If you’re anything like me, you’ve probably been told your whole life to save money. The implication being that your frugality and ability to sock away money will equate to a future of prosperity. Unfortunately, IT’S BS!! Savers will NEVER be wealthy! That’s the cold truth of the situation and we’ll look at the numbers to prove it. But don’t worry, it’s not all doom and gloom. We’ll also talk about the skills you need in order to move down the path toward wealth & financial freedom.
Let’s first tackle why savers will never be wealthy. The median income for an individual in the U.S. for 2020 is $43,206, while the average individual income is $62,518. For the sake of this article, we’ll use the average income. A variety of articles from financial “experts” suggest that a person save between 10-20% of their post-tax income. Let’s split the difference and use 15%. Depending on what state you live in, your post-tax NET pay would be ~$49,000 per year. Assuming you start “saving” at age 30 until you plan to be wealthy (retirement) at age 65, you will have saved $257,250.
While that may seem like a decent amount of money, let’s see what really happens to savers.
We listed 3 popular examples of how people save their money. People who classify themselves as safe or risk adverse often choose these options. The first thing we see is how quickly inflation can eat away at the true purchasing power of your money. So with all 3 of these options, you actually lose money as time goes forward! The second thing we notice is how quickly the money will evaporate when you stop working. Assuming you’ll still need $41,650 per year to maintain the same lifestyle (took out the $7,350 not needed for saving anymore), the money will run out in less than 4 years for ALL of these examples.
Now you might be saying to yourself, hey you didn’t account for a pension or social security. True, we didn’t, and with good reason.
1. Pensions are really only available to public sector workers these days, and those workers account for about 14% of the U.S. workforce. That means the overwhelming majority of us won’t get a pension. And for those that do, you need to be careful too! It is estimated that pension funds are currently underfunded by $2-$4 trillion. Yes, you read that correctly. The funds have $2-$4 trillion less then they need to fulfill their promise of payment. That will make for an interesting future. We advise not counting on your employer at all for your financial future. If you do get something, think of it as a bonus.
2. Social Security is another source of income for many Americans. 64 million people currently collect social security benefits, and that number is only expected to increase. Unfortunately, this program is underfunded by $43 trillion! And with an aging population, there may not be enough workers to pay for the people receiving benefits. So we advise not relying on the government for your financial future either. Besides, the average social security payment is $1,503 per month, so that would make your money last another 2-3 years until you’d be living off only $18,000 per year!
Another thing you may be thinking is that you save in the stock market. First off, that isn’t saving, it’s speculation, but that is a conversation for another article. Secondly, you’d be right that the stock market is another option to put your money, so we looked at the math on this one too.
Most people don’t put their money into the stock market directly, they do it through some sort of retirement plan like a 401(k), 403(b), IRA, mutual fund, etc. These people typically classify themselves as being “hands-off” with their money. They probably have contributions automatically deducted from their paycheck, or perhaps have a financial advisor manage their money for them. They prefer the simplicity and ease of this process.
What are some things we notice about this option? The first thing is that an annual return of 8% really helped our money grow, to nearly $1.3 million! That is a great nest egg and would last us 30 years, probably more than enough time for the majority of us. But wait, we haven’t yet accounted for inflation, fees, and expenses. As you can see, that eats away 5% of our 8% return leaving us with only, $444,396. What?! We lost 2/3 of our money to inflation and fees? Yes. Now you would only have enough money to last 10 ½ years. That is the steep cost of being “hands-off” with your finances.
We did a lot of math on all the examples above, so let’s boil it down to a few keys points.
· Playing defense, and letting someone else be in charge of your financial future probably won’t end well for you. Lack of insight and control will cost you money.
· Earning a return significantly higher than inflation is key to ever having a chance at real growth.
· Fees, expenses, and inflation CRUSH a 401(k)’s annual rate of return, but that is rarely talked about. Financial companies are allowed to advertise their fancy rate of return of 8%, and in the fine print somewhere it says *not adjusted for inflation. Does not take into account commissions, fees or expenses. Do you think the average person knows that?
· The title of this article has the word “wealthy” in it, not “how to save just enough to not have my money run out before I die and I’m still stressed all the time” (that would be a long title!) Did any of these options make you feel wealthy?
So how can you be more in-charge of your own financial future? Here are a few suggestions:
1. Increase your financial literacy. The more you know about how money REALLY works, the more prepared and confident you’ll be to make key financial decisions.
2. Ask questions. If you are going to trust someone else with your financial future, ask them how it works, what are their fees, does that rate of return take inflation into account, why do they recommend a particular strategy for your situation, how overfunded/underfunded is your pension plan, etc.
3. Shift from a “saving” mentality to an “investing” mindset. Investing involves allocating money with the expectation of achieving a profit. True investors don’t invest in things that lose money; that is not an option for them. They also don’t invest in things that only provide a rate of return of .5%, or 3%, or even 10%. Most of them learn so much about their specific investment of choice (real estate, commodities, businesses), that they expect much more of a return for their time and capital. They also understand the role that inflation, fees, and taxes play on their investments, and plan accordingly.
4. Consider investing in things that you can personally control the outcome. When is the last time Apple or Citibank let you influence how they run the company? Yet people will invest their hard earned money into something they have zero control over. True investors want control over their investment, so they don’t lose money.
5. Reinvest your profits. In order to really achieve financial wealth, you need to create money, invest the money, make a profit, reinvest the profits, and repeat. There is an old saying that poor people learn how to add & subtract their money, while rich people learn how to multiply theirs.
6. Earn passive income. If you learn how to master this, you will be wealthy and NEVER run out of money. True investors make money while they sleep, while they’re on vacation, playing with their kids, and even after they retire.
7. Understand the velocity of money. Investors know that static money is dead money. The real way to accomplish wealth is to always keep your money moving. Send it out, make sure it returns with more, and then send it right out again. If you let it sit, inflation digs its claws in!
Some of these suggestions may seem intimidating, but believe me, they can be learned. At the end of the day, it all comes down to knowledge and action. Spend the time to learn as much as you can about multiplying your money, and then take action on what you learned. Rather than defense, learn to play offense. Start to feel comfortable managing your own money, and making sound financial decisions.
When you hear about people like Bill Gates, Warren Buffett, Henry Ford, Oprah Winfrey, John D. Rockefeller, and Sara Blakely, do you ever hear someone say “Wow, that person saved their way to a billion dollars?” Nope.