Now Shift Your Focus For A Better Perspective

To be clear, and despite all these nice calculations for your future: It is certainly important to get a job first and to cover your daily needs and expenses. But that combination of working and making money alone is unlikely to help you improve your path to financial freedom or even stability.

You need to put in the little extra effort and set up as saving plan – either for you, if you are young enough, or your kids. Of course, the biggest threat to this simple plan is when you stop working or decide not to save anymore, as in the model we were looking at in Part 1. You don’t need to be Einstein to figure that out. And I assume everyone knows this intellectually anyways. Yet, so many people still don’t use the leverage of Time enough, although it requieres the least skills and is by far the easiest form of investing. I’m repeating myself. This should be your ultimate PRIME factor for your foundation (and which I love so much).

There is a second very important thing that needs to be discussed, however: In the conventional retirement models, these savings most likely do not go into such things as low-cost Index Fonds (ETFs) like in the above calculation with average returns of 5-6% p.a. over a long period of time. Instead, hard-earned money often goes into such things as high commissioned investment models, like mutual funds, sold by your bank with also high commission fees, or low return pension funds. These annual fees and commissions will have a tremendous impact on your result. And I have not even put an order or entry fee into that above equation.

Because these low costs are an important recipe for success, if not even the spice itself. Yes, and here comes the second key besides Time.

 

Fees? Who Cares About Fees When I Have A Truck Load Of Money

 

Everyone is fancy about „secrets“ and admittedly I put this word as a cliffhanger in my last part. Sorry for that, because actually there are no secrets. Everything is common sense and a rather boring rational approach. But if I had to boil down wealth building to one secret sentence, it would be this one:

You accumulate financial wealth by keeping your money, not by earning it.

I think this is completely legitimate thinking because everyone is just looking at how much someone is making per month or per year. But I couldn’t care less because it says basically nothing about how financle stable someone is in the end. But this is what matters. So don’t necessarily focus on your income, but especially on your saving habits.
Because as we have seen in Part 1, small rates can do the job as well and provide you with nice cash-flow. The income (Financial Capital) can be used to leverage your saving rate for even faster and better results.

 

Nothing In Life Is Free But Death – And This Costs Life

 

Now, how does keeping money (aka avoiding costs, saving,… you name it) affect your outcome? Let’s do the math first with an example of low-cost Index funds such as ETFs. Sure, that’s a lot more boring than looking at the growing account in the investment model from Part 1, I get it. But as already discussed: All your earnings mean nothing, if you don’t keep them. Don’t skip this step.

In the model, our ETF costs us 0.25% each year in fees, which is pretty average. Those fees are shown in the spread sheet of every ETF you can buy (identified by „TER„). The amount shown as a percentage is deducted from your invested amount every year. Take a look at these costs to make more accurate calculations. However, since these costs are only low, they should of course not be the number one criterion when deciding whether to buy an ETF.

Unfortunately we have not finished yet: Even though it is expressed as Total Expense Ratio (TER) these costs are not so „Total“ for you as they seem:
Because every order likely produces some fees as well. I say likely, because these order fees are determined by your broker or even by the fund itself and therefore differ individually. Some broker offer flat rates, which means every order (or a limited amount of orders) is free, but instead you get billed annually according to the networth of your depot, etc. Keep this in mind while calculating, because the calculated results may vary a bit in the outcome – it just depends on the calculator and if it is sophisticated enough to implement such volatile numbers accurately. Also, broker like to change their fees from time to time. The TER alone however is pretty consistent.

Now we have indirectly uncovered the reason for ETFs being so cheap: The managers of your ETF at the other end of the line simply buy each company from that Index the ETF represents at once – and then basically leave everything to itself. Sometimes they need to adjust, when one company gets kicked out of the index, but that’s about it with trading input from their side. They could take a nap now while the natural growth of the economy does its thing. That’s up with the term passive investing.
Investment funds with active management, on the other hand, cause more costs through more trading (every trade costs), the manager is more active in buying and selling shares (which costs) and, if successful, charges you a commission for his brilliance (costs). The best (or worst): If the manager doesn’t make any profit, he still charges you for his activeness. PLUS: Some fund managers think they are so elite in their profession with making profits that they charge you an entry fee (which could be something like 5% on your investment). That means, you want to invest $10.000 but have to start out with $9.500 effectively, because it cost you $500 to just be in the game.

In conlusion, when buying an ETF, there are the costs of your order fees (by your broker) and the fees for your ETF (TER, determined by the company who sells the ETF, such as BlackRock or Vanguard). Any additional costs by your bank or broker, maybe for your account in general, the usage of a certain trading-app etc., are not part of this equation. They play the least role.

Ok, to visualize the differences of fees better, we compare an investment of $10.000 for an ETF with our 0.25% fees (first row) and a mutual fund with total average fees of let’s say 2% per year (right next to it, displayed in bold). We also assume they grow by an average of 5% per year. We do not put an order fee into account this time.

I think these numbers are self-explaining. After 65 years, the 0.25% ETF has amassed an amount of over $200.000, while our actively managed fund has made $65.000. I put the difference in dollars and percentages next to it to illustrate the disaster. All our nice effects of compounding are washed away by the fees. If grandparents are gifting their grandchild such a nice sum of $10k for their birthday, they should make sure to put it in low-cost index funds, such as ETFs. There you have it: Avoiding costs is essential.

 

OK, Leveraging Time And Avoiding Cost – Got It. What’s Up Next?

 

We take a short breath from these numbers and come back to the reality of many people by assuming you actually did take a job in your early 20’s.
A job to cover your expenses, not your dream job, just a job in order to earn money. Sounds familiar? I know how it feels when literally any dime is precious at the end of each month. How can a silly saving plan over a timeframe of 50 years be on someone’s mind in this situation?

Worse, people get even more desperate and intimidated when the saving rate needs to get higher by each year to gain at least some form of stability in the future, as shown in the example in Part 1. And once caught up in desperation, it is easy to lose focus which would be needed for the skillset (Personal Capital) now to balance out the other two resources. If you don’t like your job, it is hopefully a bit more motivating now to stick with it and save some money until your next chapter in your life. The financial rewards add up enormously later.

But now we want to look at your alternatives, when you are in a different stage of life and did not have set up an early saving plan. Again, no need to worry and give up entirely. There is just a shift of focus needed to stay in the game to avoid financial nightmares. Never forget all the options you have. Never let you put down by people who say you messed up because you are 50 and havn’t started saving yet. Yes, you messed up your resource Time, which is unfortunate enough though, but you did not mess up your life.

However, it is also mandatory that there is consistent work on everyone’s own Personal Capital.

Personally, I even think Personal Capital is still very underrated in today’s society and in my opinion even outtrumps Time in regards of becoming financially unshakeable: When you take care of yourself both mentally and physically, you don’t need to fear some kind of retiring age, maybe set by the government or your employer. You basically manage to stay independent as long as possible. With physical and mental fitness, you maintain your flexibility to react on circumstances life throws at you.
That means it won’t be such a threat if you need to generate an extra income at the age of 70 when you somehow lost your savings or used it up or need to help someone, just as long as you are fit enough to do so like, just like with the example of a broke Warren Buffet from Part 1.

As long as you are able to bring in your personal capital, you can always regain control of unfortunate financial (or other) circumstances that time or money may not be able to compensate

Last Part Of Our Traditional Limited Life Model

 

In Part 1 we read: “…. accumulate and save money (aka “spend less than you earn and put the difference in something like a retirement plan (= asset)”) to reach retirement at maybe 65 – and then live from there with your (hopefully plenty) savings and finally enjoy life.”

Collecting and saving money also falls under the resource of Time in this statement, but to me that sounds more like a linear path.

The conventional retiring plan however, provided by the government and/or your employer, is not equal to a comprehensive wealth plan. For sure, it is better than nothing. However, the truth is that many people who have worked their entire lives still suffer financially in retirement even though they begin to receive their pension.

Sorry to ask, but where is the “wealth” in this equation when pensioners did use all their powerful resource of Time when they worked for 45+ years but still suffer in the end?

Since I have been very aware of this question as an entrepreneur for 15 years, the idea of also ​​creating assets instead of just buying assets also helped me to always think a little bit outside the box. Because creating assets (like expanding your business) has no mathematical limitations as our discussed bought assets (like our ETF’s, but also Real Estate, Bonds etc.) do. But there is another huge possibility of leverage hidden here.

That means, that in our mathematical assumptions, we calculated with numbers such as 5%, because it pretty much represents the average growth of the economy over a long period of time. This is a fair assumption, it could be a bit less, it could be a bit more. But is also very fair to say that the economic growth is pretty much capped to a one-digit number over a larger time period. No worries, though, the compounding effect of Time compensates for that (and with no further skill from our part). And there are many young millionairs out there. How did they do that? Using the leverage of a one-digit percentage can’t be the factor there.

If they lacked Financial Capital, they leveraged their Personal Capital and created assets.

Creating, establishing and selling a business is basically independent to a certain number. The profit could be 1000% and beyond. And this could be accomplished even in a relatively short time frame of just a few years.

Now we hopefully get the final clarity about the power of Personal Capital, tooAfter all, this is the most accurate answer to why people like Warren Buffett basically never fail financially (again). Creating assets can be the ultimate shortcut – depending on your skills.

 

Conclusion

I hope you could gain a bit more clarity about what is possible, what is optimal, what to avoid, etc.
Even though this has only been a very short overview, I hope you get the most important point that there is almost always a way to financial growth, as long as you keep the three resources going. I hope you see that overall wealth building is a huge undertaking and literally achieveable to anyone.

Again, it makes no sense to start a three-digit monthly saving plan for your retirement when you are 55 years old, because a saving plan is only effective with the help (leverage) of compounding. A better strategy in this case would be to focus on increasing your earning capacity (your Financial Capital with the help of Personal Capital), while using the leverage of investment strategies such as entrepreneurship for example. However, these strategies will be topics of discussion in more depths elsewhere if you like.

It may sound cheesy, but there is always a strategic solution. You are never doomed to end up poor just because you ran out of one option.

Just be aware enough to manage, adjust, and use your resources wisely according to your personal situation.

The bottom line: Never freak out.

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