Making fewer mistakes on your financial journey can help you build wealth faster. While some mistakes are worse than others, financial guru Humphrey Yang recently revealed a ‘poor financial decision' that can cost you millions.
This decision often stems from fear and not wanting to take risks. While it may be scary to take a risk in the moment, these same risks can set you up for long-term wealth. Yang identifies the mistake and shares what you can do to strengthen your finances.
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Don't Let Your Cash Sit On The Sidelines
Yang mentions that letting money sit in cash is one of the worst mistakes you can make. While there are benefits to establishing a small emergency fund, being afraid to invest money can result in significant losses.
Although you will retain the same paper money if you avoid stocks and real estate, your purchasing power will go down. Yang says that keeping $1 million in the bank for 30 years would have been a terrible idea. However, he also mentions that if someone invested the same $1 million into an S&P 500 fund that averaged an 8% annualized return, they would end up with more than $10 million.
Yang also mentioned that if you averaged a 3.5% return during that stretch via bonds and CDs, you would have ended up with $2.8 million. The one caveat with this return is that interest income is treated as ordinary income, which results in higher taxes. On the other hand, you'll get better tax rates with long-term capital gains on an S&P 500 fund, and you only pay taxes on that fund when you sell shares.
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Purchasing Power Goes Down Each Year
Money loses value each year due to inflation. Yang mentioned that inflation growth has averaged 2.52% per year since 1995. It's the main reason why everything feels like it's getting more expensive. When the government prints more money, the amount of goods does not change.
Therefore, you have more money chasing the same number of goods and services. Yang provides an example of buying an iPhone at an auction. If everyone suddenly had more money to bid with, the iPhone would end up selling at a higher price.
This trend doesn't look like it will stop. The government currently has a large debt that regularly accrues interest. Those interest payments require more money printing, which increases inflation. Any government spending also boosts inflation.
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How To Counter Inflation
The cost of products and services will continue to go up over time as federal debt and government spending increase. However, there are ways you can counter inflation. Yang mentions taking your money and putting it into an S&P 500 fund.
This general concept is the key to keeping inflation in check when it comes to your finances. Investing in stocks, real estate, and commodities can help you ride the current instead of getting left behind.
These assets have fixed supplies. Printing more money will not increase the amount of gold in the world, but more dollars chasing the same amount of gold will lead to higher gold prices. That's why gold and other commodities are considered valuable inflation hedges.
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