Archive for the ‘Question of the Day’ Category

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How does Social Security work?

Monday, August 10th, 2009

Everyone who works has to pay Social Security taxes on their earnings. Employers and employees pay social security taxes, and self-employed individuals pay twice as much, being both employer and employee. You pay Social Security every year for as long as you work.

So what do you get in return for shelling out all this money to the government? Once you stop working for a legitimate reason, like retirement or injury, the government supports you with the money that was collected in Social Security taxes. In addition, because you were the one paying all those taxes for so many years, you don’t have to be in desperate need of funds to qualify for Social Security – you have a legal right to those benefits.

There are certain terms and conditions, of course. People who earned more money throughout their lives paid more money in Social Security taxes, so they have a right to higher benefits. However, Social Security is weighted in favor of workers with lower lifetime earnings and workers with families to support. This means that even though the wealthier may get higher absolute benefits, low wage earners get more money relative to how much money they paid throughout their lives. The goal of Social Security is to prevent those who have stopped working from becoming poor, but it isn’t a charity: you’re paying the government when you’re young and healthy so you can use that money when you’re not.

What trades on the CME?

Monday, August 10th, 2009

The CME is the Chicago Mercantile Exchange, the largest futures exchange in the United States. The CME is also the exchange where the idea of a futures contract first developed (all the way back in 1851, when it was called a “forward” contract). The exchange trades in futures and options for all major asset classes; its four main product areas for futures are interest rates, stock indexes, foreign exchange, and commodities.

Why do some nonprofits have a for-profit arm?

Monday, August 10th, 2009

Frequently (especially in tough economies), nonprofits struggle to meet their costs on grants and donations alone. When these organizations consider their options for a financially sustainable future, they sometimes choose to create a for-profit arm – though the goal of the for-profit business is generally just to finance the nonprofit’s mission and activities when its members can’t do so by other means.

Like any other organization, nonprofits need money to accomplish their goals, or even just to pay employees and keep the lights on, and there isn’t any way around that. So if they can run a business that doesn’t conflict with their mission or ideals, how is that so much different from throwing fundraising parties or soliciting donations? But having a for-profit arm doesn’t turn a nonprofit into a full-scale business. Why? The difference is that, in a regular company, the goal is to make money for the owners of the business. The more money the company makes, the richer its owners (and stockholders) get and, by extension, the more they’re willing to pay their employees. But even if a nonprofit has a for-profit arm, the extra money generated goes toward the nonprofit’s mission, not in its CEO’s wallet.

Aren’t health and a clean environment human rights?

Monday, August 10th, 2009

Deciding which causes you want to support – with time or money – can be confusing. If you give to just one cause, you might feel like you’re neglecting something else you care about, and it seems like some of the categories overlap anyway. Aren’t health and a clean environment human rights? It depends on who you ask. Even defining exactly what it means to be or have a human right isn’t simple.

The UN’s Universal Declaration of Human rights and other major documents have listed health and a clean environment as “human rights,” but what might be more relevant for you as a budding philanthropist to realize is that giving to an organization with a specific mission can have a broad impact. Many microfinance and poverty causes aim to help their constituents develop sustainable livelihoods – which has environmental and health implications as well financial ones. Helping to preserve and restore local environments can have major health and economic benefits as well. All of these things make people better able to live happy, meaningful lives, which is the true spirit of human rights.

The point is to find a cause that excites you and in which you will enjoy becoming involved, whether by giving money or time. The impact you make might be far wider-reaching than you think.

Why does every pro athlete have their own foundation?

Friday, August 7th, 2009

Tiger Woods, Michael Phelps, Mia Hamm, and seemingly every other big athlete out there has their own charitable foundation. There are many reasons why an athlete might open his own foundation, which are really no different than the reasons a normal person would have for starting a foundation. Starting a foundation allows you to determine its mission – what causes it plans to address and how it will go about doing that. Mia Hamm’s foundation focuses on two causes very close to her, young women in sports and transplant patients – her brother Garrow died from complications from a transplant. A lot of athletes’ foundations have something to do with the sport in which they excel or with another cause otherwise meaningful to them.

Also, having a foundation is good PR. Running a foundation that does charitable work makes you look like a good person and therefore, more marketable for a larger number of companies. This can be good for endorsement deals and generally adding to your fame. That isn’t to say that athletes are bad for being famous and starting foundations at all – their fame can bring lots of attention to issues that might otherwise be overlooked. Although not an athlete, Farrah Fawcett’s advocacy and unfortunate death brought lots of attention to a little-discussed form of cancer.

Some think it would be better to give to a pre-existing foundation than starting your own. Michael Jordan closed down the Michael Jordan Foundation because he wanted to focus on the James Jordan Foundation, started in honor of his father. He noted that they did similar things and he wanted to be able to concentrate his energy and money in one place to enhance his impact.

Starting a foundation allows athletes and other people with money and influence to direct their giving precisely as they choose. They should be commended for lending their name and their money to causes that need support, and so should you for giving to good causes.

If I donate to an organization, will my boss donate too?

Friday, August 7th, 2009

You might be sufficiently passionate and inspiring enough to convince your boss to donate, but you shouldn’t get discouraged if he or she doesn’t follow your lead. Being passionate about a cause can inspire others to give, and advocating for something you believe in is a powerful way to support your cause. Being a good example to your co-workers, classmates, and friends is very important, but there is certainly no guarantee anyone will follow suit.

There is one situation in which the boss’ donation is a sure thing: some organizations have “matching gifts programs” in which your company, or your boss, will match the amount of your donation to a good cause. This encourages people in a company to give and is one way good companies and other organizations can make a big impact on lots of important causes. Whether or not you are involved in a matching gifts program its good to give – if your donation can help others to make the same good decision, it’s even better.

Two for the price of one?

Monday, August 3rd, 2009

Once you’re married, you and your spouse probably live under the same roof and share most of the expenses, so it makes sense that you should be able to share taxes, too, right? The government does allow married couples this option: you and your spouse can choose to file joint or separate tax returns. If you file a joint tax return, the government basically taxes the two of you as one person, lumping your incomes and tax deductions together; if you file separately, you’re taxed in much the same way you both were when you were single.

Why does the government give you the option to file separately? Although filing a joint tax return usually means you and your spouse pay less in taxes, this isn’t always the case. The problem is tax deductions due to theft, casualty losses, or medical expenses: in order to earn a tax break for these and similar catastrophes, you usually have to have lost or been charged for a certain percent of your income (usually 10% for casualty losses and around 7.5% for medical expenses). If you file jointly, your income is higher, so it’s harder to reach the benchmark that would let you qualify for those deductions. It’s a matter of considering both options and figuring out which one saves you more money.

How does your mood affect the market?

Thursday, July 30th, 2009

Believe it or not, the way you feel about the stock market can actually affect its performance. The Consumer Confidence Index (CCI), a measure of how optimistic the average citizen feels about the present and future economy, is considered a valuable resource for predicting market trends. The premise is simple: if people feel pessimistic about the market, they generally sell stock, and the market indeed goes down. The reverse is also true. But how do you measure confidence?

The CCI is put together once a month by an organization called the Conference Board. The Conference Board conducts a survey of 5,000 U.S. households, asking questions about people’s opinions of the present economy, the possibility of future improvement, and the availability of jobs. Its members plot the results and look at, for example, how many people think the economy is “good” versus how many people thought so last month. The original point of reference is the year 1985, because during that year the U.S. economy was fairly “normal” – we weren’t in boom times or in a recession. By comparing the newest data to the previous month’s data, as well as to a fairly neutral reference point, the Conference Board can determine whether consumer confidence is declining or increasing and whether it’s higher or lower than you’d expect during an average year.

How do shareholders exercise power?

Thursday, July 30th, 2009

A shareholder, or someone who owns stock in a company, has some power to make decisions about what that company does. The primary way in which a shareholder has power is by voting in the annual meeting. Usually you get one vote per share, unless you have special shares that come with extra votes or other perks – the more shares you own, the more power you wield.

If you can’t physically make it to the meeting you can send in a proxy vote. Some time before the meeting, the company should send each shareholder a packet with information on how to do this.

All the information you need to make an informed vote is made available in the annual report sent to shareholders. You can empower yourself and your dollars by staying informed and using your vote as a shareholder.

What’s the difference between a credit score and a credit rating?

Thursday, July 30th, 2009

A credit rating is like a grade for how likely an individual, company, or even a country is to pay back debts on time. Credit rating agencies or bureaus keep track of relevant information about a person, company, or country to determine their credit ratings.

A credit rating for an individual is called a credit score and is a three-digit number, like a batting average in baseball. Credit bureaus (like Equifax or TransUnion) look at how consistently you pay your bills and then publish your credit score, which creditors like banks use to determine how much they are willing to loan you.

Commercial credit rating agencies like Moody’s or Standard & Poor’s assign ratings to companies – from AAA down to D – that reflect how likely it is that the company will pay back dividends on your investment. Some rating agencies also give sovereign credit ratings, i.e. ratings for countries. These ratings give you some idea of how safe it is to invest in that country and take factors like political stability into account.

Your credit score tells creditors (like banks) if you are a good investment or not. Corporate and sovereign credit ratings can help you decide what might or might not be a wise investment.

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