We humans are really good at convincing ourselves of our “upper hand” — that we can see the “truth” when others cannot. We repeat stories of winning hands, the right stocks, and big paydays with our closest friends. Examples and supposed successes of prediction are trumpeted in our skewed media landscape, too.
For instance, CNBC and other financial news networks feature stock chartists who create lavish drawings of candlesticks, moving averages, and support levels. Lines are drawn and circles made on fancy touchscreens. When a stock fails to perform as predicted, it’s written off as a statistical anomaly. And nobody returns to the err. The reality is that any stock-picking strategy is fallible because the herd knows about it (or soon will). These technical mavens’ moves are already priced into stocks.
Scientists can also be poor predictors of future technology and advancement. As an astrophysicist, Neil deGrasse Tyson, explains, “…what happens is, if you try to go too far into the future, there is no way you are going to predict the cross-pollination of ideas and fields that produce things that are not extrapolations of anything going on at that time.” He exemplifies this technological development with the iPhone, as it wouldn’t have been created without GPS satellites, cell towers, and the commercialization of space. Variables needed to coalesce and come together to make the idea possible. Predicting each of these individual components is nearly impossible.
Psychologists are another fallible group that’s highlighted for near-telepathic powers. Popular culture seems to hold high esteem for their predictive abilities. They are depicted as readers and savants of the mind. Watch what you’re thinking, they might just read your body language, thoughts, and emotions! The reality is that psychologists aren’t fantastic at predicting behavior; slightly better than the lay public, but that’s not saying much. At their best, psychologists center on past behaviors as predictors of future behavior. Much like the stock chartist or scientist, psychological/behavioral prediction is sort of like analyzing an historical stock market chart and looking for patterns.
In failing to see our losses and failures of prediction, we risk creating confirmation biases. These psychological tricks of the mind make us think we are right — that our hypotheses have time and time again come true. We repress our failures in favor of successes, but in doing so, jeopardize our ability to accurately plan for the future. That’s when we stand to lose boatloads of money.
The fact is, we are fallible creatures. Seemingly, we are basically limited by the amount of knowledge available on the world. At a long enough timeline, nearly everyone fails.
By accounting for predictive limits, we can protect and preserve our wallets. Now, it’s all about what we do with this realization. These are five fast rules for managing your money without genius predictions:
1. Budget based on present day information
The present day includes your current income and expenditures. If you’re budgeting for a car, Christmas presents, or anything else, your budget should account for today’s income — not chances for the future. This will always keep you within limits. Unfortunately, many people use pay raises and predicted promotions to account for future purchases. This mentality can lead to excess debt and complicated repayment plans. Avoid the drama by budgeting based on today’s information — not what tomorrow might be like.
2. Be careful with retirement predictions
Companies like Betterment and Wealthfront have some sexy chartists! They beautifully illustrate the capability of compounding interest and continued investments in average performing stock markets. However, this tends to smooth over the swings of market swings and does not account for the unexpected. In fact, Betterment has a tool that attempts to predict with 50/50 accuracy how your money will perform over a set period, but it’s better to make consistent investments and look at the principal — not the predicted total.
3. Build up emergency funds
From a car accident to strange toenail fungus, you never know when you’ll need to pay for some extra costs. We cannot predict when an accident or the end of a job could occur. To account for our predictive inability, let’s build emergency funds. Most financial experts suggest people maintain about 3 months of solid income, which would cover expenses while you search for a new job or deal with an accident.
4. Avoid following interest rates
Tens of “online banks” are propping up with teaser interest rates. Instead of chasing the next biggest thing, stick with the consistent. For example, Ally Bank has earned my trust and respect after years of solid performance and service. This online bank doesn’t have wacky fees, gives me free checks, and pays a solid interest rate in both checking and savings. When you find a solid, long-term rate, stick with the bank. It pays to find a good company and then worry about making more income elsewhere — not following the next greatest interest rate.
5. Invest regularly – don’t chase bottoms
This tip comes from one of my hardest investing lessons. When it comes to putting money in the stock market, don’t call bottoms. Humans inability to predict is never worse than right here. If you think the market has crashed, you’ll likely be proven wrong. The stock market has tons of false bottoms and tops. Prediction isn’t generally your friend. Instead, I use average investment amounts and make regular investments. When the market suffers, I tend to invest more. But avoid the chase and focus on making consistent investments.
A couple weeks ago, Iowa City entered the 21st century. The City Council, after much hemming and hawing, decided to approve Uber within city limits. In this booming college town known for some of the hardest partiers in the country, ridesharing services have been sorely missed. College students have needed to pay for expensive cabs, take circuitous buses, or stumble home. We’ve really missed the Uber option.
I’ve been waiting for this moment for years. I’ve been fantasizing about it. I would roll up in my Bentley, glide the window down, and chuck a half-smoked cigarette onto the curb. I’d peer over my Secret Service-style aviators and say, “Someone order an Uber?” Then, the fantasy would evanesce — including the Bentley, the smoking, and the aviators.
Now that Uber is here, I can’t help but think: Between taxes, fees, depreciation, and other driving costs, can you actually make any money driving for Uber?
In many ways, Uber is the perfect side income. It subsidizes the ownership and use of a car, pays for hours otherwise uncovered by other opportunities to make money, and is a fun, social method to make money.
Despite the many positives, Uber isn’t some sort of utopia. Passengers smoke cigarettes, vape, leave trash, and can be altogether rude — and that was just my first four rides. People can miss your phone calls, texts, and app notifications of your arrival, too — or cancel the request after a couple minutes of driving towards them.
This morning I had an extra 40 minutes and decided to “go online.” Within the Uber Partner app, I waited about 45 seconds and was called to pick up someone. That was quick, I thought. About 25 minutes later, after the Uber mafia had taken their cut (25% of every fare), I walked away with $9.17.
The couple I picked up were out-of-towners whose car had broken down in the city. They needed a lift to a dealership for auto repair. Being there to help them seemed important — a win-win for us both.
Searching for the real Uber income statistics
Plenty of news articles have noted Uber drivers’ incomes and attempted to get a net income, but it’s challenging to see how they do their math. I figured I’d do some math right here, and see what I found for both of our sakes.
Let’s estimate $1,000 for 2016 earnings. I haven’t made that much — yet — but intend to keep driving when fares surge due to increased demand. Maybe I’ll get there?
At Uber, you’re considered an independent contractor. You are your own business in many ways. Many of the company’s risks and costs are displaced onto their drivers. You have to pay for medical and car insurance, and if you get in an accident, it’s on you.
Thus, the $1000 earned is called self-employment income. The IRS considers self-employment income for a couple special taxes: Social Security and Medicare. When Uber pays you — or other drivers — it doesn’t take out any money for income taxes. Thus, you have to give some of the money back to the government. Importantly, these taxes are only owed on earnings over $400.
Calculate your self-employment taxes
Currently, the self-employment tax rate is 15.3%. But like anything the IRS publishes, it’s complicated. Only 92.35% of income is considered taxable. Why? Again, call up the IRS — I’ve got no clue. Here’s what the math looks so far with the taxable income consideration and self-employment tax:
$1,000 total Uber earnings
x.9235 taxable income conversion
$923.5 total taxable income
x.1530 self-employment tax
$141.30 total taxes owed
In review, by calculating this initial taxation, I’m left with $1,000 minus $141.30. After all these calculations I’d be left with $858.70. Here’s where people tend to stop and say, “Hey, I think driving for Uber is worth it!”
Calculate your tax deductions
But wait a moment, okay? These initial calculation fail to account for business expenses and tax deductions. Tax deductions are usually expenses incurred in the process of making additional income. Over the last few weeks, I’ve calculated a few deductions because of the business.
Here are some quick examples of things I’ll be watching out for:
- Tax deductible portion of self-employment taxes (50% of taxed self-employment income)
- Mileage deduction ($0.54 per mile driven for business)
- Parking (e.g., $5 thus far)
Meticulous drivers out there should try to keep track of all mileage driven for Uber. Pay close attention to every mile, as the IRS provides a $0.54 standard tax deduction per mile. What I’ve noticed is about a 40% per dollar to mile calculation on average. In Iowa City, which might differ compared to your local city, I’m out in the boonies for a long drive and then back into the city area for short trips. For the sake of this estimate, I’ll say $1,000 in income equates to 400 miles driven.
Here are my tax deductions:
400 miles driven
x.54 per mile deduction
$216 tax deduction for standard mileage driven
+$70.65 deduction for self-employment tax (50% of taxes)
$286.65 total tax deductions
Importantly, tax deductions are not money put directly in your pocket. They essentially are a method of reducing your tax burden on annual income. For instance, if I made $25,000 in combined income in 2016 — some of it receiving income taxes and others from self-employment — that would put me in the 15% tax bracket. With $286.65 in deductions, the IRS says I made only made $24,713.35 in adjusted gross income.
Now, here’s why I hate calculating taxes by hand…
$25,000 combined annual income
x.15 tax bracket
$3,750 in taxes
$25,000 combined annual income
-$286.65 total tax deductions
x.15 tax bracket
$3,707 in taxes
Hold on, let me take a breather — this is a lot of math. Phew! Subtract $3,707 from $3,750, and you get $43 from the tax deductions. $43 that the federal government is essentially giving back to you because you drove for Uber.
Calculate your driving costs
You might’ve thought we were done. You might’ve thought, “Okay, now we can add and subtract — bada bing bada boom!”
You’d be wrong.
Before we can calculate a realistic number earned, we need to account for depreciation, registration, maintenance, and other fees associated with operating and owning a car. Driving all those miles, while accounted for in the IRS mileage deduction, still hits your wallet. Simply put, you still incur costs to driving that vehicle all around town.
The best driving statistics come from AAA. Every year they publish their driving cost statistics, while accounting for gasoline, insurance, and other variable rates from year to year.
Based on a small sedan (that’s what I drive), driven about 15,000 miles per year, equates to 43.9 cents per mile in costs. Driving for school, work, or even Uber on the side costs the same amount: 43.9 cents per mile.
Here’s an estimate of driving costs:
x.40 rough estimate of dollars to miles
400 miles driven
x.439 cents per mile
$175.60 total driving cost based on AAA statistics
The final, Uber calculation and results
Starting from $1,000 in earnings, I lost some to self-employment taxes (-$141.30). I was fortunately able to reclaim some money through tax deductions ($43). But before I could make the final judgment, I calculated the driving costs (-$175.60).
In total, after all is said and done, $1,000 becomes $683.10 in take-home pay. And by “take-home,” I mean no one can touch it at this point. That’s after everything is paid off.
Throughout this article, I’ve made a number of calculations. With more time and statistics, I’d be able to report more accurate estimates. For now, the statistic equals 70% of what you see is what you get.
Every fare, surge, and ride time. Every cool conversation. and every drunk college student — you’ll make about 70 cents on every dollar earned.
I forgot one remaining variable: time. When you’re staring at 70 cents per dollar, you might wonder if Uber driving is worth your time. While an important question, this is what I fall back on: the money and market for ridesharing didn’t exist prior to Uber’s arrival. There were fewer ways to monetize free/down time. Now, every few moment or time off can be an opportunity to earn.
There are many caveats and exceptions, it’s hard to clarify them all in this article. If you’ve driven for Uber, or have experience as a passenger, or are thinking about driving, let me know in the comments below! I’d love to include any additional insight you have into this article, as well.
I’d been following the stock market for years by the time I could finally invest on my own. It used to cost $50 a trade with a major broker, and the fees were cost prohibitive. I waited and waited for fees to decline. Instead of trading, I researched stocks and followed prices.
When companies like E*Trade and Ameritrade were born, they slashed trading fees to a manageable $10 to $15. Suddenly, investing became a tool for a greater population. I was a teenager when I made my first trades.
Actually buying and selling — pulling the trigger on a stock — took little of my time. Most of it was spent reviewing reports and books. I read like mad from economics and investing books.
For last 15 years, I’ve heard some comically bad advice. It’s flown in the face of everything I’ve read. Sometimes it’s senseless; at other times, dangerous. If you hear this “advice,” run.
1. Buy low and sell high
I’ve heard this unhelpful tidbit more times than I can count. Usually, it’s repeated by people who understand what the stock market is: a place to buy and sell. But they hardly understand the how.
To actually “buy low and sell high” is far more complicated. The cliché presumes you can spot a low point or “bottom,” have money ready to invest, and “call” the bottom by buying in. Unfortunately, this advice can also encourage people to look for “high” points or a market top or a bubble.
Few people — statistically speaking — can accurately call bottoms and tops. Even the most trained professionals fail over and over again. CNBC anchors, analysts, and commentators regularly preach markets as being oversold and/or overvalued, but rarely are their comments checked — veracity analyzed.
While the guidance is right, I call this bad advice because it doesn’t make you a better investor. Despite the intention, this statement doesn’t help you find lows and highs.
2. Penny stocks lead to significant returns
Amidst this culture of capitalism, get rich quick schemes are everywhere. The stock market, with it’s daily returns and losses, is something of a casino for the world. With one big trade, you could be rich; at least, that’s what might be sold to you with “penny stocks.”
Penny stocks are less than $1.00 and often traded on the OTCBB — an off-market, poorly regulated exchange for little-known companies. Online scammers and tricksters tell potential investors about their regular returns and successes.
Can you believe they made a 1000% gain in a week? They became a millionaire overnight!
They’ll tell you to invest in companies — with little capital needed — and get ready to profit big time. Unfortunately, there’s no reliable way to get rich quick. Penny stocks are a surefire way to lose money. Never listen to those who are swept up in the potential percentage gains of a company’s 50-cent shares.
3. Buy the upgrade, sell the downgrade
Stock analysts might be my least favorite market players. Their salaries and decisions are closely tied to major investment banks, which can lead to a bias in their decision making. Allow me to catalogue some of my concerns.
Firstly, their decisions immediately affect stock prices — regardless of the veracity of the claims.
Secondly, many analyst ratings are a buy — all the time. Regardless of market changes, being on the sell side isn’t rewarded within investment banking companies and predicting a negative downturn is inherently risky when the market tends to go up.
Thirdly, they frequently make positional shifts without lowering prices. For example, let’s say Netflix is 95.90 per share today. A stock analyst might downgrade their position to sell, but keep a $105 price target. So, as an average investor are you supposed to hold onto that position or sell it?!
For most investors, these recommendations don’t make much sense. And trading off of them is an acknowledgement of a “rational” market. But the markets are anything but rational. Emotions constantly affect market capitalizations, and these analyst ratings fail to capture passion.
4. The entire market is going to collapse
Every day, week, month, and year there’s another threat to market returns. Maybe there’s a terrorist attack, climate change, mortgages bubbles, credit card debt crashes, unexpected bankruptcies, etc. All of these events can cause market disturbances, and even more, market mavens peddling “end of days” hypotheses.
In 2009, a powerful documentary came out called Collapse. The film interviewed a charismatic man named Michael Ruppert. He speaks emphatically about the concept of peak oil and how he alone predicted the market crash of 2008.
That’s right, Ruppert, of all men, predicted it all! And when the movie was published, most of the American public was convinced oil would forever escalate. It sat around $70 to $80, and would soon go to $100 per barrel. Ruppert was considered a genius.
His prediction was that the economy would collapse and we’d have to change our why of life — drastically.
But it never came. Instead, oil markets plummeted over the last seven years since the documentary, and Ruppert… well, he died by suicide in 2014.
Investors and abstainers frequently entertain these end of days ideas because it justifies wild investments in commodities or a wholesale avoidance of the stock market. Both decisions put portfolios in peril. Best to keep a moderate perspective and diversify your portfolio.