The fiscal cliff talks of late have been more stricken with anxiety than an inconclusive pregnancy test.  While both Republicants and Democraps have been quite clear on their respective stances, we both know those stances involve full frontal nudity and lewd gestures towards one another.  In reading about the various negotiations and Biden led drinking contests I was reminded of fraternity attempting to make a decision on whether installing a stripper pole by the keg stand would be to forward or not (it isn’t).  Act like adults and members of an elected governmental body whose purpose is to represent those who elected them and lead, not John Blutarsky, although he did become a Senator.  Who knew Animal House would be so prophetic?

Two Different Financial Ideologies… But Not What You Think

Reciting the basic tenants and overarching differences between the Republicons and Democrites is easier than writing a Two and Half Men punch line (work a sex joke in!).  On the right you have a “fundamental” financial approach — cost cutting and lower taxes to spur revenue increases and on the left you have a “hybrid approach”—certain cost cutting but general increases in taxes combined with selective government investments to grow revenue.  This is not a political site and so I am treating these like they have SARS or are soulless Gingers…I’m not going near them.  I point out the political pols to apply them to personal finance[1].  What can we learn from our callow politicians?

No angry “you misrepresented me / don’t know what you are talking about” comments… it’s a premise, run with it.

Fundamental Finances

 A Fundamental Approach is the basis of any sound financial plan and is the bedrock of most American households plan for a secure future.  Spend less than you earn, work diligently and smartly: the basis of frugality. If this is the basis of your financial plan it does, from a strictly academic standpoint, make sense that you would prefer lower taxes since the entire operation is an earn-tax-spend/save system (you earn money, it is taxed and you spend or save the remainder).  If you give more money to the government in the form of taxes you are making it more difficult to secure your future (assuming Social Security won’t afford you the retirement you desire).  Additionally, debt is considered bad nearly uniformly.  As you know, most American’s are woefully prepared for their retirement and even those that are not still typically are basing their calculations off an assumed reduction in income and thus lifestyle.  Since all their assets are subject to market swings (as the typical diligent American saving for retirement has their net worth in equities and their house), their retirement plan is constantly in jeopardy.  It would seem that “fundamental finances” are not good enough to truly secure a retirement[2].

The Hybrid Approach

 The hybrid approach, ironically, is employed most commonly by those that lean right when the wind blows.  The focus is not primarily on cost cutting but rather on revenue creation through investments.  While investing in mutual funds and stocks is a core of both the Fundamental Approach and the Hybrid Approach, the Hybrid Approach takes investing a step further by seeking sources of new revenue in the form of businesses.  Purchasing a multifamily property would be a common example of creating a new source of revenue.  Here debt is broken into two forms, “good”—revenue generating debt, and “bad”—non revenue generating debt.  A hybrid approach seeks to maximize the good debts and eliminate the bad ones.  A key issue with the hybrid approach is that it takes many out of their comfort zones because it forces one to run businesses, not just finances.  It is at first far more complicated than the earn-tax-spend/save system (it is mostly an earn-spend-tax system).  Those without formal education or a low tolerance for short-term risk are usually not keen on the hybrid approach.  However, those that are typically have the highest earnings, and the most secure, fulfilling retirements.

The Ironies…

Ironies abound when these are applied to politics. If you rely on the Fundamental Finance approach and vote Democrat you are inferring that you do not trust your retirement plan and so want social safety nets as backups.  If you follow the Hybrid Approach and vote Republican you are ironically missing the point that Democrats, from the standpoint of running the government like a business, are trying to increase revenue to pay down debt—likely your preferred modus operandi.   Where is Alanis Morissette when you need her?

It seems that the main lesson here is that while the Fundamental Finance approach is a great start and at the core of any sound financial plan, it is not always as sufficient and secure as you may think; while the Hybrid Approach is out of the realm of comprehension for most.  A combination usually sees the best results.  What approach are you currently using?