Personal Finance Essentials
The Four Obstacles to Building Wealth
The Wealth You’re Not Building
Has Four Explanations
Every investor, regardless of income or intelligence, faces four obstacles on the path to financial independence. Understanding them does not eliminate them – but it makes them manageable.
The first is procrastination.
Or more precisely, the failure to use it. Procrastination is the most common cause of financial failure. Every year of delay in saving costs compound growth that can never be recovered. If you are 20 years old and want to raise $100,000 by age 65, you need to invest $1,372 today (ignoring taxes for the moment and assuming a 10% annual return). But a 50-year-old would need to invest nearly $24,000 to obtain that same $100,000. The first decade is the most valuable decade of all.
The second is spending habits.
The Dalbar research found that this behavior costs the average investor 6.9 percentage points of return per year – not in fees, but purely from emotional decision-making. We piddle money away because we don’t pay attention. Focusing on your spending habits can reveal how you’re wasting money on frivolous expenses – the first step to stopping financially dangerous behavior.
The third is inflation.
Since 1926, inflation has averaged approximately 3% per year. That means $100 today buys only $55 worth of goods in 20 years and the cost of living doubles every 24 years. For retirees relying on fixed income, this is not a theoretical concern – it is the gradual erosion of every dollar they saved.
The fourth is taxes.
Federal income tax, state income tax, capital gains tax, payroll taxes and estate taxes together take 30% or more of the average family’s total earnings. For a married couple earning $75,000, the effective federal income tax rate alone is approximately 8.4%. Add all the other layers and nearly one-third of every dollar earned disappears before it can be invested.