As I write this article the stock market has had a fantastic rebound from its last serious downturn and most investors seem to have a little more bounce in their step than several years ago. It seems that the market is hitting new all-time highs every other day. I am happy that people’s investments and retirement accounts are doing better and I hope they continue to do so in the future. However, as we all know the stock market goes up and goes down and the timing of your entrance and exit on certain investments can have a huge effect on your actual gains and losses. (never forget 1999,2001, 2008 just in recent history)
The stock market and all the emphasis put on it by almost everybody can act like a giant Magic show where you are paying attention to what the market is doing in the left hand but totally oblivious to what your overall financial picture is doing in all other parts of your life. The traditional media’s focus on stock market investing almost to the exclusion of everything else has made most Americans singularly focused on that one part of their financial life while not paying attention to where most of their wealth is being eaten up systematically month after month and year after year. This cannibalization of wealth happens no matter if the stock market is up or in the tank. I call these massive wealth drains and there are 4 huge ones (along with several other smaller ones) we will cover briefly in this article.
The first and biggest expense people have over their lifetime are income and other taxes. Even with that fact most people really have no clue how the tax system operates and that is by design by our old Uncle Sam. Books have been written on how to reduce taxes but since our time is limited take a couple of points away from this article. Since taxes are such a huge expense maybe you should spend some time studying one of those many books by a credible tested source and figure out how to reduce your taxes. The only thing I have time for today is to give you this huge general idea. The tax system is set up to penalize hourly and salaried workers while rewarding entrepreneurs and business owners. Salaried workers pay taxes based on that they gross while business owners pay taxes based on what they net for income. When that statement is made most people think of the fortune 400 companies getting something over on the little guys. Keep in mind you don’t have to be a massive business to get great tax advantages. Even the little businesses and start-up businesses get huge tax benefits. So since that is the case, rather than complain about it and say “oh well I guess I am out of luck because I have a normal job” dig a little deeper and realize that everyone should have a small business even if you run it from your home office or kitchen table. To qualify for tax deductions in that business The IRS says that you have to have the intent to make a profit and work in that business for a reasonable amount of time (he never defines reasonable). When that standard is met you automatically qualify for dozens of tax deductions that you don’t get to take as an individual. If you have losses and start-up expenses much of them can be written off against your other income from your job (limits apply so get a good business CPA to work with you) Realize that nobody (even your CPA or tax preparer) cares how much you are paying in taxes and if you don’t take time to know how it works and use it effectively you will cost yourself tens and hundreds of thousands of dollars in lost income over your lifetime plus the compounded growth that lost money would have given you over time.
Another huge wealth drain is market losses on any investment capital that you control. So when the stock market or a piece of real estate drops significantly in value it could take years for your money just to get back to even and of course, there are certainly no guarantees that it will come back during your investment lifetime. Compound interest is an amazing beast that even Einstein had trouble grasping so I will keep it brief. If the compounding curve of your money is broken by market losses or premature withdrawals it has a massive effect on your final pool of wealth. Just for fun, if you were offered a job that only lasted 36 days and you had two choices on the pay plan which one would you take? First, you could be paid $5,000 per day at the end of every day for 36 days for a total of $180,000 of income. Not bad for just over a month’s work! The second option is you would be paid one cent starting on day one but that one cent would be compounded by 100% daily and payable at the end of those 36 days. Well if you jumped at the $180,000 you missed the power of true compounding of money. If your coworker doing the same job chose the compounding penny they would not be a millionaire…………….they would be a stinking filthy rich multi-millionaire with a check of $343,597,384! Do the math and then tell me when you want to break your compounding curve with big losses or withdrawals. (did you know you can have money invested tracking the market without it being subject to any market losses?)
Next massive wealth drain is interest and fees paid to banks or finance companies over your lifetime. Loaning of money (financing) has been around in some form for thousands of years. Since the time you could pull your ox into the temple you could get a loan on it if you paid more back than you borrowed and left the ox as collateral. Any business model that has been around that long is a winner! However, when you’re on the borrower side of the transaction it is a wealth drain especially if most of your borrowed money is on depreciating assets such as cars, boats, equipment and any other item that goes down in value. Now people will tell you that if you can borrow money cheap and invest in something that makes more money than you pay in interest back to the bank then you are using leverage properly. That theory can be true but it comes with many caveats and other lessons we cannot cover here this week. Do a simple exercise and add up all the money you have paid out over your lifetime in monthly payments on everything. Then compare that number to the amount of money you have saved for retirement and tell me which one is bigger. Leave your results in the comment section. Then decide you should know more about how to be the lender and not the borrower.
Last massive wealth loss is depreciation (money lost) on items such as cars, boats, equipment, appliances and almost any other large asset we buy over our lifetimes. Almost nobody discusses this (except me of course) and yet did you know that most people will lose more money on just their cars during their lifetime than they can ever save for retirement let alone all the other depreciation? Do your own math on your life and find out the truth.
Think of your financial life as a big pie and as such it has many pieces to the entire pie. Don’t fall for the magic trick of only paying attention to what is happening to your one slice of pie, which are your investment gains or losses. Pay attention to the entire pie and start to slow down and stop your 4 massive wealth drains.
John Jamieson is the #1 Bestselling author of two books “The Perpetual Wealth System” and “Wealth Without Stocks or Mutual Funds” as well as a nationwide wealth strategist with clients in dozens of states. Contact him at firstname.lastname@example.org or visit his site at www.wealthwithoutstocks.com