The #1 Killer of Wealth in America

It’s not a surprise to hear stories these days about the middle-class shrinking. A big part of that trend has to do with the lack of sustained wage growth for decades. Families were essentially standing still financially while the tide of inflation continued to rise. The tide came in and many families are underwater. However, stagnant wages and inflation are not the full story and may not even be the most important part.
During this time of relatively flat wage growth, one would think that personal spending would go down. Typically people spend less when prices go up. For example, when gas prices go up, people tend to drive less. However, over the years, the complete opposite happened, while wage growth has been flat for the past 30 years, consumer spending has shot through the roof!
How do you explain that? One word. Credit.

Misuse of Credit Kills Wealth

We’re not looking to bore you with the history of credit, but as consumers, the only way to spend what you don’t have is to borrow. Over the past 40 years, banks have made credit such a regular part of everyday life, that today, you likely may not know an adult that doesn’t own at least 1 credit card. Imagine before credit cards, where you had to walk into a bank and fill out all kinds of paperwork to get a personal loan. We must acknowledge, access to credit is actually a good thing when used properly. The problem comes when credit is misused or financial products are designed in such a lopsided fashion that debt problems are inevitable.
The way most people build wealth is to consistently save over an extended period of time. They use those savings to invest in the stock market, real estate, or to build/invest in businesses. Unfortunately, as credit availability grew and became mainstream, personal saving rates did the exact opposite.
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Above is a chart showing the outstanding credit since 1970. Keep note that credit cards really didn’t start becoming mainstream until the 80’s. You’ll notice that credit begins to skyrocket in the 80’s and hasn’t stopped since. Compare that to the chart below showing personal savings rates. People used to regularly save 12-15% of their income in the 70’s, but now it’s down to 5%. One guess on where that 10% difference went. According to a NerdWallet study in 2016, the average family with credit card debt pays $1,292 in credit card interest per year. That does not include interest paid on student loans, auto loans and mortgages.
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This is not all about reckless consumer spending, there’s plenty of blame to go around. Inflation, lack of government regulation and complex, misleading terrible financial products are a large part of the problem. For example, recently auto dealers started extending 8-year auto loans. Depending on the interest rate, a borrower could pay as much in interest on that loan as the car itself. Imagine paying $50K for a $25K car and at the end of those 8 years, the car is worth less than $5K. The point is paying interest to banks is the exact opposite of building wealth. The money spent on interest payments for credit cards, auto loans, student loans, mortgages is money not saved and not invested.
It’s not about whether credit/debt is good or bad. Consumers need to be much more savvy about the cost of borrowing money. It’s not simply the monthly payment, but the amount of interest over time and what one is losing out on by paying that interest. It’s about making an active decision about which side of compound interest you want to live on. You’re either paying interest and growing the profit of banks or receiving interest by investing and growing your own wealth. Choose wisely.

3 Ways to Increase Your Compensation Without Talking to Your Boss

Not everyone gets salary increases every year, but that doesn’t mean you can’t increase your total compensation. Most of the focus on compensation is on salary, but your employee benefits can account for as much as 30% of your total compensation.

Remember when you started at your company and in your orientation, you had a meeting with HR to discuss your benefits? They likely gave you a thick folder of information and depending on how long you’ve been with your employer, you may not remember a single thing from that meeting, but that folder is likely buried at the bottom of your desk drawer. You may not realize in the fine print of those handouts are some really important benefits that can either put money back in your pocket or improve your overall financial standing. If you want to increase your compensation without having to talk your boss, it’s time dust off that folder and/or set up a meeting with HR. 

We’ve created a detailed FREE guide to maximizing your employee benefits, which explains common employee benefits in plain English, but here are three of the most unused benefits which cost can cost us thousands of dollars each year.

1. 401(k) and Employee Matching

If your employer matches your 401(k) up to a certain percent, you are actually turning down free money if you don’t take full advantage of it. Let’s give an example of how this works:

Example: John Doe makes $50K in salary. His employer matches his 401k at 5%. So if he invest 5% ($50K * 5% = $2,500), his company will match that investment up to $2,500. If he invests less, the company will match less.

So in that example, if John decides not to invest in his company’s 401(k), he just reduced his total compensation by the $2,500 match each year.

We recommend building a base emergency fund prior to long-term investing, but it is important to take advantage of your company match as soon as possible.

2. Wellness Programs

If you have health insurance through your employer individually or your family, your employer likely pays 70-80% of your health insurance premium. The portion that comes out of your paycheck is closer to 20-30% of the total cost. This is important because that means your employer is financially incentivized to have a healthier workforce. Healthier employees equal lower insurance premiums for the company. In order to accomplish this, employers have created incentives to get you healthier and many of these can take the form of financial incentives.  Examples include discounts or reimbursements for gym memberships, discounts on home fitness equipment, healthcare reimbursements, cash rewards, weight loss programs, smoking cessation programs. Think about it this way, your employer is willing to pay you more money to be healthy.

3. Corporate Discounts/Partnerships

Most people are familiar with receiving employee discounts if they purchase products or services from their employers. However, employees are less familiar with discounts they may receive from other companies because of their employer. Particularly with larger companies, they often have sizable contracts with different vendors and often as part of that contract, they will offer discounts to their client’s employees as well. So you may able to receive a 20% discount on your monthly cell phone or cable bill because your employer has a contract with Verizon. It’s not solely cell phone or cable bills either, this may include electronics, rental cars or even group insurance policies such as auto, home, and life insurance. Also, employers sometimes have internal online portals where you can purchase products with the discounts built-in instead of purchasing in-store or from the company websites directly.

Saving money on your expenses, particularly fixed monthly bills, is not much different than increasing your salary. Instead of increasing the income bucket, you reduce the expense bucket. The result is the same, more money in your pocket. So whether it’s retirement, wellness programs or corporate discounts, make sure you dust off that HR packet in your desk drawer or give a call to HR to learn more about your benefits and how you can increase your total compensation.

For more detailed information on maximizing employee benefits, check out our FREE 15-page guide including details on Retirement, Health, Life, Disability benefits and more, which we call Give Yourself A Raise!

4 Reasons You Need to Start Investing

Let’s face it, for many investing is a difficult topic. The financial services industry has done an excellent job creating lingo and products that seem overly complex. Part of it is to justify their services; ‘If this investing stuff is too complex, give me your money and I’ll handle it for you!’ Technology is changing that dynamic and people are starting to realize that investing, particularly retirement investing, doesn’t require a Ph.D. in Math or Finance. The first step is to understand why investing is important and then to develop an openness to learning over time. This is not a forum for specific investing advice, but rather to discuss why investing is essential to reach our long-term financial goals.
Before we get into the reasons to invest, let’s make sure we are all on the same page what we mean by investing.

  1. Prior to investing funds in the stock market, make sure you have at least a base level emergency fund in place (in a separate savings account). Many people make the mistake of saving for retirement without building the foundation to prepare for the present. If you have enough money to build both at the same time, by all means, do so, but top priority should be to build an emergency savings foundation to avoid using credit cards or tapping into long-term investments.
  2. For our purposes, when we discuss investing, we are talking about long-term investing. We would not invest funds in the market needed for short-term or medium-term goals (i.e. less than five years). We’re discussing investing for goals such as building a nest egg for financial freedom or retirement.
  3. We are also not referring to the purchase of individual stocks or day trading. While that may be of interest to some, it is not advisable for the vast majority of the public. Investing has different levels and complexities. The majority of adults can develop the skills to drive an automobile safely on the roads, but we can all agree that most people shouldn’t try to become NASCAR drivers.

Now that we’re all on the same page, let’s talk about why you need to be investing!

1. You Can’t Build Wealth by Spending

Money is a resource, and like fire, it can both build and destroy. In order to be financially successful, we have to learn how to use our financial resources to build. There are really only three things you can do with money and how much of each you do can make all the difference in the world.
Spend – We do it every single day. We use our money to acquire products or services that we believe are of equal or greater value. The problem with spending is that most things decrease in value over time, so after we part with our hard-earned money, we’re left with a product or service that is immediately less valuable. If you use too many of your financial resources to purchase items that decrease in value, you cannot build wealth. This is why keeping up with the Joneses is so poisonous; it’s a race to the bottom.
Give – Interestingly enough, studies have shown that giving actually brings more and longer-lasting happiness than spending. You likely still remember the feeling of joy when you gave someone a great gift they really appreciated or truly helping someone in need. Giving also forces discipline with our finances, when you give money away, you become keener on how you manage the remaining funds. Giving is a very important aspect of personal finance and is a driving force for many to build wealth.
Save – There are different types of saving, but the idea is that you are using your financial resources with an expectation or goal of increasing its value in the future. That can take the form of a savings account, investing in the stock market, buying real estate, or even lending. This is the primary way to build assets and thus build wealth.

2. We’re On Our Own

If you are under the age of 50, it’s likely you do not have a pension and the future of Social Security is very uncertain, it may not even exist by the time we would be eligible for it. We also know that advances in health and technology that we are likely to live longer lives. We will need funds to provide for ourselves for a longer period of time without the financial assistance from business or government. If that’s not scary enough, let’s say you want to retire at 65. You work from age 25-65 (40 years), during that time you need to save enough money to live without new income for potentially 25 years (ages 65-90). People are having enough trouble building 6 months of expenses for an emergency fund. How about building for 25 years (300 months) of expenses or more? Putting a few dollars in a savings account here and there isn’t going to get the job done. You need a plan and you need to start as early as possible.

3. Inflation Can Drown Your Savings

When planning for the long-term future, people often forget to account for inflation. This can be a big mistake and can have serious consequences. Inflation is the increase of prices or the decrease in purchasing power over time. For example, 20 years ago one could go to a gas station and purchase gas for less than $1/gallon. As of this writing, it’s about $2.30/gallon, so a $20 bill that was more than sufficient in 1996 would not fill the gas tank today. Inflation (typically 2-3% per year) is like an ocean tide that is continuously raising the financial sea level. If the sea level is ankle-deep today and you stand still (don’t invest or grow the value of your assets), the tide of inflation will continue to rise and eventually you will be completely submerged. Like quicksand, standing still financially is actually sinking because inflation decreases the value of yesterday’s dollar. The only way to counteract inflation is to make sure your long-term savings are earning more than inflation.

4. Compound Interest Can Save You

So far we have given you some pretty dire news, spending won’t help, you’re all alone and the winter of inflation is coming for your assets! The good news is that you have a force of nature available that can fight the good fight and help you win and reach your financial goals, her name is compound interest. However, there are two sides of compound interest coin and you have to be on the right side to win.
If you have ever paid the minimum payment on a credit card, paid student loans, car loans or a mortgage, you have experienced being on the wrong side of compound interest. When you borrow, the investment the lender made earns interest that compounds and you pay them more in the future. This is why debt can kill wealth; your financial past is stealing from your financial future.
The right side of compound interest is much more appealing. When you invest, the earnings on your investments compound such that your future earnings also earn interest for you in the future.
Let’s use a simplified example.  You save $500/month every month for 30 years. After 30 years you would have saved $180,000 cash. Now let’s say you invested the same $500/month every month for 30 years and it received 9% interest annually, it would total over $850,000.
The difference between the $180,000 and $850,000 is the power of compound interest. Compound interest is the sunlight that provides the energy to your investment seed to grow and harvest. The two major ingredients for compound interest to be effective are regular payments and time.
While saving is important, especially building the foundation of an emergency fund or short-term goals, investing is a necessity to build real wealth. Imagine a 15-year-old family member after watching a NASCAR race said to you they don’t want to learn how to drive. They explain that “It’s too technical, too dangerous and I’m not a car person!” You would probably explain to them how not learning to drive can negatively impact their quality of life. You would also likely explain to them there’s a huge difference between daily recreational driving and professional racing. The same applies to investing, excuses like, ‘I’m not good at math’, ‘it’s too complicated’, or ‘it’s too risky’ no longer hold. There is a huge difference between day-trading and retirement investing, technology has made investing accessible to many more people and because of headwinds like inflation and government uncertainty, in our opinion, it is riskier not to invest.