Everyone wants to know the secret to “getting rich quick.”
And in the pursuit of turning small amounts into “life changing gains,” a shocking number of people get sucked into casino-style gambling pretending to be “investing.”
But if you’re serious about becoming financially independent and leaving a legacy of wealth…
It’s critical that you understand how to play the Game of Money – which are the skills of acquiring and allocating resources – and then, how you can use those skills to win it.
Today, we’ll talk about some of the foundational “rules of the game.”
Let’s dive in…
Rule #1) Spend Less Than You Earn
If you want to achieve any version of financial independence, largely speaking, it means your investments need to generate more that you spend.
But in order to acquire those assets, you must have capital to invest with.
This means the single defining skill set you MUST develop is spending less than you earn!
Sadly, the majority of Americans do a horrendous job saving money.
According to a 2014 study performed by Emmanuel Saez from UC Berkeley, and Gabriel Zucman from the London School of Economics…
- The top 1% of Americans save ~38% of their income.
- The top 10% to 1% save ~12%.
- The bottom 90% save ~4%-6% range.
Now, It’s easy to say “well, of course rich people can save more. They’re rich!”
Yes, there is certainly truth to this. And yes, for those living paycheck to paycheck, it’s that much harder to save money.
However, we also have to examine the other piece of this puzzle…
The more discipline you have around spending less than you earn – which you can accomplish by earning more, spending less, or a combination of both – is a key factor of wealth creation.
But once you have additional capital you can use to invest, what should you do with it?
#2) Focus on Compounding Growth
Despite what the guru’s on the internet tell you about “getting rich quick” or “earning extra income from day trading“…
Please understand that what you’re doing is gambling. You have almost no chance of making positive returns over the long term.
The real secret of “getting rich” is to let the math of compounding interest do the work for you.
If you’ve ever talked to any financial advisor, chances are, you’ve been told about the importance of starting early and letting compounding do its thing.
But here’s the problem with compounding…
The human brain is wired to see things linearly – meaning, they take where they are right now and project in a straight line into the future.
But investors understand how to think exponentially – meaning, they understand how a small amount that is consistently compounded over time generates huge returns.
Now, to be fair, we can’t go back in time to take advantage of lost compounding…
But the time you have left can either work for you or work against you.
Because if you’re not stashing away money and letting compounding interest do its thing…
Chances are, you’re accumulating high interest debt that is destroying your wealth at record rates…
And if you also factor in things like inflation, it gets even worse.
That’s why it’s so important to both save more than you spend and make sure you’re positively compounding your wealth.
But it’s not enough to get your money into a compounding loop…
What matters is how much you wind up with after fees, transaction costs, and taxes.
Rule #3) Minimize Fees and Transaction Costs
The single best, easiest, and fastest way to dramatically improve your potential returns is to reduce the fees you pay.
Over the course of a full lifetime, hidden fees can add up to hundreds of thousands of dollars—money that should have been available to the investor in retirement, but instead went to a financial advisor or product seller.
But the only way to reduce those fees is to know what they are and how they’re hidden from you.
Broadly speaking, there are two types of fees…
- Ongoing fees – These are expenses you’re charged typically on a yearly basis, like management fees and advisory fees.
On paper, these fees look small. At first glance, the difference between 1% per year and 3% per year seems negligible.
But the impact over time is huge.
From the same Personal Capital study mentioned earlier…
For example, the total additional amount lost to fees in this example is more than $400,000—higher than the median price of a home in the U.S. Even a one percent difference (i.e., 2.0% vs. 1.0%) costs the investor an extra $240,000 in fees over the full time horizon.
Even worse, that doesn’t fully capture the amount the investor loses in total return. Because fees are taken out along the way, that money doesn’t have time to grow and compound.
Unfortunately, most investors have no clue how much they’re really paying in fees.
If you have an advisor, you’re paying their fee…
But if that advisor then invests your money in another managed product – like a mutual fund or an ETF – there could be even more fees embedded in the buy and sell transaction.
And that doesn’t include the other fee most investors don’t realize they’re paying…
- Transaction Fees – These are one time fees that happen when buying or selling something, like a stock or mutual fund.
In the public markets, the fees are pretty straight forward…
You have what’s called a “load,” which is a sales commission paid to a financial advisor, broker, or other intermediary.
The load gets paid when you buy (a front-end load) or when you sell (a back-end load).
And to be clear, there’s nothing inherently wrong with these fees. They exist as compensation for the value supposedly being provided.
But more often than not, these fees have the effect of sucking more money out of your pockets.
Whenever you’re doing business with someone in the financial services industry, having transparency around fees – and what you get for those fees – is important.
As investors, I think we can agree that we’re all looking for positive financial gains…
And yes, I think we can all agree we’d love big, fast gains that allow us to turn a small grubstake into a million dollar nest egg.
But as Tony Robbins says: “You either master money, or, on some level, money masters you.”
Even if you did get lucky enough to turn a small investment into a massive fortune…
If you don’t have the skills and ability to manage that money, you’re probably going to wind up losing it all.
In fact, about 70 percent of people who win a lottery or get a big windfall actually end up broke in a few years, according to the National Endowment for Financial Education.
While it’s certainly a good idea to hire a team of experts who can help you grow and manage wealth…
At the end of the day, you – and you alone – must be responsible for what you do with the money you have.
But in my experience, money has a way of flowing into the hands of people who know what to do with it.
And the easiest way to start mastering the Game of Money?
Spend less than you earn…
Focus on long term, compounding growth…
And minimize unnecessary fees.
Jake Hoffberg – Publisher
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