Two questions about people and money (but mostly about people)

I work in a cubicle farm. That means that I get to overhear a lot of complaining over the work-related background chatter. A lot of complaining. Some of the complaining is sensible, some isn't.

Since the stock markets took a dive two years ago, and since we're in the thick of tax season, much of the complaining is about money. There are two prominent complaints that I think are wrong, but I'm not sure. Maybe you can correct me.

Complaint 1: It's really bad1 that the value of my 401(k) account is low because of the stock markets. Mind you, this complaint is coming from people in their late 20s, early 30s. It seems to me that this is a fabulous time to be putting money in your 401(k). If the markets are low, then we're buying more shares for the same amount of investment. Sure, the value of the account is low now, but we can't withdraw from it without penalty for another thirty years anyway.

I think we -- "we" as in "us young folks" -- are getting a deal on this one. Some of the people I overheard in the cubicle jungle were talking about stopping their regular investments into their 401(k) accounts until the market recovers. Some were talking about withdrawing it all. Who's right?

Complaint 2: It's really bad that I have to write a check to the government for underpaid taxes. Isn't it better to underpay during the year and owe money on 15 April than to overpay and get money from the government?

Either way, the amount you pay in taxes for the year is constant. The tax rates are posted before the start of the year (estimate yours for 2010). If the government owes you on 15 April, then you're getting an amount of money that brings you to the constant level. But if you owe the government money on 15 April, that's money you could have had in a savings account making more money. Then when you pay the government to get up to the constant level, you'd keep the interest2. For example, if you owe $1000, but had it in a savings account paying 1% for a year, you'd make $10.

I'm no genius with money (else I'd be on my own private island, not here writing this junk). I suspect the complaining is from people whose lizard brains were provoked. Ah! The account value is low, panic! Ah! I have to write a check, panic! But I could be wrong -- wouldn't be the first time, won't be the last. Leave a comment, let me know. I'd like to correct my mistakes.

1 No one says "it's really bad." I G-rated that.
2 Side note: Looks like Einstein isn't the source of that line about compound interest as the greatest invention in history.

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Comments

You're right on both counts. For people your age they should put in as much as they can comfortably afford; sacrifice now so you can reap the huge benefits later. Unfortunately in our "instant gratification" society most people don’t see it that way. I upped my contribution a little before the March low and people thought I was crazy. As for taxes, I’ll take an interest free loan from the government anytime. Just make sure it’s not too much, I think penalties kick in at $1000.

Hey hey, look who dropped in... hope Alabammy's treatin' ya way-uhl. (Birmingham is one of my favorite accents. But you're in Huntsville, so what does that matter?)

To be fair, I don't optimize my taxes for... well, anything. (E.g., I'm getting a return this year.) I just try not to complain until I understand what's going on. I like to think of that as my gift to the world: if I don't know what's going on, at least I won't pretend to have an unassailable opinion about it. It's not much of a gift, but I'm not much of a person.

I wish I had done what you did. I left mine at the same level because I was relentlessly chasing two demons: (1) credit card debt; (2) car loan. I ended up slaying both of those, but mathematically, the return rate since the bottom of the dip -- and even months and months after the bottom -- is way over what I was losing to interest on the debt. Good for you for putting all of those (dreadful) math classes to good use. And building rockets, to boot!