Government publishes tax returns; millions panic

Posted by Matt

Today's post was inspired by an article I read in USA Today a few weeks ago while on vacation. It starts like this: "Every year, Sweden publishes everyone's income tax returns. So do Finland and Norway. And nobody really cares."

So, what makes the Scandinavians so well adjusted? A deputy economic minister in Italy tried publishing tax returns online earlier this year, but apparently had to take the information down quickly due to the fuss that Italians raised. In the U.S., "Federal law prohibits the release of that private information," but imagine the panic if it leaked somehow?

Americans are relatively uptight about a lot of things, but (as Paul posted about previously) it is hypocritical to be so secretive about our financial lives while simultaneously flaunting our possessions. It probably results from the fact that many people's possessions do not accurately reflect their true financial standing, e.g., they have more shiny metal in their garages than they do in the bank.

The article indicated that Scandinavians have a very different attitude:

Making the data public demonstrates the Scandinavian tradition of jantelag, which translates roughly as nobody is better than anyone else, says Veera Heinonen, spokeswoman for the Finish Embassy in London.

This reminded me of "tall poppy syndrome" that you sometimes hear about in Australian or Canada; essentially "no one likes an overachiever." However, I've read that people (or maybe just corporations) in these countries are realizing that competition drives growth. The United States is a perfect example; here, everything is a competition. Everyone wants to be a "success". The problem? We typically measure that success with dollar signs. Why? Because it is an easy and mostly objective scale.

How else are we to measure success? Does being a good parent count? If so, how can we measure that? I don't know of any type of parenting score that I could plot on a chart. How about being a valuable member of your community? The best I can think of there is public service hours, but that tracks effort more than result. What to do?

This line of thought lead me to one of my favorite quotes from Albert Einstein: “Not everything that can be counted counts, and not everything that counts can be counted." I'd apply it in this situation to mean "don't tie up so much of your self worth in your income level."

So, back to the question at hand...do we want our tax returns published? Consider that home selling prices are already available online (for Washington County, OR) and I've used this information extensively when evaluating new home purchases and pricing houses for sale. We might get similar value from being able to browse salary information. Personally, I feel pretty satisfied with my salary, but I DO occasionally wonder how it compares to the salaries of others with similar jobs. I wonder "Should I be negotiating harder at annual review time or clinging to this job for dear life?" Looking at other people's tax returns might help, though it would probably have the same limitation of sites like Salary.com, namely the difficulty of finding a job description that exactly matches mine. The only real argument that I can make for doing things like publishing tax returns (and this disregards any discussion of whether it is worth the costs, by the way) is that people are more likely to behave as they feel that they should ("do the right thing") when under scrutiny.

And we should just get over ourselves! ;)

Frugalizing a friend.

Posted by Matt and Paul

Recently we were asked by a good friend of ours to go over their finances and see what we thought.

In exchange for our advice, our friend said that we could post any lessons learned to our blog. So here goes:

Generally our friend was a breeze to Frugalize, mostly because they were already there. Here are some of the highlights we saw:

-They were totally aware of their monthly expenses. They couldn't quote their monthly expenses for car insurance from memory, but they were able to put their hand on the right document within minutes. The key point here is that THEY KNEW WHERE THEIR MONEY WAS GOING.

-They had a great emergency fund in place.

-They had medical insurance.

-They were saving.

-They had zero credit card debt.

-They were living within their means (which you could probably assume from the fact that they had no credit card debt and had been able to save).

This person had the kind of finances that I HOPE every American does, but everything I read suggests that they are by far the exception.

So to be honest we could have stopped at this point and said to our friend that all was good, but we kept looking for small details that might be helpful. Here's what we found:

1) Since they drive an older car, and plan to drive it into the ground, we suggested that they reevaluate their car insurance, and possibly drop their comprehensive and collision coverage (see previous article from Matt: The diminishing returns of comprehensive auto insurance coverage ). If they didn't want to drop the coverage entirely we suggested that they at least increase the deductibles to save some money on their policy.

2) They had a universal life insurance policy that had a death benefit of $15k and cost them about $90 a year. We suggested that they cash out the policy. If they wanted to have life insurance then that's fine, but since they were single and had no kids we didn't see the need to pay for life insurance. The way the policy is written, if something tragic did happen to our friend, their parents and siblings would split the $15000, which is a pointlessly small amount in relation to the rest of their estate.

3) Since their income varies somewhat we suggested that they increase their rainy day fund.

4) We helped them clarify their savings goals. They were doing a great job of saving so we just had a quick discussion about what they were saving for. The rainy day fund and retirement came up immediately (which is great), and they were also interested in saving up for the purchase of a new car someday. We suggested that they open a dedicated "new car" savings account. Separate savings accounts facilitates tracking progress toward each goal.

5) We suggested that our friend could simplify by getting rid of some credit cards that they never use (keeping a few for convenience). It's possible that this could negatively impact their credit score, but their credit was already good so we felt it would not be a problem.

One final thing that we learned from this experience is that good intentions are important, but thinking about and talking about personal finance are part of the equation too. Not everyone finds personal finance as interesting as Paul and Matt do, obviously, but it seems that the American public's reluctance to discuss personal finance could really be holding us all back. We (Paul and Matt) found it immensely valuable to be able to bounce ideas off of each other and I hope our friend feels that they have gained from joining the conversation as well.

Pay raises and budget adjusting

Posted by Matt

I had my annual review recently and received the happy news that I would be receiving a 4% pay increase. Yippee. So I'm almost keeping pace with inflation. Okay, attitude adjustment...be thankful for what I have and get on with the info.

My family was getting along fine before my "bump", so I decided that we could just stick with that same income level. One of my financial goals for 2008 is to increase my savings rate anyway (especially for retirement), so I signed on to our H.R. website and increased my 401k contribution level from 15% to 19%. (For the detail-oriented among you, yes, I'm aware that contributing 4% of my new salary is going to cost slightly more than I actually get from a raise that is 4% of my old salary, but I figured I should stretch.) This should put me very close to maximizing my 401k contribution this year! Finally!

I just found out that my company automatically monitors my contribution level and if I do ever exceed the maximum, they will make the excess contributions from after-tax dollars to save me from having to take a distribution. The after-tax contributions can be withdrawn tax-free (since I've already paid tax on them, obviously), however, the growth on after-tax amounts is taxed.

Seems like yet another argument to open a Roth account, but I'm still holding out. Maybe I should work on exceeding the income limit so that I can just forget about them once and for all. How's that for a goal?!

For any of our readers that our interested in the benefits of my 20/20 hindsight, I wish I would have accelerated my savings rate faster than I did. Increasing the contribution rate when you get a raise is the least painful way I know of to do it; I probably just wasn't aggressive enough with the size of the increases.