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Politics and Personal Financial Planning

Recently I’ve heard from a few readers that some of my columns are too political. Yes, I sometimes discuss politics, because political issues and governmental actions have a direct impact on our personal finances.

One of The American Heritage Dictionary’s definitions of “political” is “relating to or dealing with the structure or affairs of government.” A fundamental power of our federal government has to do with money: creating it, regulating its value and its cost (interest rates), and, of course, taxation.

Money isn’t a natural force. It is an artificial system created by social agreement. Currencies are the “money” of modern society, and government policy regulates how individuals borrow, invest, exchange, and pay taxes on money. Separating personal finance from the politics of finance is just not possible.

Therefore, a critical 21st century survival skill is understanding how money works. This includes understanding and anticipating the governmental policies that will influence how we earn, save, spend, and give money.

Changes in political leadership generally result in some changes in the policies that affect our money and finances. The recent financial crisis and the last national election resulted in what may be the most significant changes to our fundamental economic policies since the 1930’s. The economic decisions our government makes today will affect our personal money decisions and lifestyles for years to come. Helping clients anticipate, understand, and deal with the impact of such decisions is part of my job as a personal financial planner.

What I see as one of the significant changes occurring in government economic policy today is a shift toward higher regulation and taxes. These are two important components of wealth redistribution. Most attempts at wealth redistribution have resulted in a decrease of personal freedoms in exchange for increased benefits from the government.

Wealth redistribution is not new. Starting with the Roman republic in the third century B.C., many societies have attempted to limit or redistribute wealth at times when only a privileged few lived in luxury while the masses lived in poverty. It is somewhat of a myth, however, that wealth redistribution works to the benefit of the less fortunate, unless it results in an increase of personal freedom and encourages greater capital accumulation.

In many instances, the wealth is taken from the handful of people who control it and simply redistributed to another handful of people—typically the leaders of the opposition rather than “the people.” This was the case after Russia’s Bolshevik Revolution in the early 19th century. A modern-day example is China, where 90% of all billionaires are the children of high-ranking officials (WSJ.com, The Wealth Report, December 12, 2009).

I am in no way suggesting that we are on the verge of an upheaval like the Bolshevik Revolution. It isn’t that obvious. Wealth redistribution in the U. S. is a shift away from capitalism and toward socialism. This didn’t start with the election of President Obama or the current Congress; they’ve only intensified it.

We’ve been slowly moving toward a more socialist economic model for decades. This long-term trend toward higher tax rates and increased social entitlements diminishes individual incentive to work toward financial and entrepreneurial success. If unabated, it will eventually result in slowing the financial engines that produced the lifestyles Americans have come to take for granted.

If one of your goals in life is financial independence, it is important that you understand the full implications of this trend. National political decisions do indeed affect our personal finances. Financial planning is impossible to separate from the politics of money.

Next week’s column will offer some financial planning strategies for the changing economic times that lie ahead.

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7 Responses to Politics and Personal Financial Planning

  1. Joanne February 1, 2010 at 5:18 pm #

    Your thoughts/writings mirror what I just read in Sarah Palin’s book. Some good ideas – can we actually go back to being self-sufficient and responsible? I wonder.

  2. Ron W February 1, 2010 at 5:25 pm #

    Well said. We must not lose sight of the underpinnings of what affects our finances and the decisions we need to make given the current circumstances. Thank you for being brave enough to say so.

  3. Mike Haubrich February 1, 2010 at 8:01 pm #

    Great article. I could not have said it better.

  4. Scott Sime February 2, 2010 at 6:45 am #

    Dittos! We are in the midst of a “Political Awakening” (may be an idea for a new Book or Web site) in this country. Entitlement mentality and ignorance of history may lead us further down the path to Socialism. I have no desire to emulate Socialist governments because I have no desire to live in a second rate country! It defies logic that anyone might want to destroy the very system that created the strongest military to defend freedom, the highest standard of living, and unrivaled opportunity in a short 236+ years. Don’t stop educating us!

  5. richard trachtman February 2, 2010 at 4:03 pm #

    Rick,
    Where did you get that wonderful cartoon? Is it in the public domain? Do you have any others – maybe one of a sad man with his pockets inside out to show they are empty?

    With regard to your article, I’m afraid that I have a very different view than you, or those who replied before me. Of course money is related to politics but I think it is the values behind some of your ideas that offend some of your readers. I have heard a lot of talk about class warfare and it seems that you and some others are squarely on one side, when a more balanced, thoughtful (and I think saner) approach by both sides would be somewhere in the middle.

    Redistribution of wealth does not invariably result in loss of freedom as a cost of greater benefits.Government regulation does not necessarily result in less freedom. Our financial meltdown was, in part, the result of failure to regulate, and the result of this failure was – and will continue to be – a lot less financial freedom for may of us.

    And it is not a case of capitalism vs. socialism. When I was in graduate school I received government support to be able to afford tuition and books. That was socialist, but it gave me the freedom to pursue my studies and also benefited society by enabling me to provide mental health services to thousands of individuals – some rich and some poor – sometimes in public clinics and sometimes in private practice. If I now have a high income should I, having been helped out in the past, not be willing to contribute a bit more now that our nation needs the tax revenue?

    My Social Security may be socialist, but it increases my ability to live more freely in old age without detracting much from others. At the same time my capitalist investments in the stock and bond markets help me live better than I could do on Social Security alone, for which I am grateful. Both sources of my income increase my purchasing power and, therefore, probably help to stimulate some entrepreneurship. The issues are not black or white or red or blue.

    When governments tax and spend money the intention, at least theoretically, is to support the common good. Sometimes it works well, sometimes it does not. If some of us who can afford to pay a bit more in taxes are called on to do that, we should at least think discriminately about what the taxes are to be used for, and whether the use will benefit our nation and improve all of our abilities to enjoy our freedoms as a result.

  6. Margie Zugich February 7, 2010 at 5:59 pm #

    Thank you, Richard T. for your very reasonable comments. “Freedom” is in the eye of the beholder. I would like to be free from fear of corporate and Wall Street greed without having to divest from participating in the capitalist system. If that means more government intervention, bring it on!

  7. Bobbie Munroe February 10, 2010 at 10:32 am #

    Rick, I don’t always agree with you (and was frankly delighted to see that I’m not alone). But we MUST talk about politics. We MUST try to understand different points of few. And we MUST try to move forward on the many things that we (if not our Congressman and Senators) can agree on. Sticking our head in the sand is not an option. Just yesterday I wrote Rep Senator Lindsey Grahman of SC and thanked him for at least trying to move the conversation to the middle and declining to disagree with everything the “other side” says…something I require from BOTH sides. So bring on the discussion and with respect and caring perhaps we can learn how best to move forward.