5 Wealth Killers
5 Things to avoid to super charge your wealth building odyssey
1. Not knowing what you spend
It is incredibly easy to overspend these days for a couple of reasons:
- Taping your card, watch or smart phone takes a split second as you hear the pleasant ding noise and wave goodbye to your hard earned money
- Paying via those medians, as opposed to reaching into your wallet for cash, has been studied enough for us to know it does lead to more spending. (on average)
- Lack of one time purchase softwares and services.
- Over the last couple of decades there has been a big switchover from buying something and having it in perpetuity to requiring a subscription. Cutting right to the point companies do this because it makes them more money in the aggregate. If they are making more than you are likely spending more
- Buy now pay later on what seems like everything. A couple weeks ago I was buying a $5 item off Temu and one of the options was 6 payments of less than 1 dollar.
- Sure if the interest rate is 0% and you have the money mathematically there is nothing wrong with buy now pay later, but, it could lead to slippery slope.
Solution: Take inventory and build a Budget
Sit down and pull out your last 3 months of statements for all credit cards, digital wallets and chequing accounts. Categorize each transaction and see what your average month looks like. Most likely this will give you a few items to cut back on or perhaps a few subscriptions to cancel.
We take a hybrid approach that involves a secondary joint account for our necessities, a contribution amount each pay, a contribution amount to investing and the leftover is our discretionary spend. I will likely write another article around how my wife and I manage our expenses.
The categories we use are:
- Home
- Mortgage
- Car (looking at this at time of writing we spend a ton of money on our car for the amount we use it)
- Groceries
- Utilities
- Gifts
- Subscriptions
- Miscellaneous
- Owing (if we borrowed from the joint account or bought a personal item at costco for example)
2. Lack of Financial Literacy
Put simply you can’t take advantage of something if you do not know about it. A few examples of this:
- If one is unaware of indexed ETFs and/or Robo Advisors and ends up in a 1.5% mutual fund
- $500 a month @8% interest for 30 years will result in a total value of $704,275.29
- Same amount and time frame with 6.5% will only reach $533,513.15
- The first options is 32% more money
- Not buying stocks in your TFSA. This one is less common these days but every once in while I still hear people holding purely cash or cash equivalents in their TFSA as that’s what was recommended to them.
- Unless you are planning on using that money in the short term what you are really doing is simply limiting your upside potential.
- I hold a portion of my TFSA in cash equivalent ETFs but that is emergency fund money
- Not negotiating or shopping around for your mortgage, insurance, other services
Solution: Increase your financial knowledge
- I hope this blog will help educate or at least expose some of the strategies that I employ or have considered
- Read other financial blogs or watch a financial youtube channel
- I also post content on youtube quite frequently in the form of shorts
3. Time or lack there of
Your most valuable resource is time and this holds equally true for investing. Time in the market beats timing the market. Especially when you consider that a lot of the best days occur during a bear market. If you missed the best 10 days in the S&P 500 between 1994 and 2023 (30 years) you would have reduced your returns by an astonishing 83%. (Full article here)
Let’s look at what it takes to become a millionaire by age 65. We will assume 10% annual average return compounded yearly.
| Starting Age | Monthly Contribution |
|---|---|
| 20 | $111.00 |
| 25 | $181.00 |
| 30 | $295.00 |
| 35 | $485.00 |
| 40 | $811.00 |
| 45 | $1395.00 |
Solution: Start investing as soon as possible
The only day better to start investing than today was yesterday. Even if you start with $5 a week the important thing is to get started.
- If you are looking to get started in Canada and want to use the same commission free broker that I use please consider using my referral code to sign up for Wealthsimple.
- By adding at least $1 in the first 30 days of opening the account we will each receive $25.
4. Lifestyle creep
So you’ve worked really hard at work over the past few years and get a great big raise. You decide to treat yourself to say a new car or a nicer place to live. This type of “necessity inflation” is known as lifestyle creep and it is what keeps many people living paycheck to paycheck even those earning over $100,000. I’ve read that over 60% of Americans live paycheck to paycheck and that more than half of earners over $100,000 also live paycheck to paycheck. (This was information from 2023 and if I had to guess, I would bet that it is even higher now)
Why does this happen? There are two main lines of thinking
- Goal based incentive
- You say to yourself I really want to buy a fully loaded brand new vehicle when I hit my next raise or once I get my next raise I’m going to move into a place with more space in a nicer neighbourhood. If you are not careful this reward can end up costing you more than your increase in earnings
- Keeping up with the Joneses
- Essentially buying the newest phone, clothing etc to fit in with your peer. Potentially even going into debt to do so which compounds the problem
- Their are quite a few movies dedicated to this problem. One I really enjoyed was the 2009 Comedy/Drama entitled The Joneses
- Essentially buying the newest phone, clothing etc to fit in with your peer. Potentially even going into debt to do so which compounds the problem
Solution: Avoid lifestyle creep at all costs
You may not be able to get the new fancy thing or at least not be able to get the new fancy thing every time. As an example I tend to upgrade my phone every 4th generation.
In my opinion the best way to handle any raises is to put at least 50% of it straight into savings / investments.
5. Emotional Trading / Lack of Diversification
I’ve grouped these together as the root of the issue is the same. That root issue is going against the flow which very few can do this successfully. Money is made when you buy a stock or an etf. If you continuously buy and sell in and out of a stock you risk missing short term upside. Then by missing short term upside you may be discouraged and not buy back in to the market and before you know it the market goes on a run. When you eventually buy back in you are likely buying for much higher than you sold for.
- I’m speaking by experience here, while I haven’t done this often or with more than 1% of my portfolio I have fallen into this trap with both TSLA and ACT.TO
The reason I have grouped in lack of diversification here is that you can stay away from emotional trading and still miss out on the market gains. Examples:
- If you were to purely invest in Utilities over the past 5 years you would have only gained a measly 17.26%
- https://www.google.com/finance/quote/ZUT:TSE?window=5Y
- Whereas the Canadian TSX 60 is up 50%
- https://www.google.com/finance/quote/XIU:TSE?window=5Y
- S&P 500 is up 103%
- https://www.google.com/finance/quote/ZSP:TSE?window=5Y
Summary
To wrap up the article in a single sentence. “To build wealth you need to keep well informed and invest as much as you can as early as you can!”
Thank you for reading and I hope this aids you on your own personal financial odyssey!