In economics parlance they say money is fungible, meaning no dollar is unique or special and they are all fully interchangeable. A dollar is a dollar.
I learned this concept early in life when I successfully paid for a GI Joe action figure entirely with pennies. Go Joe!
But this is a little more complex in the modern world, so here are some money fungibility related questions/comments I’ve received over the years.
Money is Fungible
Here are some fun examples of monetary fungibility:
“I hate coins! I’ll do anything to avoid carrying change!”
Do you know how much a GI Joe action figure worth of pennies weighs? Or how loud a cashier will sigh when they see you pull out the coin jar? Or how long the checkout line will grow whilst said annoyed cashier counts those pennies, twice? A dollar is a dollar if you ignore the social ramifications.
Perhaps the experience explains why I use a credit card for everything, where possible. I do my best to eliminate coin accumulation. It also gives me up to 30 days of float.
We toss all coins into a small jar we keep near the door. When it fills up, I bring it to the nearby 7-11 and use the funds to increase the balance on my prepaid card. In the US, I used to bring the coin jar into my credit union near work to use their free counting machine. My parents would empty the coin jar once each year to help pay for the family summer vacation. (Optional: stuffing coin roll wrappers together is a rewarding and fun family bonding experience.)
I live in a non-tipping culture, but I will sometimes leave coins as a tip for small cash purchases, e.g. Taiwan has a $50 coin and maybe a coffee costs $45, so I will toss the $5 change into the tip jar. (Although my favorite nearby coffee shop now accepts Apple Pay.) In the US, paying tips in cash/coins is almost always better because it ensures that the server will benefit from it immediately.
“I have an emergency fund with $1,000 and credit card debt of $1,000. I want to get out of debt but then I won’t have any money. What should I do?”
I’d pay off the credit card debt with the emergency fund. Should an emergency arise before replenishing the savings, the zero balance credit card IS the emergency fund. (For reference, our emergency fund is about $0.)
Using just these 2 accounts, net worth is $0 either way (“I have no money”) but paying 18% interest on a credit card to keep some cash earning 0.1% “just-in-case” is a net loss every month. Which is technically an emergency.
“We want to retire early and have saved 25x++ our annual expenses. The problem is most of those funds are in retirement accounts, and our taxable accounts aren’t big enough to last until age 59.5 when we can make 401k/IRA withdrawals without penalty. What can we do?”
Pre-tax/post-tax/taxable accounts do complicate dollar fungibility a bit, as withdrawals may have different after-tax values.
However, there is a false assumption buried in this question – we can withdraw funds from retirement accounts before Age 59.5 without penalty, via Roth IRA conversions and/or SEPPs. These withdrawals are taxable, of course, but the tax burden may be zero. You can also withdraw Roth IRA contributions at any time without taxes or penalty.
What I would do: double/triple-check that you have saved 25x++ expenses with taxes included, then proceed without worrying too much about the split between pre-tax and taxable accounts. Make annual Roth IRA conversions if you can do so at a zero/low/reasonable tax rate. (Try kickstarting your retirement, even.) If the taxable account runs low as you approach age 59.5, set up a SEPP to bridge the gap between then and the big Six-Zero.
“I want to live solely from dividend income, but like the question above a lot of our funds are in retirement accounts. With only a 2% yield on the S&P500, or whatever, dividend income alone isn’t enough to cover our cost of living. Ideas?”
One idea is to not limit yourself to living solely from dividend income. It isn’t necessary. But I digress…
Another idea is to sort of make your own dividend. If you receive $10k in dividends in your retirement account, access it by selling $10k worth of stock in your taxable account. Use the retirement account dividend to purchase $10k of whatever you just sold.
You now have the same net worth, the same stock holdings, and the same amount of cash in the portfolio. After all, a dollar is a dollar.
The difference: your taxable income is lower than if you received an extra $10k in dividends in the taxable account. Only the gain portion of the stock sale is taxable, whereas 100% of the dividend would be. This is most significant in a state with an income tax and for those enrolled in Obamacare. (An example.)
“We are buying a new-to-us vehicle – what is the lesser of 2 evils, a used car loan at 5% interest or a 401k loan at 7.5%.”
Making virtual car payments to a savings account until there was enough to pay cash for the vehicle would be the ideal option, but when that isn’t possible… we can think about this in accounting terms.
Purchasing a used vehicle with a loan adds both debt and an asset to the household balance sheet.
Because money is fungible, it doesn’t matter if the loan is from a 401k or not. I’d go with the lowest interest rate option.
(I suppose with a 401k loan you might get some accidental market timing. That could be good or bad.)
The numerous account types we used in the modern world can complicate how we think about money, but whenever I get confused I just remind myself that a dollar is a dollar and it helps steer me in the right direction.
The examples using coins, credit cards, pre-tax accounts, and debt hopefully help cut through the confusion.
A dollar is a dollar. Money is fungible.
Also – if you see a kid paying for a toy with coins, please don’t be a jerk about it ;)
What are your examples of money fungibility?