While most financial advice is heavily focused on maximizing return while minimizing fees (and this perhaps is one of the reasons so many people fail long term in their financial plan) I’m going to take time today to introduce a concept that is by no means new, but one of those golden little nuggets that could dramatically change the way you look at financial matters through the lens of your personal self worth.
Because SOPA and PIPA went down a ball of flames I’ll post the following picture to illustrate what today’s post will be all about. Not, of course, before acknowledging that it’s not my original work and noting that you can purchase it directly from despair.com (I haven’t started selling ad space; I’m not getting paid for this, FYI)
Now that you’re all depressed and thinking about all the things you likely won’t accomplish, let’s have an uplifting conversation about all of the money you are pissing away each year. We’re going to start from the very simply building blocks on this one. It’s going to seem almost childish, but trust me, like an artist sketch, this will get better by the end.
We’ll start with a hypothetical guy (I was going to say guy or gal, but decided not to because I’d be typing “him/her” a lot, sorry ladies I’ll remember to use a hypothetical female next time, promise) who earns $100,000/year and has 30 years left before he mails it in and heads south to become a professional shuffleboard player. If this individual could save every dollar earned over the course of the next 30 years he’d have $3 million in his possession. Graphically (and I’ve got a lot this time) it looks like this:
There you have it, some $35 million dollars our friend has the potential to amass. If you sitting here thinking “I make half of what he does,” divide everything by two, and if you make double this…well if you can’t figure out what to do I’m wondering how you managed to get to where you are. But what happens when we introduce reality. We know that no one gets to save every dollar they earn, if nothing more than paying taxes, there are expenses that need to be internalized, and here’s what it looks like:
And now our $35 million fortune has sunk to not much more than a pathetic half million dollars. That’s a lot of scary red. But most people motor through life without even giving it a second thought. In large part because they can’t see the red, or rather it’s masked by utility derived from the conspicuous consumption of bigger houses, faster cars, shinier do-dads/gadgets, etc. This red portion is real, and it represents what you’ve given up as a consequence of your decisions. What’s worse is that traditionally financial planners, and investment advisors have no plan of attack for addressing this issue. Instead they live and die by the sword of rate of return. They call you in with the promise of smarter, more complete investing advice that increases your rate of return. But what does a 2% bump in rate of return get us? It gets us this: