Fast Company

10 Things You Always Wanted To Know About Money

(and can't afford not to ask)What are your chances of being audited? Could the economy function without bank machines? What's the one stock investment that you should have made when you were young? We answer 10 questions -- some serious, some lighthearted, all eye-opening -- about the stuff that makes the world go round.

1: What are your chances of being audited?

Not as high as you think. A decade ago, the IRS did audits on one out of every 94 taxpayers. By 2001, the odds slipped to one in 174. The chances that you would be hauled in for a face-to-face inquisition were even lower: one in 625.

Have the T-men lost their teeth? It's more like they've lost bodies. Even as the flood of tax returns swells, the IRS has cut 27% of its full-time jobs since 1992. The IRS Restructuring and Reform Act of 1998 obliged the agency to shift staff out of audit functions to improve customer service.

All of which has proved good news for the rich. If you've made $100,000 or more, your chances of being audited have declined by 95% since 1988. In fact, because of the oversight requirements attached to passage of the earned-income tax credit in 1996, a family that made less than $25,000 was more likely to face an audit in 2001 than their wealth-ier neighbors, according to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

But the exact disparity depends on where those neighbors live. A high-income taxpayer in Los Angeles, for example, was nearly six times more likely to face IRS scrutiny in 2000 (the last year for which the agency released such data) than one in upstate New York or Houston. "How do you explain it? I don't know," says David Burnham, TRAC's codirector. "There were active managers and more-passive managers. L.A. had a very active manager."

- Keith H. Hammonds

2: Has everyone refinanced their house?

Just about. In 2001, roughly 47 million homes had some sort of mortgage associated with them, according to the Mortgage Bankers Association of America (MBAA). In the past two years alone -- a period that smashed all records for mortgage activity -- 16 million mortgages have been refinanced. The dollar figures are even more dramatic. The Federal Reserve says that the total outstanding mortgage debt is $5.8 trillion. MBAA says that during the past two years, $2.6 trillion in mortgage debt has been refinanced -- more than 40% of the total.

At the end of 2002, the Federal Reserve released a detailed study on the impact of refinancing on the economy, filled with dramatic, revealing data. The Fed's study, covering 2001 and the first half of 2002, concluded that between 16% and 23% of people with mortgages had refinanced during that period. Some 45% of those who refinanced took out some cash when they did -- and not trivial sums either. The average amount of cash taken out was $26,700. Perhaps the most dramatic number, though, is the Fed's calculation for total cash taken out: $132 billion, for use on everything from drapes and cruises to credit-card-debt reduction and stock-market investment.

- Charles Fishman

3: Are Swiss bank accounts overrated?

They're certainly not what they used to be. There was a time, as recently as the mid-1990s, when confidential numbered accounts offered a true veil of secrecy. "You didn't even have to be present" to open an account, says Chitra Staley, chief investment officer at financial-advisory firm Mintz Levin. "You just came up with the cash -- about $2 million if you knew someone, $5 million if you didn't -- and signed your name." Often, the name associated with a numbered account was a mere formality: "Banks didn't ask for ID," Staley says.

The days of secret numbered accounts ended, however, as pressure mounted to crack down on money laundering by arms smugglers and drug traffickers and to pay money that was being held in dormant Swiss accounts to the families of Holocaust victims. The veil of secrecy has been shredded further with fears of money laundering for terrorists.

Nowadays, many private banks require 1 million Swiss francs (about $700,000) to open an account. But you may have to fork over more information than you do to get a U.S. passport: your (real) name, date of birth, profession, contact information, type of currency to be held in the account, expected types of transactions, and, most important, the economic origins of the money to be deposited.

As for privacy? Swiss bankers still adhere to the highest standards of confidentiality, facing steep fines and prison time for betraying their clients. But the Swiss government now has treaties with the United States and other foreign governments to lift that policy if bank or government authorities even suspect that the money in an account comes from criminal dealings. The good news for fugitives from the IRS is that tax evasion isn't considered a crime in Switzerland (although tax fraud is).

- Alison Overholt

4: What's the one stock investment that you should have made when you were younger?

The editors of Money magazine provide a pretty good answer. In their recently published 30th-anniversary issue, they identified the 30 best-performing stocks of the past 30 years. The winner? Southwest Airlines. If you had bought $10,000 worth of Southwest stock (at $3.88 a share) 30 years ago, then your investment would be worth more than $10 million today. It is a remarkable growth story. Back in 1972, Southwest's first full year of operation, it had a fleet size of exactly three planes. Today, the company has 375 airplanes and more than 400 new aircraft on order through the year 2012.

"We're right back to where we were in 1990, when the airline industry was just hemorrhaging red ink," says Southwest's CFO, Gary Kelly. "We were profitable then; they weren't. We're profitable now; they're not."

- Christine Canabou

5: What's with Andrew Jackson's hair on the $20 bill?

Fast Company is about style as well as substance, so we had to ask. "He had a wonderful mane of hair!" raves Angie Brannon, proprietor of Angie's Hair Designs, a salon near Jackson's home, the Hermitage, in Nashville, Tennessee. "It was very stylish for his time, and it fit his long face." (She would have trimmed back the wild eyebrows though.) Says Leon Yarusi, a hair stylist for 46 years in Allenhurst, New Jersey: "He has today's look, an I-don't-care look. Like, 'This is my hair, it's me, this is who I am.' "

But in other portraits, the nation's seventh president wasn't quite so glamorous. Most reveal a face gaunter and more angular. Thomas Sully's 1820 painting, the one that's used on the $20 bill, "was by far the most romantic and handsome portrait," says Robert V. Remini, professor emeritus at the University of Illinois at Chicago and author of The Life of Andrew Jackson (Harper Perennial, 2001).

- Keith H. Hammonds

6: Why are there so many ATM machines?

Because they make so much money for banks. According to the latest figures from Bankrate.com's semi-annual survey, Americans spent $2.3 billion in surcharge fees at ATMs that they used outside their banks' networks. That comes to $6,534 a year in revenue for every ATM in the United States. And the $2.3 billion doesn't include fees that banks charge us for using a "foreign" ATM -- which could total another $1 billion.

(Side note: According to David Gosnell, senior editor at ATM & Debit News, only three countries permit ATM surcharges: the United States, the UK, and Canada.)

The surcharges have had a huge effect on ATM ubiquity in the United States. Since surcharges became legal in 1996, the number of ATMs has increased by more than 200,000, to a total of 352,000. Banks and other institutions have installed more ATMs in the past six years than in the previous quarter century. (The first U.S. ATM was set up in 1971, at a Citizens & Southern National Bank branch in Atlanta.)

These days, ATMs outnumber bank branches by more than four to one. Cruise ships have ATMs. The U.S. Navy started putting ATMs on warships in 1988 to make cash accessible to sailors, and 144 ships now have them. Americans do more than 1.1 billion ATM transactions a month -- which breaks down to 26,000 transactions a minute.

Perhaps the most remote U.S.-related ATM is operated by Wells Fargo Bank. It's located at McMurdo Station, a U.S. base in Antarctica. It's so remote that Erick Chiang, head of polar research support for the National Science Foundation, offers the ATM's coordinates when you ask, Well, where is it? "It's about 78 degrees south, longitude 166 degrees east," he says.

Chiang, who has been to McMurdo several times, says that the ATM is connected to the big global networks with McMurdo's full-time satellite link. "It even operates during the winter months," he says, when the station is cut off from the rest of the world and staffed by just 250 people.

- Charles Fishman

7: Why don't we get rid of the penny?

The fate of the country's oldest (one-cent pieces have been circulating since 1787) and arguably most useless (sorry, Abe) coin has created a remarkably contentious battle over the past few years. In 2001, Representative Jim Kolbe submitted legislation to get rid of the penny on cash transactions by rounding up or down to the nearest nickel. He argued that pennies are a hassle to handle and to use, for retailers and for customers alike. Retailers, for instance, end up paying about 60 cents for a roll of 50 pennies because of wrapping charges.

For now, though, Americans seem to want to hold on to their pennies. Nearly two-thirds of U.S. residents say that the Mint shouldn't retire the coin. And the Mint has no plans to change the game. Last year, it stamped out 7.3 billion pennies, more than half of its total coin production. More important, the penny is still profitable to produce, according to U.S. Mint spokesman Michael White, who says that each penny costs eight-tenths of a cent. In 2001, the Mint's total profit on the penny was more than $24 million.

- Christine Canabou

8: What's the right allowance for your kids?

Allowances have become big business. Paul Richard, executive director of the Institute of Consumer Financial Education, estimates that American children under the age of 18 are directly responsible for purchases that total $10 billion to $12 billion each year. Kids also indirectly influence approximately $7 billion to $8 billion of their parents' annual purchases -- items such as computers, cell phones, Internet service, and satellite television.

And it's not strictly an American phenomenon: Elissa Moses, author of The $100 Billion Allowance: Accessing the Global Teen Market (John Wiley & Sons, 2000), writes that global teens between the ages of 15 and 19 are receiving and spending more than $100 billion each year. The biggest spenders are teens in Norway, Sweden, and Brazil (about $50, $42, and $41, respectively, each week). "Huge amounts of money are going out to teens to launch them as adults," says Moses, "and parents aren't necessarily keeping track of it as a budget item. It's an invisible leak."

So how much should be going out? Richard and his organization advocate giving children 25 cents per year of age. (So a 5-year-old would receive an allowance of $1.25 each week.) Such financial modesty might not grease the wheels of commerce, but it might turn kids into less-squeaky wheels.

- Alison Overholt

9: Should you really try to buy low and sell high?

It's the oldest cliché in the book -- and it's wrong. Talk to any financial adviser with an ounce of integrity, and she will repeat the same advice: Stop trying to time the market, and instead pay attention to allocations. What percentage of your assets is in equities, bonds, and elsewhere? How are your assets allocated within each category -- and how do those allocations map your long-term needs? "Even if you could time the market well, it only accounts for a tiny fraction of a portfolio's performance," insists Sung Won Sohn, executive VP and chief economic officer for Wells Fargo Bank.

That's a tough message in our get-rich-quick culture. So Sohn points to data. Imagine three investors, he says, each of whom bought shares in the same portfolio of stocks over a 25-year period. Each one invested $1 million: $10,000 per quarter for 100 quarters. They all bought the same stocks but with one big difference. The "genius" bought his shares at the lowest price every quarter. The "idiot" bought his shares at the highest price. And the "mechanic" simply bought his shares on the last day of every quarter.

The end result? The genius had annual returns of 10.2%; the idiot, 9.9%; the mechanic, 10%. So whether you're a genius, an idiot, or something in between, Sohn's data should convince you that timing the market -- buying low and selling high -- is a fool's errand.

- Ryan Underwood

10: Why is America so hooked on credit cards?

Karyn Bosak used her seven credit cards only on what she considered to be the essentials: a $1,500 sofa, a $500 chandelier, and lots of latte. Then Bosak lost her job and was facing bills totaling more than $20,000. So the 29-year-old Brooklynite set up a Web site and asked for help. ("I wasn't out saving the world. I was at Bloomingdales.") So far, www.savekaryn.com has raised more than $13,000 from concerned cyberstrangers.

But credit-card abusers aren't usually that lucky. Most fit the typical profile of the 1.1 million people seen each year by the National Foundation for Credit Counseling (NFCC): They're in their mid-thirties, they carry about $27,000 in debt, and they are beholden to nine creditors. CardWeb.com estimates that about 20% of U.S. credit cards are "maxed out."

"Debt was once a social shame," says Robert D. Manning, author of Credit Card Nation (Basic Books, 2000). "These days, young people get credit cards before they have their first job."

But now, says NFCC spokeswoman Lydia Sermons-Ward, an even more ominous problem has appeared on the horizon: overextended mortgage refinancings. For people who are hooked on credit, putting it on their house is even more alluring than putting it on their card.

- Ryan Underwood

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