3569: Money is Fungible by Jeremy Jacobson of Go Curry Cracker on Financial Perspective

[00:00:00] Dell PCs with Intel inside are built for the moments that matter. For the moments you plan and the ones you don't. Built for the busy days that turn into all night study sessions. The moment you're working from a cafe and realize every outlet's taken. The times you're deep in your flow and the absolute last thing you need is an auto update throwing off your momentum. That's why Dell builds tech that adapts to the way you actually work. Built with long lasting batteries so you're not scrambling for the moment.

[00:00:30] The closest outlet. And built in intelligence that makes updates around your schedule not in the middle of it. They don't build tech for tech sake. They build it for you. Find technology built for the way you work at Dell.com slash Dell PCs. Built for you. This is Optimal Finance Daily. Money is Fungible by Jeremy Jacobson of Go Curry Cracker

[00:01:00] In economics parlance, they say money is fungible. Meaning no dollar is unique or special and they are all fully interchangeable. A dollar is a dollar. I learned this concept early in life when I successfully paid for a G.I. Joe action figure entirely with pennies. Go Joe! But this is a little more complex in the modern world. So here are some money fungibility related questions or comments I've received over the years. Money is fungible.

[00:01:30] Here are some fun examples of monetary fungibility. Number one. I hate coins. I'll do anything to avoid carrying change. Do you know how much a G.I. Joe action figure worth of pennies weighs? Or how loud a cashier will sigh when they see you pull out the coin jar? Or how long the checkout line will grow will said annoyed cashier count those pennies? Twice. A dollar is a dollar if you ignore the social ramifications.

[00:02:01] Perhaps the experience explains why I use a credit card for everything, where possible. I do my best to eliminate coin accumulation. It also gives me up to 30 days of float. Otherwise, we toss all coins in a small jar we keep near the door. When it fills up, I bring it to the nearby 7-Eleven and use the funds to increase the balance on my prepaid card. In the U.S., I used to bring the coin jar into my credit union near work to use their free counting machine.

[00:02:30] My parents would empty the coin jar once each year to help pay for the family's summer vacation. Optional, stuffing coin roll wrappers together is a rewarding and fun family bonding experience. I live in a non-tipping culture, but I'll sometimes leave coins as a tip for small cash purchases. Taiwan has a $50 coin, and maybe a coffee costs $45. So I'll toss the $5 change into the tip jar. Although my favorite nearby coffee shop now accepts Apple Pay.

[00:02:59] In the U.S., paying tips in cash or coins is almost always better, because it ensures that the server will benefit from it immediately. Number two. I have an emergency fund with $1,000 and credit card debt of $1,000. I want to get out of debt, but then I won't have any money. What should I do? I'd pay off the credit card debt with the emergency fund. Should an emergency arise before replenishing the savings, the zero balance credit card is the emergency fund.

[00:03:28] For reference, our emergency fund is about $0. Using just these two accounts, your net worth is $0 either way. But paying 18% interest on a credit card to keep some cash earning 0.1% just in case is a net loss every month, which is technically an emergency. Number three. We want to retire early and have saved 25 times our annual expenses.

[00:03:53] The problem is that most of those funds are in retirement accounts, and our taxable accounts aren't big enough to last until age 59 and a half, when we can make 401k or IRA withdrawals without penalty. What can we do? Pre-tax, post-tax, and taxable accounts do complicate dollar fungibility a bit, as withdrawals may have different after-tax values. However, there's a false assumption buried in this question.

[00:04:18] We can withdraw funds from retirement accounts before age 59 and a half without penalty via Roth IRA conversions and or SEPs. These withdrawals are taxable, of course, but the tax burden may be zero. You can also withdraw Roth IRA contributions at any time without taxes or penalty. What I would do? Double or triple check that you've saved 25 times your expenses with taxes included,

[00:04:47] then proceed without worrying too much about the split between pre-tax and taxable accounts. Make annual Roth IRA conversions if you can do so at a zero or low reasonable tax rate. Try kick-starting your retirement even. If the taxable account runs low as you approach age 59 and a half, set up a SEP to bridge the gap between then and the big six zero. Number four. I want to live solely from dividend income,

[00:05:16] but like the earlier question, a lot of our funds are in retirement accounts. With only a 2% yield on the S&P 500 or whatever, dividend income alone isn't enough to cover our cost of living. Ideas? One idea is to not limit yourself to living solely from dividend income. It isn't necessary, but I digress. Another idea is to sort of make your own dividend. If you receive $10,000 in dividends in your retirement account,

[00:05:44] access it by selling $10,000 worth of stocks in your taxable account. Use the retirement account dividend to purchase $10,000 of whatever you just sold. You now have the same net worth, the same stock holdings, and the same amount of cash in the portfolio. After all, a dollar is a dollar. The difference. Your taxable income is lower than if you received an extra $10,000 in dividends in the taxable account. Only the gain portion of the stock sale is taxable,

[00:06:14] whereas 100% of the dividend would be. And number five. We're buying a new-to-us vehicle. What is the lesser of two evils? A used car loan at 5% interest or a 401k loan at 7.5% interest? Making virtual car payments to a savings account until there was enough to pay cash for the vehicle would be the ideal option. But when that isn't possible, we can think about this in accounting terms.

[00:06:43] Purchasing a used vehicle with a loan adds both debt and an asset to the household balance sheet. Because money is fungible, it doesn't matter if the loan is from a 401k or not. I'd go with the lowest interest rate option. I suppose with a 401k loan, you might get some accidental market timing. That could be good or bad. Summary The numerous account types we use in the modern world can complicate how we think about money.

[00:07:09] But whenever I get confused, I just remind myself that a dollar is a dollar, and it helps steer me in the right direction. The examples using coins, credit cards, pre-tax accounts, and debt hopefully cut through the confusion. A dollar is a dollar. Money is fungible. Also, if you see a kid paying for a toy with coins, please don't be a jerk about it. You just listened to the post titled,

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[00:09:02] Built for the busy days that turn into all-night study sessions. The moment you're working from a cafe and realize every outlet's taken. The times you're deep in your flow and the absolute last thing you need is an auto-update throwing off your momentum. That's why Dell builds tech that adapts to the way you actually work. Built with long-lasting batteries so you're not scrambling for the closest outlet. And built-in intelligence that makes updates around your schedule, not in the middle of it.

[00:09:32] They don't build tech for tech's sake. They build it for you. Find technology built for the way you work at Dell.com slash Dell PCs. Built for you. The fungibility of money is awesome when you have the need for flexibility. But many of us need to put that idea aside when it comes to budgeting. Budgeting is all about giving every dollar a specific purpose.

[00:09:59] Whether it's for groceries, rent, savings, retirement, or treating yourself to a fancy coffee. It's like being the director of a financial movie, where every dollar has its assigned role. However, since every dollar is essentially the same, it can blur the lines of budgeting. Let's say you allocate $50 for groceries this week, but then you spot a killer sale on shoes. Suddenly that grocery money starts looking mighty tempting for a shoe splurge.

[00:10:27] So while the concept of giving every dollar a job is a solid budgeting strategy, the fungibility of money means those dollars might not always stick to their assigned roles. It takes discipline and mindful spending to keep those dollars in line with your budgeting goals. This is why I look at my retirement savings as a tax I'm paying to my future self, and I have no claim to it now. Technically that's not true.

[00:10:52] I could raid my retirement accounts and pay penalties and taxes if I really wanted to. But by mentally seeing that money as having a specific job that I don't want to interrupt, it helps me protect that money for my future. And that should do it for today. Have a happy rest of your day, and I'll see you tomorrow where your optimal life awaits.