Archive for the ‘Question of the Day’ Category

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What’s the difference between regular investing and socially responsible investing?

Wednesday, July 29th, 2009

Socially responsible investing (SRI) is a philosophical approach to investing. While investing typically focuses on only maximizing financial return, SRI also takes into account social considerations when calculating a return. You can think of it as a single bottom line vs. a double or even triple bottom line. SRI looks at financial return, as well as the investor’s impact on society, and the environment.

But SRI isn’t just unique in the way it measures returns – it’s also a distinct approach to the investments themselves. Let’s say you’re in the stock market. With a regular investing mindset, you’d choose companies based on how well they perform – how much money they make. With an SRI mindset, you would look at the company’s financial performance, but also its mission. SRI tends to avoid investing in alcohol, tobacco, gambling, weapons, and military companies for instance. Instead, a socially responsible investor might invest in an alternative energy company or a microfinance institution that is profitable but also directly beneficial for society.

Due to the rising popularity of mixing business and conscience, there are now funds and financial advisors devoted specifically to socially responsible investing.

You’re a foundation. Do you sit on that mountain of money or make it rain?

Tuesday, July 28th, 2009

John Hunting started the Beldon Fund 10 years ago with the intention of giving it all away by this year. He said, “I felt as an environmentalist that it was imperative to spend the money now, because it would be silly to wait for the future if there wasn’t going to be a future.” As planned, the Fund closed to meet its deadline.

This spend-down strategy is called a sunset provision. Foundations use sunset provisions when they want to assert a sense of urgency for a cause. The Beldon Fund spent approximately $120 million over its decade lifespan building a groundswell of support for its environmental cause. About 12% of family foundations adopt sunset provision like the Beldon Fund.

What does the World Bank do?

Monday, July 27th, 2009

The World Bank is comprised of two institutions — the IBRD (International Bank for Reconstruction and Development) and the IDA (International Development Association) — and collectively has the common goal of providing technical and financial assistance to developing countries around the world.

Basically, the World Bank gives money – in the form of low-interest loans and grants – to developing countries for many different developmental purposes: education, health, public administration, infrastructure, financial and private sector development, agriculture, and environmental and natural resource management.

What kind of taxpayer are you?

Friday, July 24th, 2009

You have a different filing status (taxpayer type) depending on your living situation. Your filing status helps determine your eligibility for certain credits and deductions and how much those deductions are worth, how you should submit tax information to the government, and how much you need to pay in income taxes. There are five main filing statuses, each generally designating a different level of financial dependence or independence.

“Single” is basically the square one of filing statuses: it means you’re only responsible for yourself.

If you’re married, you and your spouse can choose either the “married filing jointly” or “married filing separately” statuses. If you file separately, you’re basically treated as two “single” individuals, while joint tax returns make the two of you more like one entity.

If you file as “head of household,” it means that you have at least one dependent. A dependent is someone who has someone else (you, in this case) provide at least half of his or her income. Children and elderly or retired parents are the most common dependents, but you can claim anyone who fits this description as your dependent. When you file as head of household, you’re saying that you’re responsible for supporting at least one other person, so in return you have to pay less in taxes yourself. Lastly, you can file as qualifying widow/widower with dependent child; this status also decreases your taxes because you have a dependent to support and you’ve lost a source of income with the death of your spouse.

How much should you tip the waiter?

Monday, July 20th, 2009

Everyone asks themselves the same question once the bill comes: How much should I leave for a tip?

While there is no one correct answer, there are some standards that most people abide by. Generally, leaving an 18-20% tip is generous and is appropriate for good service. A 10% tip would be appropriate for subpar service, and for really bad service you’re not obligated to leave a tip at all. Of course the opposite is true, too – leave as much as you want for awesome service.

The important thing to remember is that much of a waiter’s salary is made up of the tips they receive from each table.

An easy way to calculate the tip is to find 10% by moving the decimal one place to the left ($25.00 becomes $2.50) and then double it for 20% ($5.00).

Can a bad stock be a good stock?

Friday, July 17th, 2009

One of the most basic principles of investing is that you want to buy stocks you think will achieve significant growth – you pay a certain price for them now in the hope that they will soon be worth much more. When you end up with stocks that aren’t increasing in value, you usually sell them. But is it ever worth it to hang onto a stock that isn’t growing rapidly?

An alternate way to profit from your stocks involves earning dividends, or payments a corporation makes to its shareholders out of the company’s quarterly earnings. Companies don’t have to pay dividends, so those that choose to do so are trying to attract shareholders. These companies’ growth rates have usually leveled off, and they don’t think they’ll benefit from trying to increase their growth any further, so they have to provide their investors with something else of value. As long as the company is stable – that is, as long as it’s not rapidly decreasing in value – you can still earn money from dividends, even if your stock isn’t growing as quickly as you’d like. So there are times when a stock that’s considered bad by conventional standards can actually turn you a profit through less conventional means.

What’s the idea behind taxing the rich more versus less?

Friday, July 17th, 2009

It might seem fair to make everyone pay the same percentage of their income in taxes. That way, the rich pay more money than the poor do, but everyone keeps the same fraction of their money to use however they wish. Then why does the government make you pay a higher percentage the more money you make? Don’t the rich contribute enough as it is?

In the U.S., we have what’s called a progressive income tax, which means you get taxed at a higher rate the more money you have available for taxation. The reason we have a progressive income tax, even though a proportional tax (where everyone gets taxed at the same percentage) might seem fairer, is because a progressive tax reduces the tax incidence of people with lower ability-to-pay.

What does this mean? Tax incidence “falls” on the group that ends up bearing the brunt of taxation. Usually, tax incidence falls on those with less money (the amount they have to pay in taxes more drastically affects their standard of living). You could take away half of Bill Gates’ or Warren Buffet’s money, and they’d still be amazingly rich, but if you took away half the income of the average worker, his ability to live comfortably – even just to pay all his bills – would be seriously affected. Our economy has made some people incredibly well-off, so we ask them to give more back because they can more easily afford to part with it.

Why can’t you cash in your trust fund as soon as you get it?

Wednesday, July 8th, 2009

The ways in which trusts can be controlled vary widely. Some trusts have an age restriction (for example, you might not get access until you turn 21, or maybe you get half of it at 25 and the other half at 30); others allow you only a set monthly income out of the trust; there are also those that require you to reach a milestone in your life (say marriage or children). In addition, the person or people who set up the trust appoint trustees – people whose job it is to make sure the trust is used according to their wishes. Many trustees have legal permission to deny money to the beneficiary (the person the trust is for) if they have reason to believe he or she will use it inappropriately. All these restrictions can be quite a pain, but when you consider that a trust is basically a gift, the trust’s creator naturally has some say in how that money is used.

What does the government do with all this tax money?

Tuesday, July 7th, 2009

If you’ve ever received a paycheck, you’ve probably noticed that a big chunk of your earnings go to Uncle Sam. The government collects trillions of dollars in taxes every year. There are different types of taxes, such as income tax and property tax, but all funds collected are ultimately spent by the government.

In 2004, the federal budget was approximately $2 trillion. Here is a breakdown of how that money was spent:

  • 26.2%—Military
  • 22.6%—Interest on the national debt
  • 19%—Health care
  • 5.5%—Income security
  • 3.4%—Veterans’ benefits
  • 3.3%—Education
  • 2.5%—Nutrition
  • 1.6%—Housing
  • 1.6%—Environment
  • 11.4%—Everything else

You can get much more detailed information by visiting government agency websites like the Congressional Budget Office.

Why does the United States give more aid to developing countries than anyone else?

Tuesday, July 7th, 2009

In absolute numbers, the U.S. gives by far the most money in Official Development Assistance (ODA) – in 2008 it was nearly twice that of the next biggest donor, Germany. Compared to how much money we have, however, the U.S. actually gives the least of any developed country. Does this mean Americans are the least generous people of all the nations of the industrialized world? Hardly. ODA is just foreign aid give by governments under the watch of the OECD (Organization for Economic Co-operation and Development). It doesn’t take into account private contributions from individuals, foundations, and other institutions.

American people, foundations, and institutions send more money and aid abroad than private citizens and organizations in any other developed country in the world by far. Why? It might be easier to understand by examining why people in other countries give less. In Europe – where most of our fellow developed countries are located – there are tons of big social programs based on the philosophy that the government should take care of the poor and other issues that Americans generally think should be taken care of by private individuals, religious organizations, and stuff like that. In order to pay for these big social programs, these countries have equally big taxes. Even more so, the U.S. gives tax breaks to people who give to charity – almost paying you to give money away.

Living under the assumption that the government should pay for all social ills, and having less money to give away because of higher taxes isn’t a recipe for huge private donations.

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