% yield of a 30-year Treasury.[9]

In a future chapter, we’ll discuss renting properties as an investment.  When you rent, you’re giving your post-tax income to either an individual, a private company, or a publicly-held REIT.  Here’s how the genome looks now.

[1] http://www.suzeorman.com/blog/4-signs-you-should-rent-not-buy/

[2] http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877322,00.html

[3] https://www.cnbc.com/2017/07/20/there-are-more-renters-than-any-time-since-1965.html

[4] https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/

[5] http://www.multifamilyexecutive.com/news/nmhc-2016-top-50-largest-apartment-owners_o

[6] https://seekingalpha.com/article/4055959-reit-rankings-apartments

[7] https://www.housingwire.com/articles/38852-zillow-total-value-of-us-housing-reaches-all-time-high

[8] http://www.dividend.com/how-to-invest/comparing-dividend-stock-sectors-by-yield/

[9] https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Chapter 7 – Housing

Chapter 7 – Housing

“Everyone has a fundamental human right to housing, which ensures access to a safe, secure, habitable, and affordable home with freedom from forced eviction.” ~National Economic & Social Rights Initiative[1]

“All of these government factors contributed to creating a situation in which millions of people were buying homes they couldn’t afford, in which the participants experienced the illusion of prosperity, in which billions upon billions were going into bad investments.” ~Forbes.com, 2008[2]

We are finally at the point where we can start discussing how spending our money impacts the financial genome.  In our lives, our expenses range on a spectrum from basic needs of survival to luxuries. How you define each expense is a personal choice; however, shelter is almost always considered a basic need, and is where we’ll start our spending.  A basic need is not to be confused with a basic right, which typically drives a political discussion.

Conventional and modern Certified Financial Planning uses a “28/36 rule,” which states no more than 28% of your monthly income should be on housing costs and no more than 36% of your monthly income should be on debt (includes mortgages, consumer debt, etc.).[3]  Dave Ramsey, a popular financial guidance advisor offers a similar recommendation of no more than 25-35% on housing[4].  Finally, the Bureau of Labor and Statistics determined 2015 average housing expenses were 32.9% of income[5].  So, based of all those numbers, the average real expense and advice is 30%, and that’s the percentage we’ll use.  Before we go further, you should check your housing costs to see how much you spend. Do you spend more on housing than 30%?

Once you’re an adult and no longer live with your parents, housing costs are generally within your control and your income is typically the basis for making that decision.  At about this point, your bias may have already kicked in and you’ve already decided that renting or buying is the best option. Please try and clear your mind of which decision is optimal because it truly comes down to timing, location, and the current financial landscape.  To have the greatest influence on the genome, the key to optimizing your income is to consider the Return on Investment (ROI) of every next dollar you spend. Additionally, when you make a decision to buy or rent, there is an opportunity cost with doing one or the other.  So, the decision to buy versus rent is based on the potential ROI and opportunity cost.

There are many types of housing that we get to choose from.  Due to my military background and my frequent moves, walking through the types of housing I’ve been in will help us navigate through the options many of us have.  The key takeaway is that I started small and moved to bigger, more expensive housing options as my income increased.

The first housing type I lived in as an adult was a military dormitory.  This was an extremely small (maybe 150 sq ft.) 1-bedroom, 1-closet, shared bathroom and kitchenette single’s room. It came furnished already, and I wasn’t required to pay for it—well, sort of.  The military pays for dorms by utilizing the funding the Department of Defense receives from federal taxes. In theory, the estimated cost of the housing is deducted from my pay.

After a couple of years, I moved out of the dorms and into a 1-bedroom apartment which had 1 bathroom, a small living room, and a kitchen.  The apartment was nearly 400 sq ft., which felt big compared to my small dorm room.  Once you move out of the dorms or military housing, you receive a Basic Allowance for Housing (BAH).  For civilians, this is just part of your normal salary. I spent about $350 a month and my salary was $1,200—roughly 30%.

A couple years later, we rented increasingly larger houses; the largest being 1,400 sq ft.  Each time we moved, I ensured that (even with all bills included) we never exceeded 30% of my salary.  The places we rented were slightly bigger or were newer.  We finally bought our first house nearly 4 years ago. Even with all utilities, our monthly housing costs are down to 20% of my salary.  This is the definition of living within your means.  If your housing expenses exceed 30%, then you have less income to go to all the other expenses.  Some people I’ve helped with their personal finances have housing expenses approaching 55% of their income.

Despite all the political missteps and the insatiable greed of lending companies and brokerages, if the public kept housing costs to less than 30%, the United States may have avoided the 2008 financial collapse.  Products like interest-only and punishing adjustable-rate mortgages would have been quickly exposed under the 30% model.  How much are you paying in housing costs?  Let’s look at how spending your salary on housing impacts the financial genome.

For starters, you are part of a $217 TRILLION global real estate market[6].  Isn’t that amazing?  Real estate is the combination of all apartments, townhomes, commercial buildings, residential homes and everything in between.  You have a choice of either renting from a company or an individual or buying your own property.  We must be careful on how we use the word “own” in our lexicon.  Typically, people need a loan to buy a house, and you’ll always need to pay property taxes.  So, while you have a loan, the bank technically owns the property.  It is also important to realize the actual value of a property is based on what a buyer is willing to pay.  Many people confuse this philosophy, thinking there must be an intrinsic value of real estate, making it better or worse than any other investment.

In the following chapters we’ll analyze the specific genome connections we connect to when buying or renting.  For now, consider us entering a new galaxy—the “housing galaxy.”  Housing is incredibly connected between all ranges of government, other individuals, corporations, shareholders, insurance companies, and billionaires.  You impact all of these.

[1] https://www.nesri.org/programs/what-is-the-human-right-to-housing

[2] https://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

[3] https://www.goodfinancialcents.com/how-much-of-mortgage-house-payment-can-you-afford-based-salary/

[4] http://www.leavedebtbehind.com/frugal-living/budgeting/10-recommended-category-percentages-for-your-family-budget/

[5] https://www.bls.gov/opub/reports/consumer-expenditures/2015/home.htm

[6] http://www.savills.com/_news/article/105347/198559-0/1/2016/world-real-estate-accounts-for-60–of-all-mainstream-assets

Financial Genome Project – Chapter 6

Chapter 6 – Assets and Liabilities

“I can’t lie, I’m guilty of splurging too man
‘Till I learned the difference between assets and liabilities
Really important man, I swear.” ~Ludacris (American rapper)

As I mentioned in Chapter 5, The Payment System, I placed the payment system outside the genome because we’ll trace out each expense. Before we dive into individual expenses though, I want to discuss assets and liabilities. Every penny we spend is either consumed (e.g., food) or becomes an asset and/or liability.

When we buy food, money is exchanged for a good that, theoretically, is consumed in its entirety. This is true until you have kids, where they claim to be “starving”, eat one bite of the food, suddenly become full, and the rest is thrown away. We’ll consider this waste as totally consumed as well. Entertainment is another consumable expense. When we go see a movie or go to a theme park, the entertainment value is consumed.

When we buy clothes, furniture, consumer technology, etc. they become assets. We spend the money; we receive a good in exchange, and we own the product—it becomes an asset. It’s important not to conceptualize assets as a good thing or a bad thing. When I took my first accounting class in college, the professor told me to wipe all word association with the words credit and debit. It turned out to be sage advice, since the main reason students struggled in the class was because they had a hard time classifying credits and debits. If you’re interested, the confusion comes from assigning items to debit “cards” and credit “cards”. Once you get passed that, accounting gets a lot easier (relatively). If you spend all your discretionary money on clothes, then you may have a lot of assets; however, that’s probably not a good thing. Having a lot of assets, that aren’t generating returns, can become costly.

These same assets can be liabilities when we use money we don’t have (e.g., credit cards) to purchase goods. For example, a shirt may cost $10, but when placed on a credit card, we must pay the whole $10 back and any interest we accrued if we didn’t pay off the whole balance before the next billing cycle. Your debt is a liability. When the debt is paid off, then the good becomes an asset; however, that interest you paid siphoned a portion of your salary. Technically, the $10 shirt is an asset and you have an equal $10 liability; however, clothing has nearly no resale value. A $50 shirt sells for 50 cents at a garage sale just like a $10 shirt does. Additionally, too many consumer assets can generate additional expenses if you need to purchase storage to hold those assets. This is becoming a negative trend in our economy, with nearly 1 in 10 households renting a storage facility, compared to 1 in 17 in 1995.[1] Storage costs, in this case, would be a consumable expense.

Some goods, like houses and cars, can be an asset and a liability at the same time. If you buy a $250,000 house and put $25,000 down, then you have $25,000 as an asset (called equity) and a $225,000 loan—a liability. As you put money towards your mortgage, your liability goes down and your assets/equity go up. An additional tangent—the interest you pay on the mortgage is then siphoned off your salary. We’ll discuss all the intricacies of the home purchasing in a future chapter. If the value of your house rises your equity goes up, but then your liability stays the same.

This is an important concept as we spend our income. The way we choose to spend our money determines our ability to influence the financial genome. There are two ways a single individual can greatly influence the genome. The first and most common is to have a large net worth. Your net worth in calculated by total assets less total liabilities. People with a high net worth, as individuals, yield a large amount of influence on the genome. They can invest their money to influence corporations, non-profit organizations, and governments or they consume a lot more, influencing the success of products. The second way a single individual can influence the financial genome is by having a large amount of power. This is intangible and difficult to calculate. For example, the annual salary of a U.S. Senator (not a majority/minority leader) is $174,000 a year.[2] Assuming the Senator isn’t already a millionaire (a rarity in modern politics), $174K is not considered an ultra-rich salary (upper 1%); however, a U.S. Senator can yield a large amount of influence on the financial genome. In most cases, power and net worth typically go hand-in-hand.

Keeping track of your net worth is a beneficial step in basic personal finance. You total all your liabilities and subtract that from your non-consumer product assets (don’t include clothes, furniture, and electronics). As I mentioned above, your house and car can be both as asset and a liability. The equity of your house or car (estimated value less mortgage or car loan) is an asset. The remaining balance of the mortgage and/or car loan is the liability. It’s recommended you record your net worth twice a year or more frequently.[3] When establishing financial goals, you should aim to increase your net worth each year. I have included an example net worth calculation below.

NET WORTH CALCULATION EXAMPLE

 It’s important not to just track your net worth, but it’s also beneficial to track your monthly expenditures (or expenses). We’ll go into all the different genome connections we make when we spend our money in future chapters. After a couple years of tracking your net worth, you may be surprised to find your net worth stop growing and plateau. A lot of times, this is because your expenditures have increased quicker than your salary; thus quicker than your savings (a.k.a. lifestyle inflation). You can record your expenditures at the same time as your net worth—every six months or sooner. A lot of monthly expenses can be renegotiated to lower your costs. In the last year, I’ve managed to reduce my phone, internet, and cable TV bills by calling each service and asking them to find ways I can lower my bills without reducing services. Some people have found success in reducing expenses/increasing services with shopping around for car, property, and life insurance. With advancements in technology, some people can eliminate classic bills. Some people are foregoing expensive cable plans and going with streaming service which can cost 80% less. Here’s an example of tracking your expenditures. This is not an all-inclusive list and some people may have fewer expenditures.

EXPENDITURE EXAMPLE
If you’re able to lower your monthly expenditures, place this money into savings or invest it to increase your net worth. If you have sufficient emergency savings, are appropriately insured, and invested correctly, you should see your net worth increase year after year. Thanks to the power of compounding interest/returns, and reinvested dividends, your net worth will start to grow exponentially. I remember it took me nearly 5 years to become debt free and to save my first $10K. It took me only 2 years to save my next $10K after that. 3 years after that (10 years total), I was still debt free and my net worth was at $100K. Shortly after, I bought my first house yet still managed to have a positive net worth.

Below is our current genome sequencing. We’ll start to trace out each expense in the next chapters, and when we do, we’ll mark its connection to an asset or a liability (or both). It’s important to note, that while we have some control over the job and income we have, we have significant control on what we do with our money, and how it impacts our net worth. Where we go in the genome from this point depends on your goals in life.

CURRENT GENOME SEQUENCING

[1] http://www.consumerreports.org/personal-finance/the-high-cost-of-self-storage-facility/

[2] https://www.senate.gov/artandhistory/history/common/briefing/senate_salaries.htm

[3] https://www.moneymanagement.org/Budgeting-Tools/Credit-Articles/Money-and-Budgeting/How-To-Create-a-Personal-Balance-Sheet-and-Determine-Your-Net-Worth.aspx

Financial Genome Project – Chapter 5

Chapter 5 – The Payment System

“When the scheme faltered [John] Law resorted to a number of rescue packages, many of which have their echoes 300 years later. One was for the bank to guarantee to buy shares in the Mississippi company at a set price (think of the various government asset-purchase schemes today). Then the company took over the bank (a rescue along the lines of Fannie Mae and Freddie Mac). Finally there were restrictions on the amount of gold and silver that could be owned (something America tried in the 1930s).” ~The Economist, 2009[1][i]

The quote in the beginning of this chapter is about John Law, a banker and gambler, which fundamentally changed France’s financial system. His bank controlled many parts of France’s payment system, and it collapsed in four years. Understanding all the parts of the financial genome can help expose and proactively avoid financial failures. This chapter will help you with your personal finances.

In Chapter 4, we discussed the “involuntary” healthcare deduction from your salary before you receive your salary (current sequence pictured below). Before we discuss what we spend our money on, we’ll spend time looking out how the payment system works. We’ll look at it broadly at first and then dig down deeper when we go through individual expenses. The main reason we should look at it broadly first, is to understand that while spending money, you’re either losing money while spending money or you’re earning money to spend money. How we spend our own money is a choice we can control. You can work against you by costing yourself money, typically through hidden costs that we’ve accepted as a society. We can avoid these costs. Conversely, the genome can also reward you as you spend money. I’ll show you how to be rewarded and avoid some costs in this chapter. I’ll put potential costs in red font and potential rewards in green font.

CURRENT GENOME SEQUENCING

                In most countries with a modern banking system, employers directly deposit salaries into employees’ bank accounts; although, some may still give physical checks directly to employees. Checks require the employee to go to a check-cashing facility. Most people go to their own bank and deposit their check directly into their own bank account or get the money in cash; however, some people go to check-cashing facilities and get the money in cash. These type of non-bank facilities charge a fee to cash the check based on the value of the check. This is one way people can avoid costs, by cashing checks at their own bank versus using a check-cashing facility. Technology has helped us avoid costs by allowing us to cash checks using our smartphones directly to your bank.

According to a 2015 Federal Deposit Insurance Company (FDIC) report, only 7% of households were “unbanked” meaning they didn’t have a checking or savings account (.7% lower than 2013). Additionally, a total of nearly 20% of U.S. households obtained financial services outside of the banking system (like check-cashing services).[2] This means that people are being charged to gain access to their own money. Having a bank account doesn’t necessarily mean you avoid fees though.

Like we discussed in Chapter 1, banks can charge a variety of fees that you need to avoid. The most basic fees involve just having a bank account and those need to be avoided. Banks shouldn’t make a profit based off fees, they should reward people for trusting them to use their bank so they can loan that money out. This is called fractional reserve banking and we’ll discuss it in more detail in future chapters. If you use a bank account properly, you can earn rewards. Interest is the most common reward for keeping money in a bank. The interest you earn depends on interest rates, which are incredibly low right, but it’s better than paying fees.

So to recap the flow of income, your employer paid you by direct deposit or a check. You can cash the check by directly depositing it to a bank account or exchanging it for cash. You have two methods of accessing your money: 1) by using the money that was directly deposited into your bank or 2) by using cash. When money is directly deposited, you can use it by transferring it from your bank to the vendor’s bank with an automated payment, utilizing debit and credit cards, writing checks, or withdrawing the money from an Automated Teller Machine (ATM). This is quick chart of what the payment system looks like.

PAYMENT SYSTEM

Automated payments are becoming increasingly popular as technology increases. Consumers often automate their bill payments which sends the money directly from a consumer’s bank to a vendor’s bank. Large companies offer this service for free. The company has to pay for this service but it’s such a negligible cost to attract the hundreds of thousands or even millions of customers. Small companies or services may charge for automated payments, and people should avoid those payment methods if they can.

I’ll dedicate an entire chapter to using debit and credit cards, but the costs have become transparent. Companies like Visa (V) and MasterCard (MA) charge vendors a percentage of every sale. Most companies simply add this cost to every commodity and it becomes transparent (actually, just hidden in plain sight). To avoid this hidden cost, I recommend you use a rewards debit and credit card that offers rewards on every purchase—only if you can pay your balance in full every month. By not doing so, you’ll be charged the finance charge, at double-digit interest rates, and negate any savings.

Switching to check usage, some banks charge to provide checks, so there may be costs in using checks. Over time, writing checks will become obsolete. If 90 checks cost $15, each check actually costs 16 cents. If you’re writing a $10 check, then 16 cents represents a 1.6% fee. Lastly, and most unsettling to me, is the cost of withdrawing cash from your bank. Finding a bank that doesn’t charge you for checks or avoiding using checks is a great way to avoid those fees.

According to data pulled from the National ATM Council, the average ATM withdrawal is $60.[3] ATM owners often charge $2 or more for cash withdrawals. Bank-owned ATMs don’t charge their own customers to withdrawal cash. A $2 withdrawal fee on $60 is a 3.3% fee. A $2 withdrawal fee on $20 is a 10% fee. For some reason, avoiding ATM fees is not a priority for consumers and it should be. Cash provides anonymity of purchases—an ideological side benefit. Interestingly enough, businesses that have an inherent requirement for cash such as gentlemen clubs [so I’ve heard] or casinos charge the highest fees for ATM withdrawals. Some ATM fees at these clubs are as high as $8. An $8 ATM fee for the average $60 ATM withdrawal is a 13% fee. To avoid ATM fees, try using your own bank’s ATMs or find a bank that reimburses ATM fees. Planning ahead and budgeting also helps prevent unnecessary or impulse needs for cash.

So whether you pay a vendor using automated payments, debt or credit cards, a check, or with cash, the money will eventually make it to the vendor’s bank. This is important to note. Almost every step in the payment system requires a bank. Banks issue debit and credit cards managed by Visa, MasterCard and other card companies. Banks wield an extraordinary amount of power in the financial genome, and we should be very mindful of that at all times. As I’ve mentioned it before in previous chapters, transparency and access are nice, but can also lead to nefarious dealings within the genome. Here’s what our current financial genome sequencing looks like now. The payment system is not outside the genome, and we’ll start making connections in the next couple of chapters.

CURRENT GENOME SEQUENCING

 

[1] http://www.economist.com/node/14215012

[2] https://www.fdic.gov/householdsurvey/2015/2015execsumm.pdf

[3] http://www.statisticbrain.com/atm-machine-statistics/

Financial Genome Project – Chapter 4

Chapter 4 – Health Insurance—A Privilege or a Right Still Comes From Your Paycheck

“For a long time, America was the only advanced economy in the world where health care was not a right, but a privilege.  We spent more, we got less.  We left tens of millions of Americans without the security of health insurance.  By the time the financial crisis hit, most folks’ premiums had more than doubled in about a decade.  About one in ten Americans who got their health care through their employer lost that coverage.  So the health care system was not working.  And the rising costs of health care burdened businesses and became the biggest driver of our long-term deficits.” ~Former President Barack Obama[1]

In Chapter 3, our sequence (pictured below) revealed that, before we receive our salary, our employer has to pay Social Security and Medicare taxes to the federal government and we must pay Federal income taxes, Social Security and Medicare taxes, and, if applicable, State income taxes and/or bank fees. All these taxes (yours and your employer’s) totaled 31-38% of your salary. But before we finally get to the point where you have your salary in your bank, ready to be spent or saved, we must look at another “involuntary” withholding–healthcare insurance.

CURRENT GENOME SEQUENCING

                Healthcare insurance evolved from nothing in the early 1900s to nearly 70% of the population being covered by employer-provided healthcare insurance in the 1960s.[2] Health insurance used to be considered a “benefit” offered by employers and treated as tax free for employers. In January of 2014, after a US Supreme Court ruling (National Federation of Independent Business v. Sebelius)[3], the individual mandate was passed requiring all applicable US citizens to maintain health insurance. While health insurance is mandatory, you get to choose how much you’d like to pay.

Modern insurance salary-withholding types involve 2 factors—a deductible and a premium. A deductible is the minimum amount you’re required to pay before the insurance picks up the costs. With the Affordable Care Act (ACA, a.k.a. Obamacare), one can also choose to pay $0, go without coverage and pay a penalty to the IRS (equivalent to the basic bronze plan). The premium is the monthly cost you and your employer pay to maintain the insurance. The size of the deductible and premium is typically inversely proportional. The higher deductible you have, the lower your premium should be. This is because you pay more initially for medical expenses.

Insurance is one of the most complicated parts of the genome. Navigating the entirety requires advanced mathematics and economics degrees, and there are several industries supporting it (i.e., insurance agents). Insurance companies use advanced mathematical algorithms to calculate the probability of someone needing to utilize the money and how much deductible/premium each person pays. This is done by actuaries, using complex actuarial tables. Since the start of for-profit insurance companies, they’ve managed to collect more than they need to pay out—creating what’s called a “float.” Insurance companies are then allowed to invest the “float,” for their own profit.

During the Affordable Care Act (ACA, a.k.a. Obamacare) planning phase, the White House webpage once said, “…the only changes you will see under the law are new benefits, better protections from insurance company abuses, and more value for every dollar you spend on health care.”[4] President Obama promised competition from the government to private health insurers. Unfortunately, as the ACA grew in complexity, politicians from both sides took opportunities to profit from it. Private insurers made money hand-over-fist. In 2016, UnitedHealth’s, one of the largest private health insurers in America, revenues rose nearly 24% to $83.6 BILLION.[5] Meanwhile, government-provided premiums continued to rise; despite President Obama’s promise to cut a typical family’s premium by up to $2,500 a year.[6] From 2014 to estimated 2017, premiums for the basic bronze plan rose 32%; 12% just from 2016 to 2017. Bronze plans started at $359 in 2014 and rose to $475 in 2017 ($408 in 2016).[7]

One of the goals of mapping out the Financial Genome is to create a forecasting model that takes in input and provides a forecast of the potential outcomes. For example, I heavily researched the Affordable Healthcare Act and knew that private insurers would make a lot of money off of taxpayers. But without a solid model, I was too scared to invest in private insurers. As mentioned above, UnitedHealth (stock symbol UNH) is one of the world’s largest private insurers and was rewarded nearly twice as much as the general stock market (see below). This is why I’m spending the time to map out the genome.

UNITEDHEALTH (UNH) STOCK SINCE ACA PASSED

All that being said, we’ll just focus on the genome connection between your employer and you. The last step before finally receiving your paycheck. You have some control over how much is taken out of your salary by deciding how much deductible and premium you’d like to pay. It’s truly a personal finance and lifestyle choice. Generally speaking, the healthier you are, the higher your deductible should be and the lower your monthly premiums should be. This is because you’ll be taking the financial risk if you need medical care. If you have pre-existing health problems or are unhealthy, then you’ll want to pay a lower deductible and pay higher premiums. If you require frequent health care, then your insurance company may pay more than you do in premiums. With ACA granting more access for those with previously uninsurable reasons and pre-existing conditions, insurers have to cover a large pool of people requiring medical care. The government and employers tend to incentivize higher-deductible health care plans since it minimizes their portion of the premiums as well as yours. Take a look at the chart below to show the different types of typical healthcare insurance plans that are available.

TYPICAL HEALTHCARE OPTIONS

We’ll discuss in further chapters, but the world has to decide whether healthcare insurance is a right of every citizen or if it’s a privilege of a civilized society. Like the title says, whether it’s a right or a privilege, it will still come from your paycheck. The choice will be philosophical, ideological, and political. Whatever path we choose, will determine what kind of connections that are built in the genome. As for now, and with the limited amount of public information, we can say that health insurance for a typical American job can be anywhere from 0.1 – 6% of your base salary. So after adding healthcare insurance, this is what our current genome sequencing looks like.

CURRENT GENOME SEQUENCING

We are finally at the point in the genome where you receive your salary and can start to save. We’re covering the very basics at this early point in our travels through the genome. It’s important to note that your employer giving you a salary isn’t the linear “starting point.” It’s a giant, interconnected circle, which we’ll continue to drill down as we touch each part of the genome.

 [1] https://obamawhitehouse.archives.gov/the-press-office/2013/09/26/remarks-president-affordable-care-act

[2] http://www.npr.org/templates/story/story.php?storyId=114045132

[3] http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf

[4] http://www.politifact.com/obama-like-health-care-keep/

[5] https://www.forbes.com/sites/brucejapsen/2017/01/17/unitedhealth-and-optum-profits-soar-despite-acas-political-uncertainties/#7e96ef535769

[6] https://barackobama.com/2007/06/23/a_politics_of_conscience_1.php  (Archive page: found in this article: http://www.politifact.com/truth-o-meter/promises/obameter/promise/521/cut-cost-typical-familys-health-insurance-premium-/

[7] http://go.avalere.com/acton/attachment/12909/f-0419/1/-/-/-/-/Deck.pdf

Financial Genome Project – Chapter 3

Chapter 3 – Benjamin Franklin the First Tax Planner

“…but in this world nothing can be said to be certain, except death and taxes.” [1]

 ~Benjamin Franklin (1789)

As we discussed in Chapter 2, you are part of a feedback loop that keeps the genome constantly running. We looked at our first connection between you and your employer, and how your salary is sent to your bank account. We showed that if you’re not cognizant of the process, you may be charged bank fees—robbing you of receiving your full salary. Those bank fees are within your control, but there are other genome connections preventing you from receiving your full salary—and those are not really within your control.

Genome – Fee Connection

We left Chapter 2 with our first connection between your employee and you. The picture above is what we’ll call sequencing—a visual representation of the financial genome. The sequence above shows your salary being distributed from your employer, to your bank account, where you can access the money and where you might be charged bank fees. Now, we’ll look into the distribution of your paycheck further to see how payroll taxes, our next genome connection, represent further reductions to your income. The payroll taxes we’ll cover are the Federal/State Income taxes, the Social Security tax, and the Medicare tax. In the first chapters of the financial genome, we’ll stick with the genome in the United States of America. As the popularity of this project grows, we’ll continue exploring other countries, and eventually map out the whole world.

Imagine you’re interviewing for a job and your future boss shows interest in hiring you and offers a $100K salary. You accept the job offer, but your future boss responds, you’ll have to take an immediate 30-40% pay cut. Would you still be interested in this job? Would you be shocked to know that this happens with every job offer in the US?

Payroll taxes have become somewhat transparent in our modern genome. The taxes are automatically deducted from your paycheck and the remainder is deposited to your bank account electronically. Your paycheck stub should show your gross pay less deductions. Your gross pay is the amount before withholdings (taxes and voluntary withholdings), while your net pay is the amount that is actually deposited into your bank account—also known as take-home pay. I remember the difference by thinking about putting a net into a gross pond and your take-home pay is what’s in your net.

You and your employer both pay taxes for your employment—and if self-employed, you pay both sides. You only see your portion on your paycheck. My personal opinion is that people would be more upset about taxes if they saw the full amount. Depending on your state, you may have to pay a State Income tax which goes directly to your state’s government. You also pay a Federal Income tax which goes to the federal government. You can manage the amount both State and Federal is taken out by adjusting your W-4, Personal Allowance Worksheet. Some companies allow you to make changes online, while others require you to visit your Human Resources department. States taxes vary by state—my home state of California is 6.6%, while New York is 9% (2017 rates).[2] Federal Income taxes vary by whether you’re married or single, and by how many “exemptions” you claim. With my income, claiming single and zero exemptions would give me a 12.8% federal income tax. In reality, I claim married with 5 exemptions for an 8.5% federal income tax. I choose to claim more so I get more in my paycheck monthly and receive less in my tax refund; while making sure I don’t owe anything either.

The federal income payroll taxes you pay monthly are estimations of your annual tax on your income. Like I mentioned above, by adjusting what you claim on your W-4 you can reduce or increase how much you pay per month. Depending on your personal situation, you may receive a tax refund or you may owe. If you get a refund, it means you paid more payroll taxes than you needed to. If you owe, then you didn’t pay enough. This generates a common debate amongst taxpayers—is getting a large tax refund a good thing? Mathematically, the answer is no. Continually striving to minimize the amount of taxes one pays is a pillar of a sound personal finance strategy. By maximizing your monthly income you can reduce debt and increase savings much quicker. That being said, behaviorally, people must look within themselves to see if they’re able to effectively utilize the additional money in your paycheck versus receiving a large tax refund. For some (many in my opinion), a large tax refund forces people to save. Unfortunately and only through anecdotal evidence, I feel most people don’t save the refund and make a large purchase instead. It’s really a personal choice; however, most certified financial planners will focus on you maximizing your monthly paycheck. Additionally and ideologically, some people acknowledge a danger of giving the government their own money during the year and then receiving it back without interest later the next year. In 2017, the IRS is already warning taxpayers that their tax returns may be delayed. The IRS will hold refunds for taxpayers claiming the Earned Income Tax Credit and Additional Child Tax Credit until February 15th, so there is some basis to that ideology.[3]

The taxes that you and your employer pay are the Social Security and the Medicare tax. These are both paid equally (50/50) by you and your employer—or completely if you’re self-employed. The total Social Security tax is 12.4%–with each paying 6.2%. Total Medicare tax is 2.9%–each paying 1.45%. So when you combine all the taxes, you’re looking at roughly 30% or more of your paycheck not going to you. In 2014, the average taxpayer paid 31% of his or her income to taxes.[4] This isn’t a conspiracy, it’s just how we created our financial genome in America. The picture below shows our current sequencing with taxes shown.

Genome – Payroll Taxes Connection

President Franklin Delano Roosevelt signed the Social Security Act in 1935. In 1937, Social Security was taken out in one lump sum and then the monthly payroll tax started in 1940.[5] The Medicare tax started in 1965. The Federal Income Payroll tax is different than the Social Security and Medicare payroll tax. The federal income tax originally started in 1861 to help pay for America’s Civil War, and then was repealed 10 years later. In 1913, with the ratification of the 16th amendment, the federal government gained the power to tax the income of individuals.[6]
Unlike the scenario in the beginning of the chapter, employers don’t discuss your net salary prior to mandated withholdings. When you apply for a job, you’re applying for the post-employer taxes salary; however, the salary advertised is before your own payroll taxes. When applying for jobs, you should automatically deduct 23-30% to figure your pre-insurance salary (we’ll talk about that in the next chapter). So the $100K a year job you’re looking at, may only be $70-$77K a year after payroll taxes.

When companies factor in labor costs, they are calculating your total salary. So that $100K salary that they’re advertising costs your employer an additional $7,650 (6.2% Social Security/1.45% Medicare) plus their portion of health insurance, retirement benefits, and any other employer-provided benefits. This is why companies are so resistant to support a federal minimum wage increase. It’s not simply an increase in wages, but a proportionate increase of employer-paid taxes and benefits. Fair wages isn’t as black and white as you may read on mainstream media—it’s actually very complicated, but that’s out of the scope of this chapter.

So far, we’ve only looked at the connection between your employer giving you a salary and how you don’t receive 100% of your salary due to payroll taxes and potential bank fees—but we’re still not to the point of receiving your salary. On top of Medicare, you must also pay for your own health insurance. In the next chapter we’ll look at health and life insurance before we talk about the connections once you finally receive your salary.

[1] http://oll.libertyfund.org/titles/franklin-the-works-of-benjamin-franklin-vol-xii-letters-and-misc-writings-1788-1790-supplement-indexes (To M. Le Roy, 13 November, 1789)

Picture link: http://www.notable-quotes.com/f/franklin_benjamin.html

[2] https://www.adp.com/tools-and-resources/compliance-connection/state-taxes/2016-fast-wage-and-tax-facts.aspx

[3] https://www.irs.gov/uac/newsroom/irs-and-partners-look-to-start-of-2017-tax-season-encourage-use-of-irsgov-and-efile-warn-of-refund-delays

[4] https://taxfoundation.org/average-us-worker-pays-over-16000-income-and-payroll-taxes

[5] https://www.ssa.gov/history/hfaq.html

[6] http://www.loc.gov/rr/business/hottopic/irs_history.html

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

Financial Genome Project – Chapter 1

Chapter 1 – It All Starts With You

“We shouldn’t expect immediate major breakthroughs but there is no doubt we have embarked on one of the most exciting chapters of the book of life,” Professor Allan Bradley, director of the Wellcome Trust Sanger Institute.[1]

     Like the movie, The Matrix, there is a complex system operating around you. Instead of operating off of sleeping humans, like in the movie, the system operates with our finances. It impacts you every day without you knowing it. I’ve called this financial system the Financial Genome; comparing it to the Human Genome Project. Once you know about the financial genome, then you’ll be able to influence it to secure your future, protect your family, and understand the world around you. It is like the galaxy, infinite in all directions with complicated networks of connections. We’re going to start small and then expand farther out making “connections” with various parts.  Every day that passes without you knowing and understanding it, the greater the influence other people have on you and soon you won’t have any more control.

I want you to embark on an exciting adventure as we explore the Financial Genome together—known as the genome from here forward. Exploring the genome can help you with your personal finances; though it’s not a personal finance book. Economic principles will be the highway as we explore the genome, but don’t worry, it’s not an economics book. This isn’t a self-help book either, but one of the key concepts of this book is that time will continue to push and evolve the genome, whether you understand, believe, or participate in it.

This is simply a way of understanding the genome and exploring the exciting connections around us. There are some great parts of the genome where the smallest, marginal, influences can create a positive impact on the whole genome. And unfortunately, there are a lot of dark areas in the genome where bad influences can negatively influence the genome—some overt and some covert. Simply knowing about these great parts and dark areas are can help most of us. In our vastly complex genome, we must start somewhere.

I had a hard time deciding where to start our journey into the genome. My first thought was to start with money—but what is money? The concept of money is extremely complex and we’ll cover our concept of money in another chapter. My second thought was to start with “the why” of exploring the genome. “The why” will be explored through each chapter as we go deeper into the genome. But for now, “the why” is simply to allow you to understand where you fit in the genome and, most importantly, apply force to your surroundings—creating a change in your financial environment.

The most logical point to start to me is to start with you. Not you specifically. You as a human being, which as a species, has accepted and participates as a functioning part of the genome. It’s important not to think of the genome as some linear shape with input and output, or a hole that we can go deeper into until we meet an end. Instead, think of the earth in the entire galaxy. If the galaxy is infinite, then you’d need to start somewhere, and most of us would start on Earth. You are the Earth of the genome.

99.9% of the time, the “person”, or you, our starting point of the genome, is a plugged-in member of our genome. When we discuss money in more detail, you’ll see that the entire genome relies on our belief in the entire construct. The genome slowly evolved into the complex system it is now. Once one of our ancestors traded a product for another product, it created a connection in our genome. Those two humans believed that those two products had an equal value in which a trade was completed. Assuming these two humans didn’t immediate kill each other, and the trade went through without conflict, then the first verbal contract was completed. The majority of our genome is simply a verbal contract, growing larger and larger, and more complex as technology advances.

The modern genome relies in your utmost faith and obedience to the verbal and written contracts you engage in every day. As a human, you absorb an input, typically as an income and you produce an output, typically as you spend, save, and are taxed.

You exert influence on genome connections in three ways. 1) You exert influence based on how much you believe in the system and how obedient you are. 2) Your influence is usually greater as your income increases. In almost all cultures, the rich are able to control more connections and exert influence on genome connections that increase their control.  3) The genome can exert influence on you through your output. Governments can tax you and companies can increase prices. Your ability to manage your consent, input, and output will determine your impact on the genome.

The genome is constantly evolving around you, regardless of how much influence you may have on the genome. No matter how complex it becomes, your understanding of how you influence the genome will help you navigate through it. Despite our knowledge of the system or how powerful some connections become, there are also outside pressures on the genome as well.

There’s an external pressure on the genome, that has nothing to do with your participation, understanding, or obedience. It is time.  Time is the greatest pressure on the genome. It can be a negative or a positive force. The longer you remain ignorant of your presence in the genome, the more negative the force is perceived—like pressure building as you go deeper underwater. For those of us that become aware of the genome early, the positive force is like the wind in your sails pushing your boat effortlessly. Remember, time exerts its pressure on the genome no matter what you do.

The biggest secret of the genome is…the entire system can be altered, changed, and modified if enough connections (people in this case) make it so; however, the system has been carefully crafted to prevent that from happening. There is a surface layer that most of us know about—and accept and are obedient to. An example of a simple connection, in which we’ve accepted and are obedient to, is the 40-hour American work week. Back in the late 1800s, the 40-hour work week was actually an improvement on the average 100-hour work week that some industry workers experienced[2]. The 40-hour work week isn’t common among all countries and neither is the Monday through Friday work week. We’ve accepted the 40-hour work week and the 5:2 work-to-rest ratio. Financially independent people don’t have a 40-hour work week. They may have more or they may be completely free.  There are many more examples deeper into the genome. There are some we can modify ourselves, and some that require an entire culture to change. This is why it’s so important to explore the Financial Genome. Come with me.

[1] http://www.cnn.com/2003/HEALTH/04/14/genome.reut/

[2] http://www.businessinsider.com/history-of-the-40-hour-workweek-2015-10