ADVERTISEMENT

Personal finance, population growth, dollars and percents

May 28, 2017 GMT

This past week I spent some time crunching the latest census data on population growth in South Carolina, and realized those numbers have a strong personal finance connection.

Here’s what I mean: If you’re a city that wants to grow its population, or an individual who wants to grow your money, would you rather see your numbers rise by 2 percent next year — or by 2,000 people or $2,000?

The answer — and this is a key to understanding tax policy as well — is that it depends on the size of the number you’re starting with.

For example, in 2016 Greenville was the fastest-growing large city outside Texas, with a population growth rate of 5.8 percent, which amounted to 3,680 additional residents. That’s a big deal, but what about the South Carolina town of Aynor, which saw its population rise 14.4 percent in a single year, the Census Bureau estimated.

ADVERTISEMENT

Well, Aynor had 667 residents in mid-2015, so it only took 96 more to see that rapid rate of growth. It’s certainly a high rate of population growth, but 96 more people won’t likely cause traffic jams and crowded classrooms. A large city would be overwhelmed by such a growth rate.

The same sort of math plays out with money as well as population. If I have a dollar in my pocket and find a quarter on the floor, that’s a 25 percent increase in the amount of money in my pocket — no big deal. If I have $50 in my pocket and find $5 on the floor, that’s just 10 percent more, but it’s five bucks nonetheless.

If you’re a big city, or someone with lots of money, you want percentage growth. Two percent of $1 million is a lot ($20,000).

If you’re a small city of 10,000, or a person with $10,000 in their retirement account, 2 percent wouldn’t amount to much, but 2,000 more people or another $2,000 sure would (a 20 percent increase).

I know, this is basic math, but it’s the math that drives retirement savings, the value of a pay raise or a bonus, and lots of the decisions made in Congress on tax rules.

Let’s say you have $5,000 in the bank at current, paltry interest rates. Would you rather have another $250, or a quarter-percent increase in the interest you’re earning for the next year? You’d rather have the money. But if you had more than $10,000 in the bank, you’d rather have the higher rate, because it would be worth more than $250 under the same scenario.

The way dollars and percents play out explains why tax credits are a more valuable break than a tax deduction for most people — those without high incomes.

For most taxpayers, a $1,000 tax credit, such as the Child Tax Credit, which reduces one’s federal income tax bill by $1,000, is a big deal. A $1,000 tax deduction would, for most households, be worth just $150 (15 percent of $1,000).

ADVERTISEMENT

But for a household at the top end of the income scale, even a small change in percentage rates can mean serious money.

For example, take the federal 0.9 percent Medicare tax on income above $250,000 or more (or $200,000 for single filers) that’s been around since 2013 under the Affordable Care Act.

A married couple with $500,000 in taxable compensation would save $2,250 if that tax were repealed (as the House voted to do in the GOP health care bill awaiting Senate action). A small percentage, but important for those with big incomes.

Percentage increases also can involve the magic of compounding, whether we’re talking about populations or paychecks.

A town of 25,000 that gains 500 more residents every year would have 30,000 residents after a decade of such growth. The same town of 25,000 that sees a population increase of 2 percent each year (500 people the first year), would end up with 30,475 after a decade, because each percentage increase builds upon the previous gain.

Of course, compounding percentage increases also work against us in the form of inflation. Even small yearly percentage increases in health care premiums, electricity rates or college tuition will build upon themselves, turning into large increases over time and chewing away at savings.

The trick to staying ahead is to work the percentages.