Information today in the information age is readily available. The problem lies in the credibility and verifiable nature of the information you have at your fingertips and which is being presented to you without you having to go searching for it. “It’s on the news, it must be true…”
How does information end up on your home page that relates directly to your personal interests? While you are online, metrics or measurements are collected on what topics and stories you viewed, any searches you conducted in your browser, how long you stayed, the links you clicked on that page, and other things that track your behavior. Those “behaviors” are cataloged and assigned to you through your online identity tracked very often through the cookies that are saved on your computing device that identify you to the services like search engines that you use most often. That information is then used in targeting your specific interests for companies who purchase that service through advertising directly to people like you who are more likely to be interested in what they have to offer based on your past online activity.
So, how then does wealth continue to be elusive?
In my online reading and research, I came across another representative example of “misinformation” that leads people like yourself in the wrong direction. If you’re reading this, you’re likely interested in self-improvement, personal finance, and retirement, education, or other family wealth-building goals. That’s what I write about and help my clients and readers with. To someone with those interests, the following short video seems to make a great deal of sense.
In the world of yesteryear, that video’s basic premise, of compound interest, or how I would explain the concept of compound interest: “put your money to work and earn more money on the money you earned previously” is a good principle on the surface. However, in today’s financial environment, the advice in the video without the guidance to evaluate the investment vehicles available is a recipe for disaster. When investing, losing your capital is a disaster and when investing, rule #1 is “don’t lose your capital”.
If we put $1000 to work and earned an annual yield of $50, that APY (annual percentage yield) would effectively be 5.0% or five percent. The video shows you that money is growing, building the hope of the minimally informed, yet the money is growing at an abysmal rate. So why tout this line of thinking? It supports a large population of under-informed people, financially uneducated people in directing their hard-earned money into the banking and Wall Street investment machines.
Where do you think a return rate of 5% is available without a large degree of risk of loss? The average person isn’t going to find that in a savings account, or CD, or even a municipal or government bond. Rates from your local bank where deposits are FDIC insured are a fraction of a percent… Stock shares can lose value, and even bonds can be defaulted on. Do you think the people in banking and on Wall Street that are looking to put the savings of millions of uninformed savers and investors are going to be satisfied with a 0.5% rate of return? Well, yes and no…
“Over 30 years, your savings would grow over 400%…” That assumes quite a list of givens, including: given that the market doesn’t experience another crash from a bursting inflated bubble of value such as over-inflated housing values, or the mountains of debt in both the private and public sectors. Given that inflation spurred by Quantitative Easing policies of the Federal Reserve doesn’t depreciate the purchasing power of each dollar to a fraction of what it currently buys. Meaning, if you have $4 for each $1 set aside 30 years ago, but your favorite cup of Starbuck’s now runs $36 when you’re retired, you’ve lost rather than gained. When I started drinking coffee, paying $6 for a cup of mostly hot water would get you a psychological evaluation. So, six times the current price 30 years from now isn’t really such a stretch of the imagination.
With billions of dollars under their control, they can push market values around in fractions of a second with computer controlled trading platforms that can net millions of dollars with a fraction of a percent as they pump up the market with their billions in capital and sell it off for tiny profits of numbers involving six zeros left of the decimal. That’s what control of capital can give them. In a longer term scenario, fractions of a percent when capitalizing business loans won’t interest them. Consider what a bank charges you interest for an auto loan or a home loan. Is it 0.5%, a half percent, or might it be several times that?
That is motive, yet it’s not legally a crime.
For all the hype and social outrage over fairness in popular culture, I would think this situation would rise to the top rather quickly. Our public school systems, however, don’t teach people how to be financially intelligent. That isn’t a “core” intelligence targeted by the government agencies controlling our schools. I wonder why… (no, I don’t…)
Control large amounts of capital, pay out very little in interest, collect several times the amount of interest you are paying out. That’s the modus operandi (standard practice) of the banking industry and Wall Street. That’s their business. Over the past thirty years however, they have pushed consumer interest rates down, and significantly widened the gap between the rates of interest they are paying out and the rates of interest they are collecting. Following the financial crisis of 2008 and tax payer bailouts of the banking industry, record profits in this industry were recorded as banking organizations deemed “too big to fail” prior to 2008 are now even larger, having pushed their smaller competing banking organizations out of the market or into mergers.
The short video featured with this article claims the following of compound interest: “It’s one of the ways that you can beat inflation and grow your money exponentially.”
If the rates you were earning were higher than the rates of inflation, that might be true. However, the rates of inflation are much higher than government reported statistics which include the practice of hedonics, or substituting items on which the average consumer would spend their money so that the results appear more favorable. Our government influences the calculation of the CPI so that government doesn’t look as inept, ineffective, and inefficient as government tends to be. The real rate of inflation when tracking the same basket of goods as was tracked 20 and 30 years ago shows inflation at 4 to 5 times the rate that government is currently reporting.
In addition, rates offered at banking institutions where deposits may be protected by FDIC insurance have been barely 1% or fractions of a percent over the past several years. Finding a higher rate of return, or “chasing yield” in the market with stocks, bond, and mutual funds involves a greater degree of risk of market loss and default than the average saver is comfortable with.
The video also touts that increasing your contribution over time also helps. While that’s true, they also assume that the saver investor is doing this “not counting employer contributions” which largely includes qualified for tax deferred government retirement programs (TDRPs). TDRPs require distributions in retirement which are both taxed at earned income rates with fewer tax write-offs and which are usually still invested in mutual funds where fund costs include 4.5 to 6% in annual fees. How many mouths will you be trying to feed once you’re on a fixed income? … yourself, your spouse, your mutual fund managers, and government.
The final chunk of sage advice, “make sound investments” with no indication what characteristics those should embody or where to look for them. I’ve told you more about what characteristics you need to find to succeed in this environment in this article than most people will find in their lifetimes. It gives the viewer the sense that “this is easy” if you start. Where most people end up is where accounts are most convenient and simple to understand, which does them the least good and allows them to be taken advantage of.
So, if you’re earning 0.5% or “one-half percent” interest in an environment whose inflation rate is over ten percent (10.0%), then investing the way that this video suggests has you taking one step forward in a storm that is pushing you back 20 steps at a time! Later in the video, the narrator suggests earning a 7% annual return… Where does the average saver or investor earn 7%?! I know where to find that without exposing the account holder to a great deal of market risk, but the average saver-investor certainly does not.
How do you fight that storm?
First, you find options that protect your hard-earned savings from things like a market crash and the highest rates of taxation. The options are out there, but don’t expect your lunch-mates at work, your boss, your financial advisor, to tell you about them. The best strategies are often known to the best advisors who are employed by high-paid executives, wealthy families, and successful business entrepreneurs. The good news is that the best strategies in the tax code are also available for the rest of us; you just have to know where to find them and use them properly.
Second, you stay informed on “the real numbers” of just how fast prices are rising on common goods and how quickly the value of your currency is degrading requiring you to have more of it to purchase the same amount of groceries or gasoline. You can easily do that on the shadowstats.com website by following the CPI page which shows the Consumer Price Index calculated at both 1990 and 1980 standards as well as what government is currently telling us.
Third, you know your own financial situation. While my book MoneySmart Solutions organizes that process, you simply know what is coming in as income, what is going out as expenses, and work to expand the difference between income and expenses so that more “financial energy” is available to help you accomplish your financial goals. Sounds simple, but there are several tools and strategies that make that process much easier and more efficient!
Finally, you find accurate and therefore valuable sources of information which you can trust and can be verified through real documented statistics and numbers. Trusting what you’re told will allow others to take advantage of your lack of information. That’s why my articles include links to supporting information. Don’t believe me, go look. That’s why the linked video seems to be good advice, yet is really bait for a larger trap, whether intended to be so or ignorantly presented as a public service. You can also do a bit of reading or listening to those whose skill set qualifies them to comment on the economy and matters of finance. How so? They don’t punch a clock or collect a paycheck, they send their money out to work and expect it to come home with friends. Learn from people who are better at the subject than you are. It’s who you will find in my list of articles entitled Incredible Financial News under Publications on my website. Not every link is valuable or wholly credible, the search algorithm pulls in all links to that topic on the internet, but with a little careful scrutiny you’ll find financial information that you won’t often find elsewhere.
isn’t easy. If it were, more people would be financially successful. But, personal financial management skills aren’t taught in school and throwing your hard-earned money at a fund manager and expecting them to “make you wealthy” is a good recipe to stay broke. If you expect to succeed financially, you’ll need to learn a few skills and have your own financial skill set. I learned to play drum set, guitar, photography, I build my computers from components, and I’ve changed my skill set more times in my life to accomplish goals than I have fingers to count them on. Success is going to take a little effort. I don’t offer “baby steps”, and here’s why:
Don’t expect a fund manger, a financial advisor, or anyone else to allow you to use their skill set without them taking a good slice for themselves. That’s their skill set. They make a living with it. If you are going to be financially successful, you’re going to need your own financial skill set.
“What about you, Mr. Pandone?” I am well compensated for my work, but my clients don’t pay me. A company pays me to educate and help the clients and represent their programs and products. After the client is educated and happy with the custom tailored plan I’ve crafted both for them and with their input, only then do I get paid. I’m well compensated and I don’t mind working first and reaping rewards later. I find that it’s an honest and credible way to help people succeed financially. My books, website, articles, and videos help you gather your own skills so that you can wield those skills and not have to continue to pay someone else, including me, further encumbering your own financial success. Most of that information is available to you for free. If you want a copy of my book, my work I put in on weekends and evening when nobody was paying for me to do it, the basic financial skill set most people should start with, no, that isn’t free. It has value and should be traded for value. Once you have and practice those skills though, they are no longer mine; at that point they become your skills!
Residents of Arizona, Michigan, and California might consider how my business can help them with a custom tailored plan. Do let me know if I can be of service…