Logic?

[SecondCor521]

From IMDB:

Professor Kirke: Logic? What are they teaching at schools these days?

In this article I read:

"Save $219 Per Month on TaxesHere’s How: The average refund for the 2008 filing season so far is about $2,500. If you received an average refund and you are in the 25% federal tax bracket, you could be entitled to three extra exemptions worth $3,500 each. That would boost your take-home pay by $219 a month. A couple of reasons you might be eligible for more exemptions: becoming a new parent or buying a house."

I don't see how this qualifies as saving at all, especially not in a way that one could argue that these "savings" could be diverted into an investment program to produce $1M over 35 years.

Increasing one's exemptions to reduce the size of one's refund is a smart idea to be sure. But switching from receiving ~$2,500 in April to $219 every month of the year just evens out the cash flow; it doesn't directly result in any saved money.

Let's suppose this hypothetical family spends their $2,500 tax refund on a trip to Disneyland every year. They change their exemptions as described, but now they don't have the tax refund to pay for their trip; so instead they take that $219 per month and stick it into a savings account and earn a few bucks of interest, and then they withdraw from that savings account to pay for their Disneyland adventure.



The family is ahead a few bucks in interest, not $219 per month.


Given that this $219 a month is nearly half of the total monthly savings amount in the article, this seems a significant flaw in their argument.

Never mind that three exemptions only equals $219 per month at a specific income level, and that exemptions aren't "worth" $3,500 a piece (yes, I know what the author meant, but that is not what s/he wrote).


Sigh...



2Cor521

[lucija]

I agree, the argument makes little sense. Then again, the rest of the article is not much better... bring lunch to work and save money? I am yet to meet someone who is not aware that packing lunch is cheaper than going to a restaurant.

I never learn anything from this type of articles ("how to save $x per month" or "financial planning in x steps").

Sometimes I wonder - why do such articles get so much traction without presenting anything even resembling true insight? Is general public finding this useful? Are they really so clueless?

[Abreutime]

Originally Posted by lucija

Sometimes I wonder - why do such articles get so much traction without presenting anything even resembling true insight? Is general public finding this useful? Are they really so clueless?

I guess the answer is that they don't get a lot of traction. Websites need to keep churning out advice columns, and most of them need to be recycled themes. Worthless to an informed person, but revolutionary to the random person who just started reading about finance stuff.

[HFWR]

The slogan at my former company: We build logic (chips), we don't use it...

[Texas Proud]

Originally Posted by Abreutime

I guess the answer is that they don't get a lot of traction. Websites need to keep churning out advice columns, and most of them need to be recycled themes. Worthless to an informed person, but revolutionary to the random person who just started reading about finance stuff.

I agree... it is 'news' to the stupid people who would not get it anyhow... and just gibberish to the people who do....

As an aside (and very very slightly an analogy)... I saw an interview with Kelsey Grammer... he was talking about sitcoms... he said 'there are no new stories' (or something like that)... his point... you have SEEN every story that any sitcom can come up with... they just package it differently... same with these stories... we have seen it all, just packaged differently...

[maddythebeagle]

Originally Posted by Abreutime

I guess the answer is that they don't get a lot of traction. Websites need to keep churning out advice columns, and most of them need to be recycled themes. Worthless to an informed person, but revolutionary to the random person who just started reading about finance stuff.

I think that it is...I suspect that if you polled a bunch of people on tax refunds, you would find a lot of folks dont understand what is really going on...Besides, I think the same people would find something stupid to spend it on with 200/month extra coming in vs. a 2400 refund at the end...

[igsoy]

Regarding recycled "news":

Don't forget that there are millions of people starting out in adulthood or entering the financial awakening phase of life every new year.

These articles are new to them, and can be a helpful intro that might get them interested in reading further and gaining knowledge about finances.

So, while we may mock the obviousness of such writing, there is a reason (and a market) for putting it out there.

[NinjaPigeon]

Increasing one's exemptions to reduce the size of one's refund is a smart idea to be sure. But switching from receiving ~$2,500 in April to $219 every month of the year just evens out the cash flow; it doesn't directly result in any saved money.

The $219 figure isn't based on changing exemptions to not get a tax refund. It's based on those three $3500 exemptions:

$3500 per exemption * 3 exemptions * .25 taxable amount / 12 months = $218.75

[lucija]

Originally Posted by igsoy

Regarding recycled "news":

Don't forget that there are millions of people starting out in adulthood or entering the financial awakening phase of life every new year.

These articles are new to them, and can be a helpful intro that might get them interested in reading further and gaining knowledge about finances.

So, while we may mock the obviousness of such writing, there is a reason (and a market) for putting it out there.

OK, that make sense. However, is there really a need to say, "bring lunch to work instead of eating out"? Who does not know that? Pointing this out is just as silly (to me) as it would be to say "don't live in a hotel suite, rent/own instead and save money in the long run".

[ladelfina]

There probably is some use in saying 'bring lunch to work'.. if only to reinforce that on some planet that would be considered normal. I bet a lot of offices used to engage in a standard going-out or take-out routine and you might have been the only one at your desk with a brown bag and so you figure, "what the heck, live a little" since the immediate expense seems negligible. It's about encouraging people to resist peer pressure as much as it is about teaching the math.

[SecondCor521]

Originally Posted by NinjaPigeon

The $219 figure isn't based on changing exemptions to not get a tax refund. It's based on those three $3500 exemptions:

$3500 per exemption * 3 exemptions * .25 taxable amount / 12 months = $218.75

At first I thought one of us must have a reading comprehension problem, because your understanding of the article clearly differed from mine. So I went back and reread the portion of the article quoted in my original post, and now I'm even less impressed.

The way I read it was the usual thing about reducing one's payroll withholding via submitting a new W-4 form in order to reduce the size of one's refund and increase the size of one's regular take home pay. This, as I argued before, doesn't produce $219 per month of savings; it just shifts the cash flow around.

But as you point out, the author could be referring to qualifying for additional personal exemptions. This is supported by the phrase "becoming a new parent". Indeed becoming a new parent would entitle you to an additional personal exemption on your taxes, and you should adjust your W-4 in this case as well. This is a true savings in taxes which is probably more than offset by the cost of that new child.

But this is just really sloppy journalism on so many fronts:

1. Lumping becoming a new parent in with buying a new house and adjusting withholdings with actual changes in one's tax liability is confusing.

2. The author appears to ignore the $1,000 per child tax credit that should also in most cases affect withholding as well.

3. Again, shifting income from a one time April windfall to a monthly increase in cash flow doesn't save any money.

2Cor521

[kcowan]

Sure buy a house and have a kid and then guess where the $219/mo goes? You had better pack your lunch!

[Walt34]

Originally Posted by lucija

Are they really so clueless?

Many of them are, yes. Talk to one SIL - she doesn't have the willpower to save for a vacation, she knows it, and that's how she comes up with the money. I explained that she's giving the govt. a free loan and I got a blank look and the statement "But I want to go on a vacation every year".

Sigh.

[Abreutime]

Originally Posted by Walt34

Many of them are, yes. Talk to one SIL - she doesn't have the willpower to save for a vacation, she knows it, and that's how she comes up with the money. I explained that she's giving the govt. a free loan and I got a blank look and the statement "But I want to go on a vacation every year".

Sigh.

1) Get her to change her withholding.
2) Offer her 1% to hold the money for her
3) ?
4) Profit!

[Khan]

I help a neighbor file her taxes.

She gets about $5000 refund as a result of EIC, child care credit, 401K matching...

I told her she can change her withholding and get the EIC throughout the year, but she says she needs that big refund.

[Anne]

I also read this as suggesting that one have a child in order to save money on taxes, which makes absolutely no sense to me.

I agree it's sloppily written. I think the author meant to say:

Save $219 Per Month on Taxes Here’s How: You could be entitled to three extra exemptions of $3,500 each. If you are in the 25% federal tax bracket, that would save you $219 a month in taxes. A couple of reasons you might be eligible for more exemptions: becoming a new parent or buying a house."

[Nords]

Originally Posted by Texas Proud

As an aside (and very very slightly an analogy)... I saw an interview with Kelsey Grammer... he was talking about sitcoms... he said 'there are no new stories' (or something like that)... his point... you have SEEN every story that any sitcom can come up with... they just package it differently... same with these stories... we have seen it all, just packaged differently...

In a stunningly unrelated coincidence, his sitcom has apparently not been renewed for the fall season.

Originally Posted by Khan

I told her she can change her withholding and get the EIC throughout the year, but she says she needs that big refund.

I wonder if people need that "big refund" to jump-start their IRA... or to pay their bills.

Business Week occasionally trots out the bromide "Never underestimate the laziness or ignorance of the American consumer"...