Switching focus from income to wealth...
In the early years of our careers, my wife and I had a sole focus in our financial lives to increase our incomes as quickly as possible, with minimal regard to what we were actually doing with the money we earned and saved. Once we built up a sizable sum, we figured we needed to park that money somewhere other than a checking account.
We had ZERO knowledge of investing at this time and were very likely conditioned by the financial media to believe we couldn’t possibly manage investments on our own. We had a friend who worked for a large investment firm, so we figured connecting with him would be a good place to start.
One of the first things a typical financial advisor will ask a new client is an evaluation of their risk tolerance. For someone uninitiated in personal finance and investing, the natural inclination is to respond with low to moderate risk. After all, how could a novice be willing to take high risk? What I didn’t understand at the time was that low to moderate risk from an investment standpoint typically indicates bonds, treasuries, and various fixed income sources that can barely keep pace with inflation.
I continued to keep funds with this institution with minimal oversight, paying little to no attention to the returns, asset allocation, or fees. As long as I focused on my income, I figured I’d be fine since that’s what I saw from my peers as well as from more senior colleagues who I aspired to become one day. Internalizing the idea that success stems from wages was the single biggest point of ignorance I had in my financial life. The impact of that ignorance compounded in ways I would not understand until years later…
The culmination of my financial illiteracy
After saving money for about a decade, my wife and I decided to leave city life and buy our first home. It was in a condo building that happened to be in the middle of litigation with the builder. This isn’t terribly uncommon, as lawsuits against builders typically happen within the first decade of construction when the builder is still on the hook for fixing certain issues that may arise. However, it makes it extremely difficult to qualify for a loan as the large banks are wary of taking on that risk, even for a buyer with high credit and stable income. So who would be willing to give us a loan? You guessed it, our existing high fee private equity firm.
Naturally, it was not difficult for us to get approved by a high-fee broker. The response was that not only could we qualify with 20% down, but we could also even “pledge” another 10% to invest with them in order to get a lower mortgage rate of a combined 30% down payment. We thought that was a great option as it got us a rate of under 3%.
After about 2 years of living at that property, I noticed that our investment returns were essentially flat with our primary investments. The returns were NEGATIVE with our additional pledged investments after fees since those funds needed to be in especially low-risk funds to eliminate risking the loss of the principal leveraging the mortgage. Essentially we were paying 1.5% in advisory fees to keep these funds in treasuries.
This experience was during the early to mid-2010s when the stock market was booming, and any broad equity index investments made at that time would be worth considerably more today. I did the math to figure out the net effect of saving on my mortgage vs. the opportunity cost of investing with this high fee broker instead of using index funds (this was also when I learned what an index fund even was). What I discovered as a result changed everything for me…
I had concluded that the decision to entrust a high fee broker had cost me about $40,000 over 2 years. $40,000 is a lot of money in general, but at that point in my life, it was paramount to my security and was on top of a whole host of mistakes I had already made. This was the single most eye-opening event in my financial life and the inflection point in which I made financial and investment literacy a priority. It leads me to the financial awakening that wealth comes from ownership of appreciating capital, which changed just about everything in how I viewed and operated my family’s finances.
What I did after my mistake
After liquidating funds with my advisor, I decided to make large foundational changes. I inhaled personal finance content with as much diligence as I would for a major project at my job. Aimlessly listening to music or playing games on my commute would be replaced by personal finance podcasts. I became mindful of every dollar in and every dollar out. I began to make many macro and micro tweaks to my money management, but the biggest ones are as follows:
Toward the end of 2015, I started tracking my finances across all accounts, so I could get a sense of what was working and what wasn’t. My process has evolved over the years but has always been very deliberate in monitoring exactly what I need to see.
Tracking makes it personal. It makes you mindful of your financial decisions, why you make them, and how it brings you closer or further away from financial freedom. For anyone who doesn’t operate against some sort of scorecard, this is my first recommendation to initiate. It doesn’t have to be elaborate, and it can change over time, but some level of tracking your progress is critical in getting where you want to go.
I became laser-focused on reducing fees
Note that I said reduced and not eliminated. Most fees should be avoided, but it is still acceptable to pay for services if you truly believe the value you are receiving in exchange pays for itself. I personally believe that paying for some investment help, including automation and tax optimization, at a low fee is well worth it. As a result, I have often made a case for investors of all levels to at least test investing with Robo-advisors.
I don’t intend to plug or promote any specific service and in no way benefit from you trying any of them out, but I do strongly believe that there are some services worth paying for, and intelligent automation, in my mind, is one where the benefit outweighs the costs. I have found tremendous value from experimenting in this space.
I turned to write about my path to connect with others
Lastly, my mistakes and learnings have to lead me here. Writing about money was never on my radar before I started paying close attention to my own finances. Building wealth is a deeply personal endeavor and one that inspired me to share what I’ve learned with others. Formal education does a porous job of teaching us even the basics of personal finance, and in the past few years, I’ve felt an obligation to do my part in spreading knowledge while also continuing to learn from others in this amazing community.
Feel encouraged to make mistakes. Educate yourself on tried and true strategies while also feeding your curiosity and delving into unfamiliar territory. Even if you fall on your face, there is always a lesson to be learned. One day, these lessons will grow your wealth and make you financially free.
This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
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