Behavior

Personal Finance Policies for Joe (or Don)

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It might be a couple weeks before we’re sure who will be in the White House for the next four years. But we’ll have someone. And we’ll have federal, state, and local officials too. I’m convinced that these folks can implement creative personal finance policies that will help you and me. So here are seven ideas for future personal finance policies.

P.S.—If you know Joe, send him this link.

Basic Tenets and Rules Behind the Ideas

I wanted these personal finance policies to meet three basic criteria.

1) Large Marginal Benefits

$1000 means more to a single, working-class mother than it does to Bill Gates. The marginal benefit for her is greater. Maximizing these marginal benefits is a utilitarian choice.

I’ve written extensively about the role of luck in society. The lucky owe a debt. The unlucky deserve a credit. This first tenet is an extension of those thoughts.

2) Incentivize Positive Behavior

You don’t want to give money for nothing (or chicks for free). Instead, we want our tax dollars to incentivize good behavior. Or even better, we’d like the benefits to scale upwards as the good behavior scales upwards. This is a principle of behavioral economics (e.g. nudge theory).

3) Find a Fiscal Balance

Some believe the government owes you nothing. Others think the government owes you everything. Most of us are somewhere in between. That’s why I aim for a “fiscal balance” in today’s proposals.

And One Tacit Assumption

I’m making an overarching assumption in this post. Namely, the assumption that positive personal finance behavior is a virtue.

I’m assuming that keeping money in people’s hands is not only good for those individual people, but also good for society.

I’m assuming that paying credit card interest and student loan interest is bad for individuals, and therefore bad for society.

Financial stability leads to happiness. It leads to better health outcomes. And when more people are happy and healthy, society improves.

We all do better when we all do better.

There Will Be Shortcomings

I’m jotting these ideas down on election night. I’m doing a little research, but I’m sure I’ll miss something. I’ll mistakenly create a perverse incentive. Maybe I’ll mess up my math and propose a trillion-dollar aid package. Or maybe you’ll just think my ideas are just dumb.

If (when) I mess something up, drop me a message. Real politicians have teams of aides and trusted advisors. I have you—and I’m very thankful for that.

And with that, let’s get started on my list of seven ideas for future personal finance policies.

1) Help with Student Loan Interest

I wrote a detailed, mathematical explanation of this idea. I think we should help students with their student loan interest, which is different than helping them with loan principal. Let me give you the summary.

First off, interest is the killer. It’s “normal” for someone to spend $200K to repay a $100K loan. How? Because of interest.

My proposal is that government funding can help pay the interest, but only if the debtor is willing to contribute a significant amount of their income. The more income the debtor contributes, the more the government contributes.

Let’s apply some hard numbers.

  • Imagine a former student with $100,000 in total student debt
  • …at a 5% interest rate
  • …with the ability to make $750 per month payments

In the current reality, this person must pay principal and interest. They’ll end up paying a total of $144,535 over 16 years.

But If We Encouraged Them to Pay More?

But what if we had an incentive system that encouraged people to contribute more to debt repayment in exchange for government-funded interest-only payments? Hard numbers: what if this person contributed $1000 per month and the government covered 50% of the interest payments?

In this scenario, the debtor pays $111,935 over 12 years. They save $33,000 and get out of debt four years earlier.

But at what cost? The government picks up $11,935 worth of interest payments over those 12 years, or about $106/month on average.

We asked the debtor to increase their monthly payments by 33%. Get out of debt faster—that’s good. We’ve spent $12K in tax dollars to give the individual $33K—some of which will surely end up back in the tax coffers eventually!

Who loses? I’m sure the loan servicing industry will raise some questions. Over the long haul, they are losing out on interest payments—and that’s how they make their money.

Also, there are some ~45 million Americans in student debt, with an average of $30,000 debt per person. That’s ~$1.35 trillion total. If my proposal has the government contributing interest payments equal to ~10% of each person’s loan principal, then we’re looking at a $135 billion bill (spread out over many years). Not exactly couch cushion money.

So maybe it’s smarter to set the bar lower. Perhaps $135 billion is way too high. But the principle stands. By merely helping with student loan interest, we can help a lot of people out.

2) Government-Funded Matching

Many of us get an “employer match” as an employment benefit. If we contribute to our retirement account (e.g. 401(k)), then our employer will also contribute to that account. It’s free money.

What if Uncle Sam did something similar?

Now, it couldn’t be too much free money. And I doubt the money could be doled out at a 1:1 ratio (e.g. you contribute $1000, Uncle Sam contributes $1000). But I do think we could incentivize positive behavior (contributing to a retirement account) via a small financial incentive (government-funded matching).

How about something like a 10% match on the first $5000 contributed each year into a retirement account. If 100 million U.S. workers took full advantage of this program, it would cost $50 billion per year to fund.

But keep in mind! That would also mean that 100 million people are making significant contributions to their retirements. That is very good for the welfare of our citizenry.

Assuming someone takes advantage of this benefit from age 22 to 62, the U.S. government will have provided them with $20,000 in benefits. But assuming historical average S&P 500 returns, this person can expect those benefits to grow to ~$100,000. The first year’s $500 will have grown to $7000 assuming a 7% annual real rate of return.

As for marginal utility, it probably doesn’t make sense to offer this benefit to millionaires. The extra $500 per year doesn’t do them much good. So, like many other government programs, it makes sense to cap this benefit at a certain income and then taper off the benefit.

And where does this money go? I’m sure that there is some issue with the government pouring money into S&P 500 index funds, even if on behalf of individual citizens. The details need to be worked. I still think it’s a cool idea.

3) “Baby Bond” Investments

Or maybe “Baby Stock” investments. When a kid is born, the U.S. government should invest in their name until they are “X” years old. They can’t touch it until then.

First, this employs a similar benefit to government-funded matching idea. Namely, the government puts forth a small investment today and the individual reaps a large benefit in the future.

Secondly, if “X” is high enough, then this investment can teach a very valuable lesson. Investments grow! How better can a young person learn about investing than by watching their investments grow throughout their childhood?

About 4 million kids are born in the U.S. each year. If they each received a $1000 investment, it would cost the U.S. government $4 billion to fund. Not bad compared to my first two ideas.

By the time that child retires (at age 60), that small $1000 investment will have grown to $58000—again, this assumes a 7% real rate of return.

4) Personal Finance Education

The American education system does many things well. Finger painting, carrying the zero, reading Shakespeare. It’s not easy to educate millions of kids and young adults every year, and our schools do alright.

But our education system is woefully insufficient at financial education. I’m not talking about the intricacies of trickle-down economics or how to broker a merger on Wall Street. Forget about index funds and the Trinity Study. I’m simply talking about savings accounts and credit cards, about how to create (and stick to) a budget, or how (and when) to start thinking about retirement. Basic stuff that everyone must deal with.

I understand that Pythagoras is important. I know that the mitochondria is the powerhouse of the cell. These are good things to be aware of. Just like personal finance.

So why didn’t anyone ever teach me about personal finance?!—a topic I’d have to think about on a weekly (if not daily) basis for the rest of my life.

You’ve probably asked that question. I know I have. And in my pursuit of answers, I started a blog.

But the real point is that all adults realize—eventually—that personal finance education is a requirement for success. Just stick to the simple stuff. It’s hard to function in society without a cursory knowledge of money and credit cards and bank accounts.

Public personal finance education could solve a lot of the money issues we talk about here. That’s money well-spent. It might be the most useful of the personal finance policies I discuss today.

And with the marvel of the Internet, imagine if we created a comprehensive, online personal finance course that anyone could take from the comfort of their own home. Anyone want to start a non-profit with me?!

5) HSA-like Accounts for Personal Finance

A Health Savings Account offers significant tax benefits if you to put money away for medical costs. And if you never use that money for medical needs, you can access it at retirement like a Roth IRA. In the interim—between now and retirement—you can even invest those HSA funds. Utilizing an HSA is an excellent idea if you’re able.

I’d propose a parallel account—the Personal Finance Savings Account. It would offer similar tax-advantages as an HSA. But you would use the PFSA funds to do things like pay for tax preparation or investing fees. You could buy personal finance education material or buy budgeting software. The PFSA would incentivize smart money choices.

And if you never use your PFSA funds? Then you can access them at retirement. That’s smart too.

Imagine if you could set aside $250 per year in tax-free dollars. That might cost the government ~$50 per person in lost tax revenue. There are ~30 million HSAs. If an equivalent number of people take advantage of PFSAs, then the Uncle Sam would lose roughly $1.5 billion in tax revenue per year.

6) Credit Score Bonus

I have two related ideas here. The first is an incentive to have a high credit score. The second is an incentive to increase one’s credit score. These two options are analogous to the growth vs. proficiency debate in education. Either way, the goal is to incentivize improved credit scores.

But Jesse, there’s already an incentive for having a good credit score! You get to pay lower interest rates!”

That’s true. But “paying lower interest rates” is both too far out in the future and not tangible. What’s the different between a 3.1% mortgage rate and a 3.3% rate? If you have to get out a calculator or spreadsheet to answer, then my point is made. It’s not tangible enough.

But a $100 check in the mail? That’s tangible!

7) Personal Finance Testing

Pass a personal finance test, get paid. I know this is a pipe dream. I’m just spit-balling. But in some sort of anti-cheating utopia, this would be an effective method of encouraging personal finance education.

What Are Your Personal Finance Policies?

What are your ideas?

Where could we allocate money to incentivize the best personal finance behavior?

What dumb things have I written above?

Thanks For Reading

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About Jesse Cramer

I’m Jesse. I’m an engineer, a new owner of an old home, and an avid reader/writer. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@BestInterest_JC) or on Reddit (u/BestInterestDotBlog). Many of my posts have been directly influenced by my readers. It’s the most fun part of writing this blog. And as always, thanks for reading the Best Interest.
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6 thoughts on “Personal Finance Policies for Joe (or Don)

  1. Hey Jesse – thinking about idea #3, one could find a supporting argument around that strategy being subsidized by taxes on the back end. I give you $500 today. That grows to $7,000. I then tax you as you take that $7,000 out. Meanwhile it has driven up the prices in the market triggering larger capital gains (taxable) and larger required minimum distributions (taxable.) Not sure it’s enough to justify the program overall, but gross versus net costs make it more interesting (obviously using the term “interesting” pretty loosely here.)

    Only thing I’d add to the list: emergency funds. There are already proposals/ideas out there, but I’d love to see a system that automates and incentivizes emergency funds. Hard to swallow that 41% of Americans couldn’t cover a $1,000 unexpected expense without taking on debt.

    1. Craig, excellent feedback. I was thinking exactly about your first point. In general, we can find way to use a little tax money to keep a lot of personal money in individual’s hands. If that money then gets taxed later, it’ll end up back in the gov’t hands.

      So who loses? In a couple cases, it’s whomever is collecting interest from the individuals. But in this case, nobody really loses (that I can think of). Perhaps it just means that investments become overprices due to the new demand?

      On your point #2, a great thought. I have one challenging question for you, though. How do we enforce that money be used for “emergencies” and not for late-night Twinkie shopping runs?

  2. In any system, a small subsection are going to try to take advantage for Twinkie purposes.

    It’s not perfect, but I tend to favor nudge or legislation. Make the accounts super easy to fund (automated from payroll, automatically enrolled/must opt out, the first $500 of employer and employee contributions are tax free.) Then make it annoying to take money out (must be done using a form, earnings are taxed if drawn before 59 1/2, need to indicate in the form why you’re drawing the money.) It doesn’t matter that no one is reading the reasoning, making someone fill out a form and write down a reason will discourage much of the silly distributions and you can’t save them all.

    If 50% of people drew the money right back out and wasted it, that would still mean you’re providing the security blanket for a huge number of people who wouldn’t have saved the money on their own.

  3. These are awesome ideas! It perhaps follows that… we should subsidize healthier food production as opposed to high fructose corn syrup and corn fed beef perhaps utilizing the Netherlands’ style vertical farming that was showcased in Attenborough’s film. The education idea is awesome. I hear that in the Soviet Union maths were taught in terms of AK-47s and bullets, so why not interest, debt, and balance sheets? The same could be applied to teaching science in terms of nutrition, the scientific method in terms of nutrition research, and all sorts of practicalities that are useful for navigating school and post-school life. Why does critical thinking have to be learned in the context of Shakespeare. I dunno, myself I found the ol’ english tiresome. It’s perhaps easier to “buy” into the educational process if you can more directly relate it to the fundamentals of existence, in the cave man sense and not just the enlightenment’s philosophical development sense. Not that the latter doesn’t have virtue. Also, a class on conspiracy theories should be mandatory 🙂

    I especially like your student interest argument. The idea of paying all debt is far fetched enough to in fact be counter-productive to the cause. Interest assistance also doesn’t significantly arbitrarily penalize people who have put in the hard work to build disciplined habits or make savvy educational choices. In a way, the interest assistance is another way to make higher education more accessible while maintaining the benefits of free-market education. Also, if the gov were to fund people to go to Harvard, which is awesome in individual cases via scholarships, on a wholesale basis I might consider all the amenities (sorry varsity sports teams :\ ) to be a bit unnecessary. I.e., I would question the virtue of my tax dollars going towards another’s 70k educational extravaganza.

    I agree with the replier above, the format here is very clean and makes for easy reading.

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