I think we can all agree that facing unfortunate events in life is inevitable. For instance, some people will fail an important exam, some people will be stood up on a promising Tinder date and some will even misplace a winning ticket for their local lottery. I don’t know about you but I could definitely handle a poor grade or a cancelled date a lot easier than giving up millions of dollars yet people are actually giving up their own chance at wealth every single day! What do I mean by this? You heard me right, each and every day, people are passing up the opportunity to amass life changing money and in a minute I will explain three ways in which they are doing so!
As someone who is constantly observing and studying the financial decisions of others, one thing has become very clear — most people lack the financial education needed to build true wealth. Now, of course I don’t blame anyone for not having this important set of knowledge because quite frankly unless they are actively seeking out how to better manage their money then they are destined to live in financial mediocrity forever.
This is why it’s so common to hear your friends complain that their jobs don’t pay them enough money, how things are so damn expensive or how they never have any money left over at the end of the money. When I see how much people spend to keep up with their peers, the size of homes they buy or how they invest, or don’t invest, their money it tells me all I need to know about the state of financial affairs of most people today.
Again, I really can’t blame people for making these kinds of suspect financial decisions because they literally have never been taught any better. However, when push comes to shove, we all will need to acquire this financial education at some point of our lives because let’s face it, money plays a massive role in the quality of life we will enjoy.
Why Build Wealth?
If you ask me, there are really three reasons why people should aim to acquire wealth, with each playing a role in the overall enjoyment we get out of life. The first reason to pursue a quest for above average wealth is to protect your mental health. I’m sure it’s no shock to you but maintaining a healthy mental state is something that many people struggle with and your finances can have a dramatic effect on how you feel on a daily basis. For instance, if you are constantly wondering how you will cover next month’s bills, chances are your mental state will be in a less ideal state than if you had ample money stashed away.
The second reason it’s wise to get your finances in order is to help others. Now, I’m not saying that you need to get rich and turn into Mother Theresa but I think we can all agree that being able to support ourselves, our partners, family and kids is of the utmost importance. While support can come in many forms, you and I both know that buying diapers, taking a family vacation or sending your kids to college isn’t free and as such you have a duty to ensure you amass enough money to tackle all of these life responsibilities.
Finally, there’s retirement. For some people, being able to slam down their two-week’s notice on their boss’ desk tomorrow would fill them with complete bliss while for others, they are happy to work but know they can’t continue to do so forever. Whatever your level of urgency to retire is, there’s one thing that’s common to all retirees and it’s the need for enough capital to take you through your golden years. However, amassing this amount of money is no easy feat and while I hate to say this, I truly believe that we will see more and more people working well into their later years simply because they lacked the financial awareness to make better decisions earlier on in life.
Fortunately, you don’t have to fall into any of these unfortunate financial situations and can take back the wealth that is rightfully yours. However, to do so, you need to become aware of how you could be giving up millions of dollars because it’s that money that will ultimately determine the quality of life you will be able to enjoy now and into the future!
How You’re Losing Money
The first way you’re potentially giving up millions of dollars is by failing to earn extra income. I can’t even count the number of people I meet who complain to me about their abysmal raises or the current state of the job market yet they stand every waking minute outside of work drinking, partying or watching The Office reruns — which I’ll admit was a pretty great show! The point I’m getting at here is that people are quick to identify and clamor on about the problem instead of addressing the issue head on and whether they realize it or not, they are giving up millions of dollars in doing so.
Now, you may be wondering how working a bit extra equates to giving up millions of dollars and this is a fair question. On the surface, it would appear that giving up a few hours of work time a day to catch up on your favorite show or level up your character on World of Warcraft wouldn’t be that financially costly but let me tell you from first hand experience it is.
Roughly five years ago, I was in a pretty rough spot financially. I was working 60+ hours a week at a management consulting firm making barely enough to get by. As you can imagine, when you are spending most of your waking hours at the office and being compensated very little for doing so, your mental health will naturally start to decline and this was certainly the case for me. Fortunately, instead of turning to drinking and partying like many of my other peers, I devised and actioned what I call my “financial freedom” escape plan and part of this plan included starting to make money online through freelancing.
After some initial struggles, I was soon able to start making an extra $1000-$2000 a month and over time that amount of money has grown even more.
Now, if you’re following along attentively then you’re probably still wondering how this extra income is costing you millions of dollars. Well, let’s get into that next!
Of course, unless you are literally earning tens of thousands of dollars a month via your alternate income sources then you wouldn’t be giving up millions simply by wasting time playing League of Legends instead of spending that time making money. But, as you know, bored money is soon lost money which is why those among us who are the most financially savvy always find ways to deploy their capital to keep their financial progression moving in the right direction. One way they do this is through investing.
I’m incredibly happy to see that in the last couple of years, more and more people have awoken to the power of compound interest and investing in general. In fact, in 2020, popular brokerages like Charles Schwab, TD Ameritrade and Etrade saw new accounts rising by as much as 170% which speaks to the spike in interest in investing that people have recently experienced.
Now, just because more and more people have started to dip their toes in the investing waters doesn’t mean that their efforts have been devoid of issues. Amongst these new investors, many have invested blindly based on the sentiments of the market or the stock tip they got from a random guy they met at the club. In short, many people looked at investing as a quick path to financial success with most soon coming to the realization that it was anything but what they had hoped it would be.
The reality is that for 99% of people, their best chance at becoming wealthy through investing is to make regular contributions into low-cost index funds for extended periods of time. However, while this approach is incredibly simple, it’s far from easy. Now, don’t get me wrong, setting up this system is not the hard part, making the money to make meaningful contributions is, which brings us back to my point about making extra income and how without pursuing it you are giving up millions.
To dive into how you, and many other people, may be giving up millions of dollars, we need to look at the investing habits that most people have, or are at least suggested to possess. General financial wisdom recommends that you save and invest between 10–15% of your income every month. As of 2021, the average US income for a single person was roughly $50,000 which after taxes is around $3,000 a month. Based on an investing rate of 15%, you would then be investing $500 a month, which, based on a 7% average rate of return over 40 years would have you amassing just over $1.3 million. Not a bad sum of money right? However, what if you could achieve much more?
Instead, if you were to use my example of earning a few extra thousand dollars a month by turning that Netflix time into cash and investing $3,000 a month instead, under the same parameters, you would end up with almost $8 million instead. So, while passing up opportunities for income now may seem rather inconsequential, it is literally costing you millions of dollars.
I know at this point, you’re about three seconds away from deleting your World of Warcraft account and getting to work but there’s one other hidden cost that you must be aware of if maximizing your financial success is of top priority. This last hidden cost basically has you being robbed of your money and it relates to the fees that many people subject themselves to when investing.
As you can imagine, most people who invest do not feel comfortable doing it themselves and as such pay financial advisors and other money managers to undertake these activities for them. Sadly, most who take this route fail to understand the true consequences of this incredibly costly decision.
Presently, the average management expense ratio (MER) you can expect to pay for equity mutual funds is 2.23%. To put this in perspective, if you have an investment portfolio of $100,000, you could be losing about $2,230 to fees every year on average and while this amount may seem rather inconsequential in a single instance, it’s actually much greater when you take a long-term approach.
As I just mentioned, investing $3,000 a month at a 7% rate of return for 40 years has the potential to leave you with almost $8 million in four decades time. However, how much do you actually get to enjoy out of that $8 million if you’re handing over 2.25% a year to your advisor? The answer is just over $4 million. That’s right, you read that correctly. You are literally giving up millions in management fees over this time period for returns that studies have shown fail to outperform their passively managed competition less than 50% of the time.
This is why I said that earlier on, the approach most people should take to growing their wealth is finding ways to maximize their monthly contributions into low-cost index funds. Many credible funds will net you better returns and only cost you a fraction of a percent a year compared to the grossly overpriced counterparts I just mentioned.
Therefore, as you can see, if you are failing to generate extra income, are not investing or are investing but in non-cost effective ways then inevitably you will be giving up millions of dollars over the course of your life. Fortunately, you now know the mistakes to avoid and I hope that one day I can be there personally to welcome you into the 7-figure club!