There are certain words people bandy about like everyone knows what they mean. And I don't think that's true. People are born knowing anything about finance, it's all learned. The three that are the most prevalent in fiance are taxes, stocks and bonds. Here I offer just a little context for you to steal and use at a cocktail party.
I talk about taxes a decent amount so I just want to makes sure we are all on the same page here. So there are all sorts of taxes. I’m only going to address 2 – ordinary income tax and capital gains. First is ordinary income tax, the cruel bitch. Here’s a picture of the history of taxes. Important thing to note:
- People used to pay WAY more. Like up to 94ish% on their top dollars
- Taxes always suck now, but historically they are still pretty low
- The average highest tax bracket is 60% and the law of averages states that numbers are always moving towards their average so it stands to reason that taxes are going up. (Well that and the massive US deficit.)
The Stock Market or Ya Know, Wall Street Stuff
Owning stock in a company means that you own a share of that company. And from that notion an entire market was created. To me the stock market is like CatDog, the old Nickelodeon tv show, just when I start to think I understand it completely something new pops up that changes everything and kind of upsets me. I mean really, where does CatDog poop from?! How do stocks go up? What makes them go down? I know now that I got all licensed but really when you think about it, things are pretty arbitrary. I mean try to find a pattern in the chart below! I can’t, can you? I know there is a downturn every 3-7 years but not specifically when. I know the average return is 5.53% but I don’t know what my personal average will be since it depends on when I buy into the market and when I sell out.
Bonds, Because They Have Fiber
Bonds are kind of the opposite of stocks. When you own a bond it essentially means that you loaned money to someone/place and they are going to pay you interest on that money and then, after a certain amount of time, they will pay you back. Some people think bonds are a more reliable market because there is less chance of losing your initial investment (principle). Which is true but take a look at the chart below. If you were depending on bond interest (the money that comes when you own bonds) to live on the difference between 18% and 5% is massive. On $1,000,000 that’s either $180,000 or $50,000.
Basically this is all to say that with taxes and investments there are no guarantees. We can't predict the future. And without that skill, we leave ourselves open to risk whenever we get in the ring with taxes, stocks or bonds. Thankfully there are places you can get guarantees with financial products but I'll leave that for another day.