2729: Money is Fungible by Jeremy Jacobson of Go Curry Cracker on Building Wealth & Retirement

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[00:00:59] stay today at LQ.com. This is Optimal Finance Daily, episode 2729. Money is fungible by Jeremy

[00:01:10] Jacobson of GoCurryCracker.com. And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:17] This is the show where I serenade you with the sweet sounds of personal finance knowledge

[00:01:21] from some of the best blogs on the planet, with the author's permission, of course. And we have

[00:01:26] a bunch of shows covering different topics. Just search for Optimal Living Daily to find all of

[00:01:31] them. But for now, let's get right to it and continue optimizing your life. Money is fungible

[00:01:42] by Jeremy Jacobson of GoCurryCracker.com. In economics parlance, they say money is fungible,

[00:01:51] meaning no dollar is unique or special and they are all fully interchangeable. A dollar is a

[00:01:56] dollar. I learned this concept early in life when I successfully paid for a GI Joe action figure

[00:02:02] entirely with pennies. Go Joe! But this is a little more complex in the modern world.

[00:02:08] So here are some money fungibility related questions or comments I've received over the

[00:02:13] years. Money is fungible. Here are some fun examples of monetary fungibility.

[00:02:22] Number one, I hate coins. I'll do anything to avoid carrying change. Do you know how much a

[00:02:28] GI Joe action figure worth of pennies weighs? Or how loud a cashier will sigh when they see you

[00:02:34] pull out the coin jar? Or how long the checkout line will grow will said annoyed cashier count

[00:02:40] those pennies twice? A dollar is a dollar if you ignore the social ramifications. Perhaps the

[00:02:48] experience explains why I use a credit card for everything, where possible. I do my best to

[00:02:53] eliminate coin accumulation. It also gives me up to 30 days afloat. Otherwise, we toss all coins in

[00:03:01] a small jar we keep near the door. When it fills up, I bring it to the nearby 7-Eleven and use the

[00:03:07] funds to increase the balance on my prepaid card. In the US, I used to bring the coin jar into my

[00:03:12] credit union near work to use their free counting machine. My parents would empty the coin jar once

[00:03:18] each year to help pay for the family summer vacation. Optional, stuffing coin roll wrappers

[00:03:24] together is a rewarding and fun family bonding experience. I live in a non-tipping culture,

[00:03:31] but I'll sometimes leave coins as a tip for small cash purchases. Taiwan has a $50 coin,

[00:03:37] and maybe a coffee costs $45, so I'll toss the $5 change into the tip jar. Although my favorite

[00:03:43] nearby coffee shop now accepts Apple Pay. In the US, paying tips in cash or coins is almost always

[00:03:49] better because it ensures that the server will benefit from it immediately. Number two, I have an

[00:03:56] emergency fund with $1,000 and credit card debt of $1,000. I want to get out of debt, but then I

[00:04:02] won't have any money. What should I do? I'd pay off the credit card debt with the emergency fund.

[00:04:08] Should an emergency arise before replenishing the savings, the zero-balance credit card is

[00:04:13] the emergency fund. For reference, our emergency fund is about $0. Using just these two accounts,

[00:04:20] your net worth is $0 either way. But paying 18% interest on a credit card to keep some cash

[00:04:26] earning 0.1% just in case, is a net loss every month, which is technically an emergency.

[00:04:34] Number three, we want to retire early and have saved 25 times our annual expenses.

[00:04:40] The problem is that most of those funds are in retirement accounts, and our taxable accounts

[00:04:44] aren't big enough to last until age 59 and a half when we can make 401k or IRA withdrawals

[00:04:50] without penalty. What can we do? Pre-tax, post-tax, and taxable accounts do complicate

[00:04:57] dollar fungibility a bit as withdrawals may have different after-tax values. However,

[00:05:02] there's a false assumption buried in this question. We can withdraw funds from retirement accounts

[00:05:08] before age 59 and a half without penalty via Roth IRA conversions and or SEPs. These withdrawals are

[00:05:17] taxable of course, but the tax burden may be zero. You can also withdraw Roth IRA contributions at

[00:05:24] any time without taxes or penalty. What I would do, double or triple check that you've saved 25

[00:05:31] times your expenses with taxes included, then proceed without worrying too much about the split

[00:05:37] between pre-tax and taxable accounts. Make annual Roth IRA conversions if you can do so at a zero

[00:05:44] or low reasonable tax rate. Try kickstarting your retirement even. If the taxable account runs low

[00:05:51] as you approach age 59 and a half, set up a SEP to bridge the gap between then and the big six zero.

[00:05:59] Number four, I want to live solely from dividend income, but like the earlier question, a lot of

[00:06:05] our funds are in retirement accounts. With only a 2% yield on the S&P 500 or whatever, dividend

[00:06:12] income alone isn't enough to cover our cost of living. Ideas? One idea is to not limit yourself

[00:06:19] to living solely from dividend income. It isn't necessary, but I digress. Another idea is to sort

[00:06:25] of make your own dividend. If you receive 10,000 in dividends in your retirement account, access it

[00:06:32] by selling 10,000 worth of stocks in your taxable account. Use the retirement account dividend to

[00:06:38] purchase 10,000 of whatever you just sold. You now have the same net worth, the same stock holdings,

[00:06:44] and the same amount of cash in the portfolio. After all, a dollar is a dollar. The difference?

[00:06:50] Your taxable income is lower than if you received an extra 10,000 in dividends in the taxable account.

[00:06:57] Only the gain portion of the stock sale is taxable, whereas 100% of the dividend would be.

[00:07:04] And number five, we're buying a new to us vehicle. What is the lesser of two evils?

[00:07:10] A used car loan at 5% interest or a 401k loan at 7.5% interest? Making virtual car payments

[00:07:19] to a savings account until there was enough to pay cash for the vehicle would be the ideal option,

[00:07:24] but when that isn't possible, we can think about this in accounting terms.

[00:07:29] Purchasing a used vehicle with a loan adds both debt and an asset to the household balance sheet.

[00:07:35] Because money is fungible, it doesn't matter if the loan is from a 401k or not.

[00:07:40] I'd go with the lowest interest rate option. I suppose with a 401k loan, you might get some

[00:07:46] accidental market timing. That could be good or bad. Summary. The numerous account types we use

[00:07:53] in the modern world can complicate how we think about money. But whenever I get confused,

[00:07:58] I just remind myself that a dollar is a dollar and it helps steer me in the right direction.

[00:08:03] The examples using coins, credit cards, pre-tax accounts, and debt hopefully cut

[00:08:08] through the confusion. A dollar is a dollar. Money is fungible. Also, if you see a kid paying

[00:08:14] for a toy with coins, please don't be a jerk about it. You just listened to the post titled

[00:08:23] Money is fungible by Jeremy Jacobson of gocurrycracker.com and I'll be right back

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[00:09:42] Looking to part ways with complicated, expensive, and uncertain shipping?

[00:09:46] Then give your business the edge it needs with USPS Ground Advantage shipping from the United

[00:09:52] States Postal Service. Keep everything simple with clear, upfront pricing and no unexpected

[00:09:59] surcharges. Keep things affordable with some of the lowest prices out there. And keep it all

[00:10:05] reliable with on-time ground shipments. It's time to turn shipping to your advantage. Learn how at

[00:10:12] USPS.com slash advantage. USPS Ground Advantage. Simple, affordable, reliable.

[00:10:22] The fungibility of money is awesome when you have the need for flexibility.

[00:10:26] But many of us need to put that idea aside when it comes to budgeting. Budgeting is all about

[00:10:32] giving every dollar a specific purpose, whether it's for groceries, rent, savings, retirement,

[00:10:38] or treating yourself to a fancy coffee. It's like being the director of a financial movie,

[00:10:43] where every dollar has its assigned role. However, since every dollar is essentially the same,

[00:10:49] it can blur the lines of budgeting. Let's say you allocate $50 for groceries this week,

[00:10:55] but then you spot a killer sale on shoes. Suddenly that grocery money starts looking

[00:11:00] mighty tempting for a shoe splurge. So while the concept of giving every dollar a job is a

[00:11:06] solid budgeting strategy, the fungibility of money means those dollars might not always stick

[00:11:11] to their assigned roles. It takes discipline and mindful spending to keep those dollars in line

[00:11:17] with your budgeting goals. This is why I look at my retirement savings as a tax on paying to my

[00:11:23] future self, and I have no claim to it now. Technically, that's not true. I could raid my

[00:11:29] retirement accounts and pay penalties and taxes if I really wanted to. But by mentally seeing that

[00:11:35] money as having a specific job that I don't want to interrupt, it helps me protect that money for

[00:11:41] my future. And that should do it for today. Have a happy rest of your day, and I'll see you tomorrow

[00:11:46] where your optimal life awaits.