There are four main things that are a major drag on you being able to build wealth. These are things that, unfortunately, not many people are aware of, and so I’m hoping that this will help you in creating awareness about these issues and you can start thinking about how to limit each of their works and effects in your own life.
I want to start with each cause and compare it with a lie that many people have been told, so we can see the effects a bit more clearly.
So first thing, Taxes. Yes, the dreaded tax man. So what is the lie? ‘Go to school, get a good job’…sound familiar? The reason this is such a damaging lie is because income from your job is the highest taxable money you can earn. There are three type of education needed for success, first academic education, the ability to read and write, and do basic math. Second is professional education, learning to work for money. And number three, financial education, learning how to make money work for you. The school system does well in the first two categories, but is non existent in the third, and has caused very well educated people to lose trillions of dollars over time. This lie of ‘go to school and work hard’ inadvertently pushes kids into a lifetime of working at the highest tax rate: earned income.
This lie of ‘go to school and work hard’ inadvertently pushes kids into a lifetime of working at the highest tax rate: earned income…
There are three basic types of taxable income: earned, portfolio, and passive. Earned income is from labour, trading your time for money, and this is taxed at the highest rate of all. Portfolio income is typically from capital gains and investments, and is taxed second highest. And third is passive income, or income earned through a business tax structure. This is taxed the least.
Solution? Financial education. Taxes will be the number one expense in your lifetime. Being aware of how different taxes affect your wealth will help you in your decision making. The details of each of these types of taxation can be handled by an accountant, but the big picture here is to help you make better decisions in how you choose to earn income, or how you teach your kids to earn income.
Number two, debt. Big D. So what was the lie with debt? I think these days there are two: One is ‘buy a house, it’s an investment.’ but the other one is similar to the cause of taxes, ‘go to school, get a good job.’: Student debt. Both of these have wreaked havoc across so many lives. This lie trains people to go to the bank and get into ‘bad debt’, usually in the form of a mortgage. A house is a liability for most people because it usually takes money out of your pocket, instead of putting it in, and the same goes for a college education. A lot of people don’t actually know if they’re getting value for their education anymore. There are so many stories of highly educated people, in terms of academic and professional education, who are not seeing any intrinsic value* from paying so much for their education.
*Intrinsic value is the difference in what they would earn because they have a college degree, as opposed to how much they would earn with just a high school diploma. Say they earn $30,000 a year for ten years with only a high school diploma, and $60,000 a year for ten years with a degree, the ‘intrinsic value’ of the degree is $300,000 because that is the difference between the two incomes over the ten years ($30,000 x 10 years). Unfortunately, it is becoming more and more common that many people’s college degree has a zero, or negative intrinsic value.
Solution? Learn about the difference between ‘bad debt’ and ‘good debt’. Bad debt means you’re paying profits into someone else’s bank account. Good debt means you’re receiving profits into your bank account. Bad debt, think mortgage, car loan, credit cards. Good debt, think rental property, or using debt to fund things that produce cash that covers the debt and more.
Inflation is number three, and this one is the most sneaky of the bunch, but none has as great a destructive power as inflation. 30 years ago, what took $0.40 cents to buy, now takes $1. Because of our banking system and monetary policies, inflation is simply a part of life. Being aware of its eroding effects is absolutely critical. Because banks operate on what’s called a fractional reserve system, they can lend out $5 for the $1 in your savings account. Then if they lend to other banks, those banks can then lend out another $5 and so on. So your $1 in savings just sprouted say $20 out of thin air, decreasing the value of your dollar, because now there is more money in circulation. Monetary policies, like printing, or ‘creating money out of thin air’ are the main contributors to inflation. These decisions are controlled by a few people at one bank in particular, called the federal reserve. There’s so much to cover here, but the main thing to remember is…
30 years ago, what took $0.40 cents to buy, now takes $1…inflation is simply a part of life. Being aware of its eroding effects is absolutely critical.
Stop saving, and keep your money active in things like investments, your own business, or things that put cash back into your pocket. Think of it like exercise. If you’re money isn’t working, it atrophies, and eventually dies. Your money needs to stay fit to outrun inflation.
And lastly, retirement accounts. The lie? Invest for the long term in a well diversified portfolio of stocks and bonds. Sound familiar? This one is a killer. It’s what allowed Wall Street to take in 100 billion in fees in 2008. Check out my posts about Mutual Funds and ETFs that go into this a bit more in depth. Because people are typically forced into these types of investments through their work retirement accounts, this money gets decimated over time. There are so many hands in that pool of money it will make you nauseous. I should also note, another kick in the pants to most investors who use retirement accounts, like 401k’s for Americans, and RRSP’s for Canadians, when you retire and begin to withdraw that money, it will be taxed at the highest rate, earned income…nothing like kicking you while you’re down..
It’s what allowed Wall Street to take in 100 Billion in fees in 2008…
So what’s the solution? By making time for things like reading good books, you are financially educating yourself to be able to take back the responsibility of creating a much brighter financial future for you and your family. When we abdicate responsibility to someone else, this creates a massive drag on wealth creation, think of driving with the emergency brake on. You absolutely have it in you to do this and do it well! It can be daunting at times, and a little overwhelming, but the alternative is so much worse! You’ll be so glad you put in a little effort now, when you look back thirty years from now.
Start small. On day one, maybe just click buy on that book you know you should purchase or rent from your library. Day two, maybe read one sentence of that book when it arrives. Day three, read one paragraph, day four, one page, and keep going, little by little!