As a teenager, I stumbled upon the fact that money is fungible while working in a grocery store. I didn’t have the vocabulary, but I had the concept down pat.
You see, as humans, we love to give certain jobs to certain dollars, and we fail to recognize the fact that these dollars are completely interchangeable. The “bucket system” is a great example of this mental accounting.
There can be a good reason to be particular about what money gets spent on what, but failing to recognize the fungibility of money can lead to silly decisions and assumptions that can unnecessarily limit how we invest and spend.
I hope to give you a better understanding of what people mean when they say that money is fungible and why it’s important to understand the concept.
I started out stocking shelves at the local supermarket, but before long, I was trained to do most jobs, including working the cash registers as a cashier and manning (boying?) the customer service counter.
I had various duties at the service counter, including sending faxes for customers, checking VHS movies in and out, and selling cigarettes and lottery tickets.
I noticed a pattern. It was not uncommon for customers on government assistance to first use WIC checks or food stamps to buy food from the cashier, after which they’d come to me for smokes or scratch-offs that they’d buy with cash.
I’ll spare the value judgment; I recognize that both nicotine and gambling can be highly addictive. What I did find intriguing was the fact that the government was effectively subsidizing the purchase of lottery tickets and cigarettes. When using money from social programs to buy food, there was money left over to feed these habits or addictions.
That’s when I first understood the fungibility of money.
Tax Credit Money Spent On Drugs?
A well-known politician recently commented on addiction while ignoring the fungibility of money. According to reports, the Senator from opioid-addled West Virginia expressed his concern that the child tax credit dollars could be used by some parents to buy illicit drugs. Given the state of affairs in Appalachia as a hotbed in our current opioid crisis, I can see why he’d find this thought bothersome.
I hate to be the bearer of obvious news, but in a situation where something like 95% of parents with kids under the age 17 will receive some child tax credit dollars, basically anything that money can buy, including sex, drugs, and rock-n-roll has been and will continue to be paid for with child tax credit dollars. And stimulus money. And tax refunds, electric vehicle credits, paychecks, gift cards, and on and on.
Now, can it be shown that these specific dollars are being used on particular vices? Maybe, maybe not, and it doesn’t much matter, in my opinion. Since money is fungible, if you give people some money and money is spent by some of them on untoward activities, you can easily make a connection between the two.
That said, these unsavory things happen with or without these programs, and it’s best to focus on prevention, dealing directly with the problem you’re trying to solve. Ascribing particular dollars to specific activities doesn’t give us any new information. After all, money is fungible.
Paying for Everything with Dividends!
People love their dividends. An oft-stated goal of some want-to-be retirees is to be able to live exclusively off of their dividends.
Here’s a hypothetical. Let’s say you can live off of 4% of your portfolio, and all of your retirement money is accessible. Would you rather a) receive a 4% dividend and get an additonal 4% in portfolio growth (capital appreciation or b) get 8 % in portfolio growth but have to sell 4% of your shares annually to get by?
I can almost guarantee that the first option would get more love, even though it would lead to you having less money in retirement (and a smaller starting nest egg if you chose this option while working).
How so? 100% of dividends are taxed if your taxable income doesn’t put you in the 0% tax bracket, and receiving those dividends is non-optional.
When you are “forced” to sell shares to fund your retirement, you are only taxed on the gains, that is, the difference between the price you once paid for the asset (your cost basis) and the price at which you sell. And you have much more control over you final taxable income (which will clearly be lower) when you can choose which assets and lots to sell.
People like to think that they’re living only from dividends, but the fact is that you’re living off of your nest egg, and the dividends are just a tax-inefficient payout for most, especially during your working years.
Sell Stocks Without Selling Stocks!
Here’s a conundrum you may face if you retire early without a solid understanding of the fact that money is fungible.
What do you do if your taxable brokerage account is 100% stocks and you planned on spending your taxable dollars first? Some people opt to invest in municipal bonds in their taxable account to avoid having to face this scenario. It’s not necessarily a bad choice — munis are tax-efficient, especially if the fund is specific to your state (if your state charges an income tax) — but it’s an unnecessary move.
So how do you sell stocks without selling stocks?
Remembering that money is fungible, and assuming that you have at least some bond allocation somewhere in a 401(k), IRA, or other retirement account when you’re retired, you can sell stocks from taxable and simply exchange some bonds for stock in a tax-advantaged account.
The end result is that you have the same dollar value in stocks in your entire portfolio as you did beforehand, along with a slightly smaller bond allocation, even though the only assets you sold in your taxable account were stocks.
For this reason, I advocate treating your entire portfolio as a whole and not trying to maintain similar asset allocations in individual accounts. Doing so allows you to invest in the most tax-efficient manner, and it makes rebalancing a whole lot easier, too.
If you need help with setting that up, I’ve got a spreadsheet template that does the job quite well.
Buy One Rental Home & College is Paid For!
This suggestion comes up fairly often when someone asks about 529 Plans in our Physicians on FIRE and fatFIRE Facebook groups. The idea is that if you buy one rental property when your kids are young, the rental income and expected appreciation of the property could pay for your child’s entire tuition by the time they’re college-bound.
Bonus points for those whose kids actually go on to live in the property by matriculating to the college or university closest to this rental property.
While Coach Carson makes some good points when he describes how this is a part of his plan for their girls, I say the whole premise completely ignores the fungibility of money.
You can pay for college with money set aside in a 529 Plan. You can pay for college with money set aside in a taxable brokerage account. You can pay for college with money languishing in a “high-yield” savings account.
You can also pay for college with cash flow from jobs you’re still working, and yes, you can also pay for college with rental income and/or the proceeds from selling a property that’s increased markedly in value over the course of a decade or more.
Is that last one a good idea? It can be if you want to invest in hands-on real estate and you’re able to find a place that cashflows really well or gains substantial value from the time you buy until the time you’re ready to sell.
Since money is fungible, saying that the rental property is paying for college is just another example of mental accounting. If you want to invest in real estate, have at it, but unless real estate is your only type of investment and you’ve got no other income source, you’re not really paying for college exclusively with that real estate investment.
Give Him a Gift Card!
What do you get for the man who has everything? Why, a gift card, of course!
Now, this does ensure that the money you give him can only be spent at the store or restaurant you specify, but the net effect is basically no different than giving cash.
If he was going to spend money there anyway (I’m looking at you, Amazon), then you’ve just given cash that requires a little extra work and a small risk that the money never gets to be spent due to a lost card or absent-minded recipient.
Now, if you give him a gift card for a place that he’d never, ever spend his money, you’ve succeeded in giving him some non-fungible money. But you’re also forcing him to spend on something that he might not value.
Justifying That Splurge
I get this one. Behaviorally, it’s easier to justify an expensive splurge with new money or found money.
The luxury resort in Bora Bora? Earned with extra call shifts.
A new car when your last one was only three years old? That inheritance wasn’t going to spend itself!
However, since money is fungible, unless you’re meeting all of your financial goals — you do have financial goals, right? — it doesn’t make a lot of sense to spend money that’s out of character or misaligned with your money objectives.
Yes, most people do have a need to treat themselves from time to time, and I believe your financial plan should already account for that. Take any newly earned or received money and apply it to reaching your longer-term goals while keeping a budget that allows for the occasional splurge you crave.
Charitable Giving Requests
When you give, you want to make an impact. You want to be sure that all of the money you give goes towards helping other people, cures for diseases, or whales or whatever, and not towards administrative costs, advertising, or paying some executive’s salary. So you specify where the money should go.
While your intentions are good, it doesn’t make much of a difference what you specify. They’re going to have those other costs, and without any sort of advertising or employees, they’d probably not be nearly as effective as they are.
While the recipient can say that all of your donated dollars went to a specific cause, the fact that money is fungible dictates that it doesn’t mean much when they say that. It’s not like they cut the marketing budget or salary pool when you specify that all of your money goes toward something else.
I’m guilty of this myself. We’ve been donating the equivalent of a physician’s salary at One World Surgery in Honduras for several years running, but I fully realize that the money we send via donor advised fund goes directly to one of the doctors we worked with.
If you are concerned about your donated dollars being wasted, do your homework beforehand and only give to charities that keep their overhead reasonably low.
Understand that money is fungible, and you’ll make better-informed decisions with your finances. You’ll be a better investor with a bigger retirement budget who is able to rebalance an entire portfolio with ease. You’ll be better at gifting to both family, friends, and charity.
What other examples can you think of where the fungibility of money is forgotten? How has understanding the fact that money is fungible impacted your life?