A simple explanation of our tax system.

I stole this from a friend on Facebook, who I’m sure stole it from somewhere else.  Doesn’t mean it isn’t perfect!

Suppose that every day, ten men go out for beer and the bill for all
ten comes to $100. If they paid their bill the way we pay our taxes,
it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every
day and seemed quite happy with the arrangement, until one day, the
owner threw them a curve. ‘Since you are all such good customers, he
said, ‘I’m going to reduce the cost of your daily beer by $20. Drinks
for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes, so
the first four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers? How could
they divide the $20 windfall so that everyone would get his ‘fair
share?’ They realized that $20 divided by six is $3.33. But if they
subtracted that from everybody’s share, then the fifth man and the
sixth man would each end up being paid to drink his beer. So, the bar
owner suggested that it would be fair to reduce each man’s bill by
roughly the same amount, and he proceeded to work out the amounts each
should pay.
And so: The fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four
continued to drink for free. But once outside the restaurant the men
began to compare their savings.

‘I only got a dollar out of the $20,’declared the sixth man. He
pointed to the tenth man,’ but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar,
too. It’s unfair that he got ten times more than I!’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back
when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get
anything at all. The system exploits the poor!’

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine
sat down and had beers without him. But when it came time to pay the
bill, they discovered something important. They didn’t have enough
money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how
our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them for
being wealthy, and they just may not show up anymore. In fact, they
might start drinking overseas where the atmosphere is somewhat
friendlier.

16 Oct 08 | Finance | Comments (0)

Personal Finance Spreadsheet

So, I’m a personal finance geek. I worship at the altar of Dave Ramsey and Suze Orman. I love it - it’s interesting and fun to plan. Most importantly, it’s one of the most important things you can do for yourself. Managing your money and credit is vital to your future - so the sooner you start, the better.

In the spirit of that, I did a template of my personal finance spreadsheet for a friend, and he thought it was pretty cool, so I thought I’d share it here as well. You can download a blank version here (I’ve added in some “dummy” numbers for reference).

The purpose of this model is to manage your month to month cash flow, taking into account debt amortization and savings (although no interest is applied to the savings, but that would be easy to add in). It’s pretty basic, but it’s what I’ve been using for quite a while now, and I have to say, it really works!

If you like this - please let me know! Also, if you have questions, I’d be happy to answer them. Just leave comments and I’ll reply.

One last thing - if you’d like to add something like savings account interest but can’t, let me know and I’ll work on it. It would be very cool to see this evolve into a more sophisticated tool that we can share for free.

UPDATE - Andy over at the Bofe Blog saw my spreadsheet, and raised me a savings account.  I say, download both!

20 Mar 08 | Finance | Comments (0)