March 20, 2023

Bucks Blog: Fewer Bank Accounts May Lead to More Savings, Study Finds

When it comes to bank accounts, less may be more if your goal is to save money, new research finds.

The report, from researchers at the University of Utah and the University of Kansas, found that test participants who had multiple bank accounts saved less than subjects who had a single account, suggesting that consolidating accounts may help you spend less.

It appears, said Promothesh Chatterjee, an assistant professor of marketing at the University of Kansas School of Business and one of the study’s authors, that if you have multiple accounts, it becomes easier to justify spending from one account because you can reason that funds are available in the others. “If you have a single account,” he said, “you know exactly how much money you have and how much you’ll have left.”

The report will be published in the May issue of Organizational Behavior and Human Decision Processes, a journal that tracks applied psychology.

The report is based on four related studies, involving 566 subjects, who were randomly assigned to have either a single liquid bank account, or three accounts. (The subjects were college students who received partial course credit for participating.) The students earned money — up to $100 total — for completing certain tasks on a computer. They were then given opportunities to buy items (in one case, the items included university T-shirts, notebooks and a computer mouse) with their earnings, or have the money added to their savings balance.

“In this research, we demonstrate that individuals allocating their earnings to a single account saved more than those who spread their earnings across multiple accounts,” the report says.

It’s not that people can’t do the math to add up the multiple accounts, Professor Chatterjee said. “But somehow, when we are motivated to spend, we don’t want to do the accounting.”

The finding suggests that having one account — or at least, one checking and one savings account, rather than multiple savings accounts — could encourage savings more effectively. If such an arrangement isn’t practical, or if you are strongly attached to multiple savings accounts, the report says, one alternative may be to use a software program that consolidates your accounts onto one screen, so you can see  your total balance in one place.

Do you have multiple savings accounts? If so, do you think that helps, or hurts, your attempts to save?

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DealBook: The Winners and Losers Under Romney’s Tax Plan

The Republican presidential candidate Mitt Romney has indicated that his plan is revenue neutral.Eric Gay/Associated PressThe Republican presidential candidate Mitt Romney has indicated that his plan is revenue neutral.

Tax reform always has its winners and losers. Mitt Romney’s proposed plan to lower tax rates and limit deductions is no different, but it takes some digging to sort it out.

Mr. Romney has indicated that the plan is revenue-neutral, raising as much revenue as current law. He has also said it is “distributionally neutral” — meaning that the rich, middle class and poor would all continue to bear the same aggregate tax burden as they do now.

The idea seems to be that lowering tax rates would spur economic growth, and the reduction in revenue from lowering rates would be at least partly offset by increased revenue through limitations on deductions, credits and exclusions.

In recent weeks, the focus has been on whether the math “works” in the sense of whether cutting deductions for the wealthy would actually generate enough revenue to finance the proposed rate cuts. The implication, based on a study by the Tax Policy Center, is that in order to remain revenue-neutral, the middle class would have to share the pain of limited deductions. That would effectively shift the tax burden from the rich to the middle class and violate the stated goal of distribution neutrality.

What has been missing from the conversation is a discussion of who wins and loses if, as Mr. Romney insists, the plan sticks to its goal of distribution neutrality.

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Distribution neutrality is a funny concept. Even if the plan is distributionally neutral, there still must be winners and losers. After all, if everyone paid exactly the same amount in taxes as before, then tax reform would not be reform: it would be the same as no change at all in the tax code.

Some people will pay a lot more and some will pay a lot less, even if the rich, middle class and poor each continue to pay the same amount in the aggregate. The fairness of the plan will depend on how finely calibrated each group is defined. Economists often group taxpayers by income quintiles, but a definition this broad places both middle-class homeowners and billionaires in the same group, even though ability to pay varies greatly.

Who are the likely winners and losers under the Romney plan? Most of the action will occur within this top quintile of taxpayers. These households make at least $100,000, and they make about $250,000 on average, before tax. In the aggregate, they pay most of the federal income tax burden.

Assume, as Mr. Romney suggested in one debate, that deductions, in total, would be limited to $25,000. The winners would be those who would enjoy the lower rates but do not take a lot of deductions. Their tax burden would shift onto heavy users of deductions.

And who is that? Let’s focus on three important tax breaks: the mortgage interest deduction, the charitable deduction and the deduction for state and local taxes. The pain would be concentrated in areas with a high cost of living like New York, New Jersey, Connecticut and California, where home prices and state and local taxes are high.

The mortgage interest deduction, under current law, is capped at a million dollars of mortgage debt. Under the Romney plan, even homeowners with a mortgage of $500,000 would quickly fill their “bucket” of deductions. Limiting the mortgage interest deduction is good tax policy, but it will also depress home prices at the high end and lead to substantial opposition from the real estate industry.

Now consider the charitable deduction. Under current law, the deduction is limited to 50 percent of one’s adjusted gross income — a limitation few people run up against. If total deductions are limited to $25,000, however, many people will use up that amount through the mortgage interest deduction, removing the tax incentive to donate.

Finally, consider the state and local tax deduction. The state and local tax deduction is an indirect subsidy to high-tax states like New York, New Jersey and California.

Allowing state and local taxes to be deducted from the federal return reduces the political pressure to keep state and local taxes low. Similarly, the exclusion of municipal bond interest, another tax break that is on the table, mainly benefits state and local governments, while investors pay an implicit tax in the form of accepting a lower interest rate.

The point is not to defend these tax breaks. Rather, it’s to emphasize that tax reform is easy to talk about and hard to do. For every unsympathetic group like insurance companies or oil and gas multinationals, there’s a charity like the Red Cross or the Salvation Army. And one voter’s loophole is another’s livelihood.

Even in advance of the election results, lobbyists are getting ready for action. The Chronicle of Philanthropy reports that some large nonprofits sent letters to President Obama and Mr. Romney last week urging them to maintain the charitable tax deduction as is. This grouping of nonprofits also announced “a gathering on Dec. 4 and 5 to bring hundreds of its members to Washington to tell members of Congress that any tax changes that led to decline in private giving would devastate nonprofits and the people they serve.”

From an academic perspective, there is much to like in the Romney plan, with its broader base and lower rates. But it is not a win for everyone. And history shows that those who would be made worse off have great success in persuading Congress to maintain the status quo.

Victor Fleischer is a professor at the University of Colorado Law School, where he teaches partnership tax, tax policy and deals. Twitter: @vicfleischer

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Economix Blog: An Edge in Science Among the Foreign-Born

I’ve previously written about the wage advantage — as well as the simple likelihood of finding and holding onto a job — that comes with a bachelor’s degree in science, technology, engineering or math.

The study in that case concluded that many American technology and scientific companies are forced to recruit from abroad.

But they can also hire from the foreign-born population currently in the United States. According to a new Census report, a much higher proportion of foreign-born residents 25 or older with bachelor’s degrees earned their degrees in science, technology, engineering or math — the STEM fields — than native-born holders of bachelor’s degrees.

The Census report looked at a broader range of degrees than usually considered when defining STEM fields. Majors analyzed by the Census authors, Christine Gambino and Thomas Gryn, included computers, math, statistics; biology, agriculture and environmental science; physical and related sciences; psychology; social sciences; engineering; and multidisciplinary sciences.

Among the foreign-born bachelor’s degree holders, 46 percent had majored in a science or engineering field. That compares with 33 percent of native-born college graduates. One-third of all residents with a B.A. in engineering are foreign-born.

Of the 4.2 million foreign-born residents who have science- or engineering-related bachelor’s degrees, 57 percent came from Asia, while 18 percent came from Europe and 16 percent from Latin America. Immigrants from India produced the largest number of college graduates in science and engineering, followed by Chinese-born immigrants.

Like American-born women, foreign-born women are generally less likely to major in STEM fields. While 51 percent of foreign-born college graduates were women, women represented only 37 percent of those with science or engineering degrees.

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You’re the Boss Blog: Finding the Right C.F.O., Working With a Spouse and Other Thoughts From Readers

Thoughts, comments, questions and other feedback from readers:

Responding to our post about when a small business should consider hiring a chief financial officer:

I would love it if someone would point out how to find a competent C.F.O. for hire. We are a small business and are not ready to add the full time salary of a good C.F.O. The CFOs for hire and accountants that say that they do more than transactional work that we have found were expensive and not particularly good at their job. At least, they didn’t seem to know any more than I do (I have a basic M.B.A). I found one that was recommended by several business owners. Turned out what he was good at was self promotion. He was terrible at financial management. Any suggestions? — HBirmingham, Birmingham

Responding to Jay Goltz’s post about overcoming your fear of pricing:

In my work helping small business owners price more effectively, I’ve found that fear of math often hides a deeper fear: that they are not actually “better” than the competition. Pricing forces us to put a number on our value, and while many small business owners talk about what makes them better than the competition, they lack the confidence to put the corresponding price tag to it. I say “be better, not cheaper.” You don’t have to be better for everyone. That’s one of the advantages of being a small business owner. You can make good money by serving the right niche. Maybe many (most?) people would rather save 10 percent on a frame, but if you become the go-to shop for people who want good frames, you’ll make good money. Sooner or later you have to believe your own messaging. – Reuben Swartz, Austin, Tex.

Responding to Bruce Buschel’s post about mining salt from the sea:

I just thought I would point out to all those that complain and moan about how the government has their hands in everything that this is a concrete example that there are sane rules, regulations and regulators. In this case the F.D.A. genuinely (and correctly) does not care about salt. They do not want it tested, certified, approved, tracked, or even looked at cross-eyed. They DO regulate adding things to salt that aren’t there naturally, but they have properly figured out that most of the bad things that can be in natural salty water either evaporate, die, or cannot be ingested in harmful quantities in food you could possibly stand to eat. – SirWired, Raleigh, N.C.

Responding to Adriana Gardella’s post about growing businesses and growing pains:

As a lawyer, misclassifying employees as independent contractors is rampant. The classification is not rocket science, and most employers who violate the law do so knowingly, and with one purpose — maximizing profits. The enforcement branches of state and federal labor agencies are so depleted, and overworked, few employers are brought to justice. The misclassified independent contractors, desperate for money, remain silent. Just another example of the extraction of money from labor to benefit the owner. — Scott, Chapel Hill, N.C.

Responding to Gene Marks’s weekly round-up post, which asked readers about working with their spouses:

My husband and I own a business together (since May 2003) and for the most part it’s been great. We have very different responsibilities and we spend our days in different cities, so when we see each other in the evening we have a lot to talk about. — Monika, San Francisco Bay Area:

Big mistake! I just bought her out yesterday… — Abu, Toronto

Responding to Adriana Gardella’s post about angel investors-in-training:

Why is it not gender-based discrimination when there are programs that can benefit only women, when it would be considered discriminatory if the programs could only benefit men? — B.N., Freehold, N.J.

Responding to Barbara Taylor’s post about her misgivings over shopping at Wal-Mart:

I guess you don’t care about fair treatment for women or members of minorities, as long as you can buy things cheaply. That’s what your shopping at Wal-Mart says to me. — CDM, Richmond, Calif.

It’s more than a little silly for small businesses to think of Wal-Mart as their competition. That is unless, you don’t have well defined niche. Wal-Mart tries to be all things to all people, or at least 90 to 95 percent of those people. Successful small businesses will practice the art of nichemanship. A well defined niche business will beat Wal-Mart, Costco or any other monolith in the niche they choose to operate within. The problem is most businesses don’t understand what their niche is. In fact, most small businesses will deal with anything that comes through the door. — Josh Patrick, South Burlington, Vt.

Responding to Jay Goltz’s post about Internet retailers not being required to collect sales tax:

Most retailers I know are not worried about Internet competition If you know your stuff, you can deal with that. Nor are we interested in stopping the “march of progress.” It is a question of fairness and ethics. Sales tax helps support, police, firemen, road construction, electric lines, and all sort of of civic improvements. Since Internet retailers use all these, shouldn’t they help pay for them? Isn’t paying these taxes a civic virtue and the sign of a good citizen? Unless Internet retailers intend to create their own systems of support, I think they should help pay for what helps them succeed. Do they owe society nothing?
— Steve, Austin, Tex.

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You’re the Boss Blog: A Small-Business Owner Tries to Overcome the Fear Factor in Pricing

Thinking Entrepreneur

An owner’s dispatches from the front lines.

My fellow blogger Paul Downs recently wrote an interesting post that described his ongoing struggle with developing a pricing strategy. He is hardly alone.

Figuring out how much to charge is part art and part science. We start our businesses, focus on delivering a better product or service, and price it in a way that we believe will win us some customers. Inevitably, we underestimate how long it will take to make or do something. No problem! In the beginning, when you do everything yourself, there is more room for error since you can make it up with your own labor and chalk it up to experience. As you grow, you might pay someone overtime to compensate for a bad estimate. Maybe you will even lose some money.

But it gets more complicated when the company gets bigger and has some success. Eventually, you have to develop a pricing strategy that will allow the company to grow profitably while you are paying people to do everything from sales to production to accounting to purchasing. It may require you to increase prices. For an entrepreneur, this introduces a new element: fear. Fear that you are going to ruin the magic formula that has made you successful. Fear that your customers will flee. And fear that new competition is going to move in on you the way you moved in others when you started the business.

Eventually, your head splits in two. A little accountant stands on one shoulder and says, “Your costs have gone up because you have had to hire more people. You need to charge more to cover the costs of your good people. Being busier does not necessarily mean you are making more money. Get control. You can’t fight the math!” On your other shoulder is the hungry, customer-driven, take-no-prisoners and lose-no-customers salesperson who says, “You have been successful because you are providing a great value. There is an old saying, ‘Quality, service, and price — pick two.’ But anyone can do that. You can provide all three! You are SUPER ENTREPRENEUR! Don’t raise prices, just work harder and smarter!”

Ahhhhhh! What to do?

As usual, doing nothing is a bad option. A good pricing formula is a critical component of a successful business. For some businesses, it is not that complicated. If you own a bike shop, for instance, there is a list price for the bikes, but you have some flexibility in how much to charge for accessories and repairs. If you make custom products like Paul Downs, and you are bidding to get business, it is far more tricky. My custom-framing business falls somewhere in between.

The process starts with cost accounting. When you buy a finished product that you resell, you know what your cost of goods sold is. Kind of. You still have to factor in whether the items will have to be discounted, whether any will be stolen (shrinkage), and whether a percentage of the products will end up in the trash (bananas, for example). Estimates of how long it should take to make something can vary greatly from how long it does take. Every year at the national picture-frame trade show — yes, there is such a thing — I do a pricing class. I always ask the group how long it takes to do the average frame job, and I give specific criteria in “framer language.” I always get answers that range from 15 minutes to an hour and a half. You simply can’t do intelligent pricing if you don’t understand your costs. And that’s true even if you are making money. You may have profitable products or services that are subsidizing unprofitable products or services.

Business owners attempt to compensate for this problem in various ways. You might keep telling yourself that because you are covering your fixed costs, any gross profit you make on incremental sales will fall right to the bottom line. And maybe it will — but only if you are not operating at capacity, and it’s not always easy to tell. Will you need more salespeople? Another delivery truck? More space for storage? I have learned that there are few costs that are truly fixed. When you increase sales volume, there is the opportunity for increased profits, but there is also the danger of unexpected expenses. Seller beware.

Some owners simply price to competition. If you have the exact same expense structure as your competitor and if your competitor is profitable, this may work. But in the real world, many low-price competitors are pricing themselves out of business. We recently had a customer tell us that our prices are higher than those offered by the framing shop she used to use — a shop, she went on to say, that went out of business. My sales consultant helped the customer connect the dots between those two facts.

At my frame shop, we provide great value, great service (my average framer has been here over nine years), and a one-week turnaround. We import frames from all over the world, and we have a rigorous quality-control process. Most of the companies that have tried to go after us by being 10-percent cheaper have gone broke trying because the 10-percent has to come from somewhere — some from profit, some from loss. If we dropped our prices 10 percent, we would get a little busier — and then we would go broke.

Do you sell a product or service that is especially sensitive price changes? This is at the heart of the fear factor. Doing some math can help you make an intelligent decision. Let’s say you sell a product for $1,000 that costs $600, including the cost of goods sold, packaging, sales commission, and charge-card expenses. Let’s also say that your company does $1 million in sales and only has a 1-percent net profit, or $10,000. You consider increasing prices 5 percent. If you do — and this surprises a lot of owners who don’t do the math — you could lose 11 percent of your business and still make more money with the price hike.

Here’s the math. Before the hike, you sold 1,000 units and had $400 on each one left to cover all of the other fixed costs and whatever profit is left. That produces $400,000 ($400 x 1,000) that we can call the contribution margin. Now — taking into account the 5-percent price hike and an 11-percent decline in sales — you sell 890 units with a $450 contribution margin on each one. That produces a total contribution margin of $400,500 ($890 x 450). That extra $500 will add to your net profit, taking it from $10,000 to $10,500. Still not good.

But suppose that, instead of falling 11 percent, your sales were to fall only 4 percent. That would mean you would sell 960 units at $450, which produces $432,000 in total contribution margin (960 x 450). This increases your net profit by $32,000, which means that it will go from $10,000 to $42,000, or 4.2 percent. Much better than 1 percent.

It is, of course, impossible to know exactly what will happen when you increase prices, but doing the math can help you can make an intelligent decision instead of a fearful guess.

There is at least one more factor in pricing, one I call market reality. Suppose, for example, your company makes jackets out of beautiful leather. Very expensive leather. You use good cost accounting. The extra large jackets take far more leather to make than the small jackets, especially because you have to use larger pieces that are perfect. These are luxurious jackets. But, as you probably know, the standard in the industry is to charge the same amount for both large jackets and small ones — even though one costs considerably more. When it comes to clothes, the larger sizes are effectively subsidized by the smaller ones. Go figure.

A business owner has to wear a lot of hats. For many, analyzing pricing is at the bottom of a long list of things to do, but I can’t think of anything that is more critical. Just do it.

Jay Goltz owns five small businesses in Chicago.

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