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Equal Income to all, Basic Income that is!

Finland is going to test Universal Basic Income (UBI) or so the news say. Finland is going to be choosing some 2000 people at random, irrespective of their financial or educational backgrounds in the working age group (25-58) to receive $581 each month through the end of 2018.

The idea of UBI is fairly timed, with some of the discussions dating as back as the 18th century (Thomas Paine seems to be the person to bring it up apparently). The idea here is that every citizen receives an equal pay, NO QUESTIONS ASKED! You can still keep your job(s) and get the Basic Income.

What caught my curiosity was HOW, just how would it work? Who’s going to pay for all that money. We’ll it’s all grounded in a theory and we’ll get to that. But before that let’s settle the question of the numbers. As it turns out,

  • Social Justice Ireland estimated that it would be affordable with a 45% tax rate.
  • Charles M.A. Clark estimates that the United States could support a Basic Income large enough to eliminate poverty and continue to fund all current government spending (except that which would be made redundant by the Basic Income) with a flat income tax of just under 39 percent.

Doable, huh! Now, now, before you go on ranting about an even higher tax rate, let’s get the theory straight.

The original theory behind UBI is that nature was created equal for all. Over time, privatization has left more natural resources with a select few. So with a UBI scheme, the “holders” of the resources will, through taxation, share the resources with the rest. UBI will enable anyone and everyone to have the absolute minimum to sustain basic life. Moreover, as more and more jobs start being replaced with automated versions, unemployment might be heading upwards. UBI would reform social security to make it equal for everyone, no discrimination.

Here’s the sequel on the possible consequences, pros and cons of the strategy.

-Akshar Rawal

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Finance for the uninitiated

I’ve always wondered why schools don’t have a course on the basics of real-life finance. It doesn’t even have to be too detailed, just the essentials, like basics of investment, saving, retirement, loans, equity etc. Anytime during the 12 long years of schooling, anytime, or at least sometime. There is so much that people can do right, from the beginning, that would essentially help them better budget their assets. It’s the lack of this information to the masses that needs to be addressed. And this post is just another attempt at highlighting some of that information out there. So here goes.

Three rules to live by:

  1. Spend less than you earn (Don’t we all know that.). The problem is we keep forgetting this or we just overlook which causes problems. This brings us to budgeting. More on that later.
  2. Always plan for the future. Not just retirement, all along the way. Plan for tomorrow, and the next week, and the next month. If you are to buy something that let’s you pay off in installments, you should know that you’ll be able off those installments.
  3. Make your money make more money. Save for emergencies. But let the rest of the money work while you sleep. Invest it.

Three tools to help you on the way

  1. Bank Accounts: If you don’t have one, get one right now. What’s stopping you? You can keep track of your money. You have some level of satisfaction of not having to worry about a basement full of dollar bills. Banking is a highly regulated industry and working with banks insured by the regulatory body insures your holdings for loss. Providers are required to maintain security standards to be insured. They are audited on a regular basis for inconsistencies. So working with insured banks is as safe as it gets. You can find the insured banks in your area using the search here.
  2. Budgeting: A simple way to describe budgeting, it is a logging and evaluation system for your finances. In that, you compare your spending and earning. Based on the outcomes from the comparison you plan how the money needs to be adjusted, whether the earning needs to be increased or the spending needs to be reduced. Ever so often, you have the opportunity to spend more. This is when you plan to categorize and allocate your earning to a set of buckets for spending. A simple categorization could be recurring costs (in-house, insurance, etc.), savings (retirement, emergency, etc.), investments (stocks, mutual funds, etc.) and fun (guilt-free spending). There are a number of budgeting tools out there. Mint is a good one. Work through tutorials that can help you get started. You do not have to be a finance expert to maintain your own budget. In it’s simplest form, all you need is a piece of paper, a pen and a calculator, if need be. From there on, all you have to do is keep track of your earning and spending and evaluate every now and then.
  3. Credit cards: You might be wondering, “Debt? Really?”. Debt is a good thing if managed well. If you are on top of it, managing it all along the way, you can make it work for you. A lot of businesses evaluate you on your ability to manage debt. And credit cards are a wonderful resource to do just that. The important part here is to have complete control over your credit cards. They basically lend you money which you have to then pay off. Most credit cards won’t charge you any interest as long as you pay off what you spend during the statement period within the specified time period. And paying a “little interest” also helps your credit. Your paying a little interest shows that the lenders can earn off of you. Now you don’t need to pay a lot of interest to fall in that bracket and all of this falls under you being on top of managing it. As a bonus, there’s always the opportunity to earn cashback or travel miles. It’s like money for spending money. (Use wisely though.)

Which brings us to the last topic Credit Reports. Credit reports are the tool used by lenders to verify your credibility for managing your finances. They are centrally managed by three independent entitites viz. Equifax, TransUnion and Experian. They monitor your financial activities and provide a score that determines your ability to handle your finances. There can be another blog post entirely about this. But not today :).

There is a lot more information on these issues over at Lifehacker. I strongly suggest you check that out if you were interested in this post. This is only the tip of the iceberg. They have done a far detailed job of explaining Personal Finance 101.

-Akshar Rawal

Employer stock plans: The Blueprint

Every company offers it’s stock as a bonus in lieu of cash benefits. While some offer it at employee level, others limit it to higher positions within the organization hierarchy. So even if you are not being offered anything at the moment, it does;t hurt to know a little bit about how they work.

There’s two types of plans ESPP (Employee stock purchase plan) and ESOP (Employee stock ownership plan). ESPP allows employees to purchase company stocks in a tax efficient manner, often at a discounted rate. ESOP, on the other hand, provides employees an ownership in the company’s stock, often at no cost. Both plans are a way for the company to foster employee loyalty by offering them a share in the company’s success. One of the major differences in the two types of plans is their funding. While with an ESOP, the company buys the stocks for the employee, the stocks cannot usually be cashed until the employee retires or leaves the company. There is also a period before the benefits kick in, before which, the stocks are as good as useless to the employee. ESPP on the other hand, is funded by the employees themselves, usually through payroll deduction. But, the stocks are available to cash as soon as the benefits kick in, rather than waiting to retire or changing employers.

While both plans have their pros and cons, companies offer at least one as you move higher up the ladder, in lieu of monetary compensation. But if you had the option to choose what kind of benefits you receive, it helps to know when choosing stock plans would pay off over choosing other kinds of benefits. Listed below are some of the things to consider when crossing stock based plans.

PROS

1. Depending on the plan, you could save about 15% on your stock which translates big when the stock grows.

2. Some plans have the “lookback” option, which is essentially you buying the stock when it was the lowest in a given period.

3. ESOP are just FREE stocks.

4. Some ESPP plans have a employer match. The employer adds to a part of your stock. Again, more FREE stock.

5. Even the most basic of plans offer around 10% discount, which can account to more as the stock grows.

Things to think about before buying

1. High potential = high risk. So you don’t want to be over-invested.

2. A diversified stock is a safe stock. ESPP or ESOP contributions should be limited to about 10% of your entire portfolio.

3. If you’re investing 10% of your diversified portfolio in one company, you will need to monitor that company. This applies to any stock that you own.

4. Know when to sell. Keep on top of news items that could be red lights to stock prices. And not just that. You might also benefit from selling your ESPP stocks as soon as your benefits start. So, whether or not the stock prices rise, you’ll have cashed in on the free stocks that you received with the discounted prices.

These are only a few of the points that you should consider and keep in mind when working with ESOP and ESPP. And as always, it never hurts to research a bit more. For starters, you can head on over to Two cents @ Lifehacker. They have a number of embedded links to further information.

-Akshar Rawal

APR vs APY…The lending brothers

We all know the dreaded APR. But how about the lesser known APY? When borrowing money, you should consider both.

APR – Annual Percentage Rate

The term annual percentage rate of charge (APR), corresponding sometimes to a nominal APR and sometimes to an effective APR (or EAPR), describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal jurisdictions, but in general:

  • The nominal APR is the simple-interest rate (for a year).
  • The effective APR is the fee+compound interest rate (calculated across a year).

APY – Annual Percentage Yield

Annual percentage yield (APY) is a normalized representation of an interest rate, based on a compounding period of one year. APY figures allow for a reasonable, single-point comparison of different offerings with varying compounding schedules. However, it does not account for the possibility of account fees affecting the net gain. APY generally refers to the rate paid to a depositor by a financial institution, while the analogous annual percentage rate (APR) refers to the rate paid to a financial institution by a borrower.

To promote financial products that do not involve debt, banks and other firms will often quote the APY (as opposed to the APR because the APY represents the customer receiving a higher return at the end of the term). For example, a CD that has a 4.65 percent APR, compounded monthly, for 8-months would instead be quoted as a 4.75 percent APY.

Well, these are the definitions from wikipedia. For a more detailed write-up on the differences between APR and APY and how to consider them when borrowing money, check out this link over at lifehacker.

-Akshar Rawal

Saving right

All of us have the tendency to save, for the small pleasures and big. But do you consider all aspects when saving? One of my previous blog posts Get a handle on your finances mentioned how you could test your emergency readiness by doing an emergency fire drill with your finances.

The thing with saving for long term is that the money is going to be static for the most part with a standard growth rate. However, the thing to consider there, is that is there a better way that you can make the money grow? There are a number of investment options that help your balance grow at a quicker rate than a usual savings account with a guaranteed return. Mutual funds and bonds are one of the more stable examples of such investments. So, isn’t it always better to block your money in a mutual fund or a bond than putting it in a savings account? Well, if you are absolutely positive that you will not be needing the money in the short-term, it makes sense to invest it into something that grows faster.

The can directly be translated to estimating your spending habits. You should consider the opportunity cost of your money when analyzing spending habits. Opportunity cost is the profit you could have gained by doing something else with that money than spending it over whatever you did. Now, you shouldn’t second guess about spending on food to calculate the opportunity cost and I believe that non of you will. But it’s an interesting component of spending analysis that could see your balance grow, more than it would.

Checkout this lifehacker post for a more detailed explanation on opportunity cost.

-Akshar Rawal

Get a handle on your finances

A study by the Consumer Financial Protection Bureau found four factors that suggest when you’ve achieved financial well-being.

  1. You can pay your bills on time and don’t have to worry about having enough money to get by. People who are in control “manage their finances, their finances do not manage them,” the research participants agreed.
  2. You’re financially prepared to deal with emergencies. When the unexpected strikes, you have enough savings, insurance, and the support of friends and family to make it through a job loss, a medical emergency, or a furnace replacement.
  3. You have a plan for each of your financial goals and are on your way to meeting those goals.
  4. You have the financial freedom to enjoy your life. You can take a vacation, go out to dinner, be generous to your family, or go back to school, if you wish.

Many of us follow a trial and error approach to life. Emergencies are not an everyday occurrence. But how’d you fare in one? You can perform a “Financial fire drill”: Go a single month without touching your primary income. Use from your back-up sources. Of-course, these resources will be replenished when you get your monthly salary. So you don’t stand to lose anything. But you’d be willing to spend only as much as you need, saving more than usual (or at-least expectedly). People who have their savings mostly in the form of inaccessible (or not easily accessible) investments wouldn’t fare well in the fire drill. But if that is the case, you’d know how to save better, if the necessity arises.

Src: http://www.lifehacker.com

-Akshar Rawal

Retirement savings…OR….debt

Almost all of us have a period of our lives that we are in debt (If you think you don’t you’re probably wrong). Especially in the early stages of our careers, right out of school, we have a loan debt to pay off. But we also get all this advice about saving up for retirement from the very beginning. So where do we draw the line in deciding what to prioritize and how to do it?

There’s pros to both saving and paying off debt. While paying off debt can reduce the amount of interest you pay on the amount you originally owed, thus increasing the amount you have for yourself to leverage, saving from early on can lead up to a sound retirement. Paying off debt has short term benefits whereas, savings have long term and often require patience. So the question still stands as to how we strike the right balance.

Well there are a number of factors to consider. For instance, the interest rate on your loan as compared to the returns on your savings. Employer matching is another thing to consider. Refinancing your loans, also a valid option, if available at a lower rate. There is a lot more to consider. Lifehacker has compiled a list of items that you should consider when making this decision. You can read all about it here.

You can also check out some other tricks to savings, investments and handling your finances @

-Akshar Rawal

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