3 Biggest Ways Millionaires Lose Their Wealth [And You Could Too!]

the three biggest ways millionaires lose their wealth it's Brian Preston the money guy yeah Brian I'm super excited about this show because this is going to be one of those ones that for all of our financial mutants out there for all of our folks that are aspiring to financial Independence and wealth building we're going to give you some tips and tricks and things to be aware of to make sure that the wealth that you are working so hard to build can last for a lifetime and maybe for Life generational lifetimes yeah I want to because it is a different mindset a different skill set and I want to give a little time to the difference between preserving wealth versus Building Wealth because we spend a lot of time on the Building Wealth but there is a skill set that we need to make sure we're exercising and preparing for as well and I love you guys know I talk all the time about how I'll be doing life and then things will happen that fit perfectly into the context of what the content is for the show y'all look at it as a blessing that this was just supposed to be presented to me at the right time well right now I'm listening to Dave Grohl's book the Storyteller um you know another coincidence you know the foo was not that's I think one of you guys we named it Financial order of operations then you guys are like that's perfect for your you being a huge fan of Dave Grohl it worked out well it worked out nicely but here's the thing in in the part I'm about halfway through the book Dave Grohl shares the best piece of money advice he ever received okay and it was actually from his father now you know and if you listen to the book you'll see him and his father have kind of a a bumpy relationship because the day that Dave let him know that he was gonna drop out of high school and go join a band didn't go you know well I think it sounds like his dad's more traditional and I I can understand how a father would be like oh you sure you won't do that meanwhile his mom goes you just better be good but fast forward Dave starts having some success with Nirvana and um and his dad was like look this likely won't last so my advice to you is treat every check like it's the last one you'll ever make I love that and then here's what Dave from hearing that it helped him on his wealth building Journey because it scared him straight because he was so just petrified that at any point he was gonna have a fear of bankruptcy because this was going to go away and and this is where it triggered another moment in me is because he said and I wrote it down the quote it encouraged him to keep his Frugal lifestyle love it so when I hear Frugal lifestyle it then made me think about when I read Morgan housel's book the psychology of money and he has a chapter in there called getting wealthy versus staying wealthy and he starts the chapter before he goes into some of his storytelling himself and he says look there's a million ways to create wealth there's a lot of books that will tell you to do that but there's really only one way to keep your wealth and it's a combination of frugality and being completely paranoid and I was which sounds like a negative thing right it sounds like am I into what Dave shared on why he said the best piece of advice he ever got was is because the before he started making big money or right as he was starting to make big money that he immediately was paranoid that it was gonna go away tomorrow and then he was going to embrace to ensure it didn't happen to him that he lost it all he was going to continue to embrace his Frugal lifestyle so that that's the word that Morgan hausel uses is survival and he actually gives two stats that I think are worth repeating is 40 percent of companies that are successful enough to be publicly traded will lose have lost their value over time I mean they went away like they've actually like so 40 of publicly traded businesses those traded on a major exchange have gone out of business and then this is this ties even more into Today's Show on the three biggest way millionaires lose their wealth is the Forbes 400 list of the richest Americans has a 20 turnover rate every decade for causes that have nothing to do with death or transferring money to loved ones or relatives or family members that one I find especially saddening right so I mean if you make it to the Forbes 400 list that's like a very elite company right there are just not a lot of folks that do that and yet even the folks that make it there don't manage to stay there for decades on end 20 of those turnover Each decade and you wouldn't think that would be the case well you would think that it's it's the death you know it's somebody passing away and you pay estate taxes or you think it's going to be they gave a lot of money to their family members or something like that no it's it just shows you how volatile sure well preservation is and then that led to and this is the kind of you know the close out of the intro with the Morgan housel reference and the Dave Grohl is that Morgan shares there's a difference between getting money and keeping money it's different skill sets getting money requires taking risk being optimistic and then putting yourself out there we cover all that in all of our aspirational content the skill set required to keep money is you've got to have humility you've got to also fear that what you've made can be taken away just as fast exactly what Dave Grohl was talking about I talk about on the show all the time a healthy entrepreneurial fear I think anybody who owns a small business you know you constantly have this fear that it could go away at any point in time sounds like Dave Grohl has a healthy dose of that too and then the third thing is frugality and then the last thing is acceptance that what you have or what you've created may not be repeatable because that is the part that I think a lot of us and a lot there's a false confidence that's where humility comes in is that if you are at the point of success is understand you might not be able to get back to this exact point just because there is this moment in time I I you know when I go and I talked to anybody about what we do for a living I'm like I'm just so blessed that we're born at this point in time because I was like look I have horrible eyesight my hair gets so greasy if I don't shampoo it every day you guys will be like what's up with his hair and then I I can't grow facial hair so if I was born like in the 16 or 1700s I don't think I had the right skill set to be successful in life but yet somehow in this century and this point in time my nerdiness and the ability to have running water in the house and have the ability to get you know contacts and other things like a normal functional successful person so it is there is something about understanding you might not be able to repeat this process but this sets up perfectly all the different ways that you can lose money so we want to kind of Coach you on that skill set of preserving your wealth building as well as building and look we have a unique perspective right because we work with wealthy individuals wealthy families all over the country and we've seen the pros of how wealth can be handled well and we've seen some of the cons of how wealth is not handled or not passed on and handled well so we're going to walk through sort of three areas where we see wealth most often get decimated and this first one uh when we first say you're going to think we're being funny but it's true because there are some statistics behind it in the first place where we see wealth get absolutely decimated for wealthy individuals is through kids well and I think you guys count on us to be your tour guides of somebody not only in our journey of building our own wealth but we do work on our day job as feeling financial advisors for successful families and companies so we have had through Decades of experience we see this firsthand yep and I will tell you this is a big one we put this as number one is because unfortunately the kids that we love with all of our heart and there is some type of just amazing thing that happens when you have your first child or your adopt your child is this unconditional love is a tremendous thing that takes over you know and I always I always tell people that you never know who your friends are going to be the crazy who your crazy parents are until they have their first kid because there is something that just happens when you have children that you don't know is it are you gonna be a normal good parent are you gonna be the crazy you know hover parent you know but that is it all goes into this unconditional love but there can be two too much of a good thing that we always try to give some guidance to make sure your kids aren't you know pulling you under water if they they start getting in trouble themselves and so naturally when we say kids everyone all of our minds immediately jump to like young children right they're thinking about babies and toddlers and kids in the house but when we talk about wealth being lost we're actually talking about three different stages of children three different times when we see the wealth transfer or the wealth accumulation really struggle the first or the early years we do talk about that uh you know when you do have children in the house the second is the adult years once your kids should be out of the house they're no longer living with you they should be out flowing The Nest on their own and then the third is when you age and it's time for you to start having conversations with your kids about finances and about what's going to happen after you are no longer here the first one is pretty easy stage one we all it's the natural parental just it's hardwired in us that we want to take care of these little ones right like they come out and we think we would do anything in the world for them to protect them to provide for them to create opportunity for them but what often happens is parents get their order of operations all out of whack and when it comes to their financial Foundation they start thinking oh man this kid is here I got to make sure that they have this or they can do this or they experience this or the college account has this much in it or I'm doing these things not recognizing that one of the best gifts we can often give our children is the ability of us not moving into their basement at some point in the future yeah we give the analogy and you guys you've heard us say it a bunch but it's it is the flight attendant analogy when you get on an airplane they always start off every flight with hey make sure if the if for some reason the oxygen Mass drops down secure yours first before you help out the children next to you your finances are very similar is it you need to make sure you're in a healthy place because your kids are going to be able to get student loans they're going to be able to hopefully get scholarships or grants or other things but you you're kind of on your own financially and that might be a big uh-oh because I've done the New York Times articles and other things we've done the screen shares where there is a growing trend of parents having to move into the basement of their their adult children not because it's a you know thing that we've all chosen because we want to have this you know family lifestyle where we can you know live together raise the children and grandkids together no it's because Mom and Dad are broke so we we're telling you take care of your retirement savings before you start loading it up for the kids yeah oftentimes we'll see uh prospects or new clients come in and they'll be so excited showing us what they've accumulated in their 529 accounts or in the upma accounts for the kids and we'll have to have a pretty uncomfortable conversation reminding them that unfortunately when it comes to financial decision making you you have to be the top priority your financial circumstance has to be above the kids that's why if you go follow our financial order of operations or if you go to moneyguide.com resources and download our free deliverable saving for college and funding uh future expenses that you may incur on behalf of your kids comes way late in the financial order of operations after you have your financial footing in place so that's kind of the first stage right we have young kids in the house getting our foundation Place well the second stage where our kids can really impact our wealth actually happens once they get out of the house once they have flown The Nest you know most of us get our kids for 17 18 19 years while they're in the house and they go off and they're supposed to get out of the nest but we have entered into sort of this new era where it's becoming very very difficult to kids for kids to actually get out of the nest for kids to actually be gone actually be out on their own and that can be decim that can be devastating to your long-term Financial well-being so we talked about this in show prep and I'm actually going to do an audible and you're gonna be like oh my gosh why didn't he do this no no I love it I love it when we do these we're about to cover the seven factors of wealth before you pull them up um from The Millionaire Next Door and guys I want to tell you here's how you know this is a big deal is that two of these seven have to do with adult children and wealth creation so but I want to give you two stats to give you context on this the first one is and listen to this 47 of parents with adult children gave them one thousand dollars or more in 2020 to help with bills debts and other expenses that's that's like half so so I'm thinking I'm like all right 2020 uh it was coveted it was unique time it was downturn okay maybe this was isolated you know one and two 47 about one and two parents with adult children had to help them out because of code unique time unique circumstance unique economy maybe that was maybe that was a fluke maybe we'll give a pass on that so and then we'll go deeper 56 percent of parents that make more than eighty thousand dollars helped out their adult children financially and gave an average of eight thousand five hundred and thirty dollars let me let me break this down I don't like to do public math but I'm even without doing public math I can tell eight thousand five hundred thirty dollars a year out of somebody who makes just over eighty thousand dollars that's over ten percent is going to the adult children and it gets worse because this is they go a little deeper in the fact that that money that goes to the adult children if you ask the parents was that kind of earmarked was that set aside for the adult children a lot of times it was not this is once again that that unconditional love where you see your children struggling your adult children and you kind of just go wow um I got to make sure I you know I can't stand to see them hurt I can't stand to see them in pain so I help them out the money they actually ask these parents What would is that money actually allocated for and listen to this of the parent of the my the parents that gave money their adult children 33 said they were planning to use it to pay down their own debt so so I want to rewind that so instead of firming up their financial footing instead of getting their debt load down as they age and as they approach retirement they opted instead of doing that to support their adult children who should have been on their own otherwise okay 27 were planning to use it for daily living expenses that means oh wow they had to cut back their lifestyle to make sure they're helping out the adult children 27 also said they were going to use some of it to build an emergency fund so even that right again if you if you're following the financial order of operations you know that a fully funded emergency fund is step four in the financial order of operations here are parents who haven't even got step four figured out and now they are trying to help out their adult out of the house children and then 16 said they were going to use it to save for retirement so all by the way every one of those goals was pretty healthy and pretty noble for their own Financial life but it shows through that unconditional love they were willing to sacrifice so now I think it's the right time to kind of show you because this is worth repeating out of the seven factors that create wealth according to the Millionaire Next Door two of them fall right into this this understanding of how adult children impact wealth building so let's kind of go through those seven factors both yeah so if you look at them and again this is from Dr Stanley's book uh here are here they are number one they live well below their means number two they allocate their time energy and money efficiently number three Financial Independence is more important than displaying high social status number four their parents meaning the parents of millionaires did not provide economic Outpatient Care meaning they did not subsidize their lifestyle number five the millionaires adult children are economically self-sufficient so they are not required to provide economic outpatient uh care to their children number 6 they are proficient in targeting Market opportunities and number seven they chose the right occupation so let's look at four and five really quick their parents did not provide economic outpatient care so let's think about this the factors that have created wealth for a lot of first generation millionaires because that's the majority of millionaires are first generation they didn't get any help you know I look at this is if you're going to get strong and exercise and create a strong heart whatever if it's whether it's muscles or just creating your exercise in a strong heart you got to do the work you've got to put the Reps in you've got to do the practice I think this is the problem and this is why in in Dr Danko and Dr Stanley's book they specifically talk about economic Outpatient Care can actually weaken instead of encourage wealth building for those adult children and you see that directly with the successful children turned into successful adults who are successful at wealth building meanwhile the ones that are getting all this stimulus from the parents it doesn't necessarily create strength and I think we all have case studies at least I know you know because I grew up from very very humble beginnings but I did have friends whose parents had done very very well and it was very interesting watching our two upbringings and seeing some of the things that their parents did for them some of the uh clothes that they bought them some of the automobiles that they purchased when they got out of college the play place or when they got to college out of high school the places that they rented the things that they did the trips that they were able to go on it was a very different story but then I'll look at how much emphasis those kids put on Building Wealth and frugality and making wise financial decisions and it wasn't the same they just had a different outlook on that and so I do think this can be something that if you don't at some point you have to if you've done it well you have to be able to get the kids off the payroll yeah you have to be able to get them out of the house off of payroll so that they will be able to self-sustain when you are no longer here to be able to watch after them um number five was their adult children are economically self-sufficient we already covered because I like I said I made the audible where we covered what the parents actually wanted to use that money but I think you know just grouping four and five together here's the advice on what I want the financial mutants to do out there is guys be very thoughtful on how you're raising your children into adults because we talked about first stage was you got to make sure you take care of yourself and your financial stability before you start worrying about the kids college and so forth but you will get to that point where you are saving for them and then I go transition from kids to teenagers to young adults and I would encourage everybody and we've done content on this go ahead and start priming the pump of Good Financial Management Decisions by your young you know teenage children by doing matching funds on if they're earning money trying to encourage them to start the Roth IRAs try to encourage them to start funding money into Investments so they can see the power of your army of dollar bills and then I think it's also important when we get to those key life decisions you know a lot of kids they daydream about the 16 or 17 year old moment when that first car I've always thought it's good to let them have some skin in the game on that first car purchase that's what I did with my own daughter was I I you know I paid for half the car that she would I matched whatever she had saved up and that's how we bought her first used car and it's hard I gotta tell you because we live in an affluent Community a lot of my neighbors are buying their kids brand new cars and I get it as a parent you're thinking Safety First there's all kind of new features and other things that it's it's just Priceless not to do that and that's true I I can understand that but you have to also think about the fact of what is the car that's going to get my child to understand the value of a dollar and not get sidetracked I mean this all goes into building that self-sufficient and that economically stable adult child that doesn't need your help and here's the here's the truth of the matter all of us are going to develop some thoughts around money every one of us has to develop that at some point and you've talked about this all the time Brown when you first got to college back in the 90s uh if somebody just offered you a t-shirt or bag of chips you could sign up for a credit card right if you don't equip your kids to get into the real world understanding how uh I'm this is old school nomenclature but how to balance a checkbook how to operate a budget how to spend less than you make how to save for the future how to have an emergency fund if you don't teach them those tools then the first things they love learn about money may be how to borrow money how to swipe a credit card how to take on student loan debt it's up to us as parents to make sure that our children are prepared for when we're not there looking over their shoulder and they start making those decisions yeah you don't want them faking it until they make it because that's I think that's so much Society tells people hey go use that bridge of debt and other things you want to equip your children that turn into adult you know adult children of yours that they know and no I don't want to fake it until I make it I want to enjoy each phase and have this success that should come and have right expectations of when things should happen and you can help them on that journey by by instilling those those skill sets at an earlier age So Okay so we've talked about stage one is when the kids are young and in the house and then stage two or when the kids are a little bit older and they're out of the house well stage three happens many years later and it's not having crucial conversations with your adult children as you age and we see this all the time with clients and Prospects where the communication never happens then it is not set up for a smooth transition of wealth through the generations this can work at play out several different ways I I know people who had great childhoods but then they find out later not because of good communication but because some bad event happens or something that the parents are broke yep and and then there's other situations where we'll be talking to the adult children who are clients or something they'll talk about their parents and they'll be like I don't know what they have going on and that's that is a very dangerous thing because it puts if you're not having those healthy conversations it puts a big question mark and we all know unfortunately as we get older we don't always keep all of our faculties about ourselves to where we can manage money well and other things I just think the transition can be much healthier if you open up communication what's the first thing they tell you at therapy is make sure you have good communication and I and I feel like that is not happening necessarily with intergenerational kind of Transitions and discussions on money yeah and why does this even matter why is this important well you know we do an annual wealth study where we interview a lot of our money guy listeners money guy clients and you know uh Ramsay Solutions did a large study asking you know do millionaires inherit their wealth so folks who've been able to build some level of financial success where did it come from how they get there well what's really interesting 74 percent of Millennials believe that most millionaires inherited their wealth 52 of baby boomers believe that exact same thing that most millionaires inherited their wealth well what's the reality and you look at them popular nation that we interact with on a daily basis we found that only about 11 percent of our population who are millionaires inherited over a hundred thousand dollars about 12 percent inherited something but not what they would call material it was less than a hundred thousand dollars but a whopping 77 percent of the millionaires that we interact with and that we talk to are first generation they did not inherit anything they built it on their own and so you might be thinking oh that sounds amazing that's wonderful that's really positive well there's a downside there's a negative side to this well that's it's one of those things by the way this is not just our data we came in at 77 but there's multiple sources you know it's eighty percent One Eighty five percent another but it is there is a disconnect from what the public perceives about wealth creation and what actually happens but I I have covered this and Beau just alluded to it is that if you're going to have 80 of the wealth created first generation that means the churn cycle on wealth must be pretty severe and extreme and it's true and you we've covered this before but guys look at this 70 of wealthy families lose their Fortune by the second generation that and that's so sad right it was it was almost 80 percent take a generation to build it and then 70 of those Lose It by the second generation I'm just thinking about like my kids that I'm like man all this hard work that I'm doing I don't know it's just it's sort of saddening especially for for first generation it's worse because if you thought 70 was bad think about the fact that by the time you get to the third generation or the grandchildren 90 lose their fortune and once again the Cycles repeated itself so that's why this is very much a churn cycle and it's on you to make sure you're instilling these right decisions and these right skill sets into your children so they don't require the economic outpatient care but let's kind of talk about also what does this mean from a communication standpoint of making sure that you're having good open conversations with your parents as you're an adult yeah because one of the things that is just a sort of a fact of life in terms of the way that our bodies and our brains are built is that an unfortunate truth is that many of us are going to suffer from some form of cognitive decline as we age we won't be able to make decisions in the same way or quite with the same ability that we once were and now that age life expectancies are expanding I think we are seeing this more and more and I think we will continue to see this more and more well and I want to give a word of caution because this is the thing if you just say hey that's not going to get involved in Mom and Dad's finances is if they want me to know they would tell me about it realize there are and I hate to be sound cynical but there are Industries where there are people that take advantage of older individuals and um and I hate that I mean because it bothers me and I'm just going to give you a few experience shares that I've personally um helped unwind some of these things and and kind of come in at the last minute and hopefully and and I have saved the day on a few of these but like one we had somebody who had inherited a bunch of Ira money okay um spouse passed away um and Ira money rolled over to to the Widow and then they met at a local fast food restaurant I kid you not not making this stuff at a local fast food restaurant somebody who convinced them to buy some Equity indexed annuities with an IRA inside of an IRA with inside of an IRA that already had a lot of those protections we fortunately got a hold of this decision before the period that you can look back and unwind it with the insurance company and they they you know most state laws allow that but that and that's a common occurrence this person that sold this product to this hangs out at the at this restaurant looking and trolling trying to situations and realize the product that was sold had a huge commission I think it was like eight and a half to ten percent commission rate on it it was it was not a good deal I had another client um there's only three of these I'll go through them pretty quick but another client that they had found somebody who saw all the equity they had in their house and it tried to convince them hey go refinance even though you're older you're retired go refinance your house so you can then take the proceeds were they debt free when they was they were dead no mortgage at all no mortgage at all so we can go invest this in the financial markets and take advantage now look financially maybe that makes money because there is an Arbitrage situation to where historically financial markets do great compared to the low interest rates but is that something you do on somebody who's in retirement Andy yeah do you ratchet up the risk as you get into retirement there's a disconnect there on the why and where that falls into the the wealth building and life cycle of individuals so pay attention to that and then the third thing this is why the communication's so important we actually had somebody come to us that found out and I kid you not their parents had over two hundred thousand dollars squirreled away in cash in the house in the curtain rods and the pockets of their clothes it was hidden throughout the house that is a horrible nightmare it's scary is what it is I asked Daniel I don't know if this stat exists I would love to know how much a Salvation Army takes in or Goodwill takes in annually from finding things jewelry cash and other things in coat Pockets that are donated after somebody passes away this is a legit issue that everybody needs to be aware of and I like I said be very proactive on understanding and having these conversations with your parents as you're an adult so that hopefully there's some some good communication and you can transition into how to handle money as we age in a noble and good way now look this is very this is very uh Dale Carnegie How to Win Friends and Influence people-esque you want to be sensitive in how you have this conversation you don't want to say hey mom dad let me see your balance sheet and let me start talking about how you ought to transition your money to me that's not the conversation you want to have but if you want to make sure that they are protected and they are taken care of as they age it makes sense to ask them hey Mom Dad have you guys done estate documents do you know what's going to happen if something were to happen to you guys have you talked about where you want your things to go have you talked about how you want that to happen have you let them know have you let the people who will be involved in that know that they will be involved those are all very mature conversations that we should be having with our parents so that we can all be on the same page because one of the worst things that we see is when a child you know a parent passes on and the child comes to us and they're like hey look you know Mom Dad they had it they were astute they had it all figured out but I've got no idea what they have going on because their system was obviously working for them but I am clueless and we have to kind of turn into detectives forensically to help them put the pieces together and that takes a lot of time and a lot of cost and you lose a lot of efficiency if you can have those conversations on the front end you set yourself up so much better long term no doubt um I want to I want to move away from the children and talk about step two or number two of things that and this is very timely currently to ways wealth is lost and number two is inflation I feel like if we could do like post edit on this we should have like the sound effects it's definitely a theme I feel like this is something that everyone's talking about right now if you turn on any sort of like Financial commentary any you read any sort of blog article whatever inflation seems to be a hot button Hot Topic item right now so a lot of folks are probably trying to figure out okay what does that mean is inflation something I should be worried about how should I think about it is this horrible do I need to run for the exits what's going on why is it going on and how's that affecting my personal situation well I want to kind of and I have a i like giving you guys experience shares because I think it helps you kind of reflect on this when you look at your your world and how you have the loved ones in your life and your friends you know what you you know how you can help pay it forward to them and I think about the fact of like we know wealth is created in retirement plans and it's it's one of those things where if you look at the Ramsey Solutions research typical millionaire reaches seven figure status in their employer provided retirement plan you also see it's around age 49 but I know when I was on a local school board back when we were in Georgia I was on the board of education and I remember when I started questioning about the 403 b plan that they had in the school system and I think this is you could probably look at all school systems at the time now look this has gotten better through legislation but they shared with me that most people were just choosing the stable value funds in their retirement accounts and so I just had this visual for those who don't know stable value fund is like a sort of a cash fixed income very low low risk low return type investment holding and and that that bothered me because it meant that when they came in to do the education meetings and they were encouraging these people I I felt like it was very self-serving to the person that was pitching these things because in in their words I'm trying to remember who told me this if it was somebody from the administration side or from the annuity company but they said look when they're in the stable value funds when the Market's volatile they don't call you nobody's ever scared during Market downturns they actually feel very excited well we know that's less than a quarter of the time that the market gets beat up but what I worry about and it's exactly what we want to cover in this section they get eaten alive when you hit inflationary periods because anybody whose idea and I also resemble this in the household I grew up in my parents didn't buy stocks they didn't buy real estate they bought CDs I mean I really did that was my parents when they saved money they were great Savers they lived on less than they made but their idea of testing was to go to the local bank and buy CDs and unfortunately that type of saving and investing for the future is highly susceptible to having its purchase power to completely diminished by inflation and why like right now is this so pertinent why is this so applicable to the day well Daniel did a great job he went and pulled this for us this is a chart showing the annual change in inflation since 2010 and you can see if you were to draw sort of a best fit line there's sort of an average in there you could figure out over the last decade but if you look at what's happened recently coming out of the kova downturn and into 2021 inflation has popped it has been big relative to where it's been over the last decade if the Federal Reserve is telling us we have five and a half percent inflation you know that number is substantially higher than that this is just what they're willing it's kind of like when you see a quarterback in college it says they're six two you know they're about five of them so pay attention if this is what the government's showing and you you know it by when you go look at gas pump prices cost of food cost of supplies it's substantially higher than five and a half percent so it's definitely on the rise and it's something to be very mindful of now so the immediate question that you might ask is oh okay oh man inflation uh is inflation always bad is it something I should always be nervous about is it something I should be concerned about and that's not necessarily always a bad thing you know oftentimes inflation can mean that there's really strong consumer demand but Supply is struggling to keep up in a lot of Talking Heads right now are suggesting that that's the type of inflation that we're seeing because we have these supply chain issues that happen through covid there was a lot of pent-up demand pins up demand pins up demand and now that demand is surfacing Supply is having a hard time keeping up and it's what's causing prices to rise what's causing inflation to ramp up that may not necessarily in and of itself be completely a bad thing somebody had posted a comment this is probably a week or so ago was saying Brian what you described was transitional inflation and I'm like no because here here let me explain when you hear the government say this is going to transition through the economy in my mind when I hear transition through that means okay I think prices are going to go up five to seven percent temporarily because this is Transitional but they'll come back down that's that's not what happens what I see and what I worry about is that you see inflation come on the scene prices go up Seven Ten Percent yes maybe it moderates to where next year they only go up three or four percent but the prices don't come back down typically I mean I you know and once again experience share my grandmother bought a car in the mid 70s as an Oldsmobile for like twenty six hundred dollars like probably like a new car like a nice brand new Oldsmobile it was like you know you know just a few thousand bucks fast forward when my parents bought a car in the early 80s and it was like twelve thousand dollars I mean this is this stuff happens and by the way y'all now hear twelve thousand dollars that's a cheap car I'll buy it tomorrow so I mean that's the thing it doesn't go back and that's the thing that we all need to be mindful of when we talk about inflation Bo is Bo puts a nice optimistic and I love it because that's glass half full I get nervous about what this inflation means for everyone Bo knows where I'm going so I won't take a society so no no we can go there so let's talk about that a little bit right so if so inflation um I am going to stand on the side of the equation that inflation is not always bad and always negative however it can be bad and it can be negative so if the premise that I'm putting out is true then it stands to reason that it during an inflationary time there are people who would benefit or it would help or would be protected against inflation and there are folks on the other side of the equation that would be harmed that would not receive benefit that would not be helped so we thought it might be valuable to kind of walk through those two types of people so who are the folks that inflation helps or who are the folks that can dare I say benefit from inflation or at least keep up with inflation so that they're not harmed by inflation keep up with keep up with inflation all right I'll switch my vocabulary number number one are asset owners folks who own Assets in an inflationary time tend to be protected against inflationary pressures and this makes sense right I'm going to use a very easy asset that most of us are familiar with a stock if you go buy a stock in a company let's say Coca-Cola that makes you an owner of Coca-Cola well because of inflationary pressures Coca-Cola has to increase the price that they charge for their Coca-Cola the benefactor of that increase in price is the owner of the company which you as a stockholder are so if you own a bucket of Diversified companies a basket of Diversified Goods or hard assets it's likely that you'll be able to mitigate some of the negative impacts that inflation come with yeah I mean I I'm Gonna Save My soapbox moment but I do think that this is this is the problem for aspirational people we both have come from that background where where we want that American dream where you come from not much but you you work hard you get education and you can get a leg up by by you know investing in yourself and then investing in the marketplace and it is true stocks are a great thing when we get to who it hurts I'll I I want to reserve the right to give a comment okay so I'm gonna so if if asset owners are benefactors or if it helps maybe not beneficials but if it helps might there be a time in history we can go look okay well how did stocks do how they perform in an inflation environment and so we just went and pulled the late 70s early 80s if you look in the year 1979 inflation was measured at about 11.35 percent the S P 500 500 largest companies uh in America in the United States made about 19 a little over 18 and a half 1980 inflation Rose it was up 13 and a half percent Market made about 33 percent 1981 inflation stayed high at about 10.3 percent Market did did lose a little it lost about five percent that year but then 1982 inflation subsided some it was only air quotes six percent but the S P 500 made 21 so even if the cost of goods is rising at 11 13 10 6 if your assets your army dollar bills is growing at 19 32 21 you are offsetting the increase in the cost of goods and you're offsetting the loss in purchasing power risk that inflation creates yeah it's definitely this is something that's lost a lot of people when they think of inflation Hedges they always jump to real estate they jump to Gold they jump to things with limited Supply even Bitcoin recently sure but I still say don't overlook what the the you know stocks can do because yes there might be short-term volatility as they work on pricing and as well as recessions or anything that might be coming through short term but long term companies do have the ability to raise prices and um adjust to inflationary concerns so asset owners are one group of folks who can uh mitigate the risks of inflation another group of folks interesting word that we came up with uh to help offset our debt folks generally speaking folks who have debt do well in an inflationary time because as inflation happens paying off a debt from the past becomes easier and easier to do and we don't just see this with like individuals this also happens often like sovereigns with government entities those that house a lot of debt when we enter to an inflationary time it's easier to pay back that debt when inflation is taking place when I graduated college my portion of the rent and my our three-bedroom apartment in in Atlanta when with my roommates was 430 a month I never forget that my parents mortgage payment on their entire house was because they were still having a mortgage payment was three or four hundred dollars which was less than your portion of it it's because they bought the house in 1978 for sixty thousand dollars the mortgage on that's pretty cheap yeah you know it's not like they refinance it's just that you know that's that's what inflation does it essentially makes your debt seem much much more reasonable and that's a great segue into Sovereign so you know that's why why does you know Washington Not freak out about inflation as they're looking at our you know our deficit they're looking at all the debt our country has and they're like hey you know how you make 30 trillion dollars seem affordable you make it feel like 15. I mean by by raising what everything costs and that is unhealthy and that's kind of that's a great segue into who does inflation hurt and that probably will give a few quick comments because I do want to speed this along but go ahead and fire that up yeah so the one that it hurts probably the most are Savers and when we say Savers we're not talking about those who live unless I make we're talking about cash holders those like your parents who are just putting money in cash putting money in CDs because those type of instruments have a very difficult time keeping up with the change in the cost of goods keeping up with inflation and this is why I think I am so passionate growing up in a household where my parents were doing everything absolutely right right I mean you lived a very modest lifestyle didn't waste it anything we're we're doing all the things except for making the money work for them because they fell into what's easy what's understandable and that's your typical savers who are cash holders or CDs I don't like that that also leads to renters you know we didn't it doesn't make the list because we talked about that in content but I do worry about anybody who's trying to transition from renter to owner of your first house of your you know cars automobiles other everything seems to get more expensive and it moves the goals they're running away from you that's not healthy in the long term so okay so Savers I'm gonna throw renters in there as well also those are on a fixed income if you are someone who is retired and maybe you have an annuity payout or a pension payout and there are not costs of living adjustments or maybe the cost of living adjustments don't actually keep up with the rate of inflation it can hurt you what used to be able to pay for your living expenses now has a more difficult time paying for the living expenses so those strictly on a fixed income are harmed during an inflationary time and also those that are risk averse because what most often happens is when you are risk averse you come much lower on the risk Spectrum when it comes to how you invest your assets well if you're much lower on the risk Spectrum we know that a higher risk generally leads to a higher reward lower risk generally leads to lower reward or lower rate of return if you are achieving low rates of return it's hard to keep up with higher inflation risk somebody can probably post if you've seen the screenshot that I've seen on social media of what it takes from an asset allocation mix to create six to seven percent annual returns by decades and guys it's scary I mean because in the past I mean it wasn't too long ago you could have almost 90 percent Bond portfolio and generate that six to seven percent Port you know conservative portfolio now it's flipped I think you have to have pretty much ninety percent equities to get yourself to the rate of return of that six to seven percent that's scary we're pushing people further and further out on the risk Spectrum to cover for their retirement their cash flow needs that's not a good thing and here's the last one that we kind of put on here and this one uh is those who are pre-paying low interest debt and again this is kind of tied into the risk averse piece if you're satisfying low interest debt and retiring debt that's at two two and a half three instead of having those dollars go out there and create a meaningful rate of return that can keep up with the rate of inflation you could potentially be harming your future selves purchasing power that's why we have the financial order of operations that's why we created the foo so that you can make sure you're taking the right steps at the right time in the right order so that you don't run into these types of problems yeah the big thing we break it into two camps are you under 45 are you over 45 and the reason is is compounding growth under 45 do not prepay the low interest debt I mean we already have shown you on these slides that inflation causes your debt to get smaller just by the sheer fact that inflation is occurring in the background if you're in that under 45 you need the compounding growth to get you through a successful retirement post 45 assuming you've done all the right things it's okay to prepay the debt because now you're thinking about the wealth preservation more than the aspirational Building Wealth in the background so pay attention to that difference all right so we've talked a little bit about how Okay kids can be something that devastates wealth inflation or the rising costs of goods can be something to devastates risk uh devastates uh well here's the third one that we've actually seen and unfortunately we've seen this one over and over and over in a real life case studies with people in the community with friends family is that folks don't account for how risk can impact your financial situation and Circumstance over the long term yeah it's you know this is one one experience share is that I have only once in my career recommended that a prospect reach out to an attorney because I felt like the way their money was previously managed was so egregious that they should go seek counsel to see if they should get something back because it was just it was horrible to see somebody he um I can't remember she was late 70s late 70s when we first talked um who had a portfolio that looked like the latest and greatest of the.com bubble I mean it was anything and everything that had technology in its title and this was for somebody who was quickly approaching the the 80 year old threshold that was it was horrible I mean they had a year of market performance where it was down like 60 percent of a Great Recession losing 50 60 70 percent of your assets in a year when you're approaching 80 that's not good management so it is one of those things where you need to understand there is a dance a balance an art to the fact that as you get older your risk profile is moderating even if you have to leave some on the table because you want to make sure there is some on the table when you need it in retirement because you're actually spending or using those resources I had a story it was a once again um you know kind of inspired by the the Dave Grohl book that then kind of triggered a memory that I had of reading the Morgan household book is that he shares in one of the books um on on keeping on chapter five I believe on keeping wealth versus making wealth that Berkshire Hathaway we all know Warren Buffett we all know this Charlie Munger in hanging out in the background but did y'all know there's a wreck I I never I know the shareholders made I never hear about Warren Charlie Andrew there were three people at Berkshire Hathaway it was Warren Charlie and Rick um but you don't hear anything about Rick anymore it was Rick guren and Rick um here's Warren Buffett was asked about this at one point and here's what Warren Buffett shared on and he said Charlie and I knew we'd become wealthy but we were not in a hurry to get wealthy and I think that's very that's very warm Buffett is that he you know he's sharing these kind of you know folksy type stories but you know there's a lot going on under the surface with that he said Rick was in a hurry to get wealthy super smart but just in a hurry and the way he was cutting a corner listen up because I see this going on everywhere on social media right now everybody is looking to cut a corner on their wealth creation and Rick got caught because he was in such a hurry to create wealth remember average age for millionaire status is age 49. pay attention keep that stat in the back of your mind as you're looking at Instagram and everything else but this is what Warren shared in 1973 1974 there was a big downturn Rick was leveraged meaning used debt with margin loans the stock market was down approximately 70 percent in those two years so uh and I I didn't go with but imagine this is what Rick is thinking right oh man returns are so good right now and I can go borrow money so cheap I can go take out a loan I can refinance my house I can do a cash out I can do them I can go borrow at super low rates sound familiar and I'm going to take the proceed to that and go dump it into something that's going to have a much better rate of return a much higher rate of run we are hearing this over and over and over right now present day keep going yeah so it's it's that whole thing Warren Buffett once again said you can still tell who's he didn't use skinny dipping but you can definitely tell who's naked with out in the ocean When the tide rolls back out and that's what debt is is it's essentially allowing you to have something but you're you're you might be naked so margin calls were what got Rick he had ended up because of those margin calls where he had to cover the debt and you know and obviously the value got crushed he sold his Berkshire Hathaway stock to Warren for under 40 a share now here's the cool thing about Berkshire Hathaway we all know it's legendary in the fact that Warren and Charlie do not do stock splits they don't do anything to change evaluation of the price of the stock so you can actually compare oh yeah what he paid to what it's actually trading at right now so every one of those shares that he traded at under forty dollars a share is now worth at least because I haven't looked at in the last few days 432 thousand dollars a share that is painful and you have to know that Rick is just sitting there thinking man was the risk I took on worth it did I really need to be in the position I put myself in and holy cow what did that cost me over the long term now maybe you're not partnered with a Warren Buffett or a Charlie Munger but all of us are faced with its exact same situation today in the decisions that we make how much debt do we take on what is our actual savings rate do we have an emergency fund are we making sure that as we build our wealth we're not only focusing on the building part we're focusing on how much of it do we get to keep over the long term because frankly we are all every one of us emotional creatures well we're also running I see so many people on social media that are saying look I'm going to keep my Equity exposure at 100 until three years before retirement I see that everywhere and and I wonder how many people are running up also the scoreboard when they have enough in the account and that led to you know I told Daniel I was like put in the cycle of Market emotion sure because we put this slide up all the time and you guys can see because you could easily say we're somewhere between optimism and Euphoria right now in the cycle of Market emotions where everybody feels like they're a genius and you see this concept I see so many people that have turned from investing to becoming speculators where they're piling in because not because something's a great investment but because the momentum says hey these people are making money the greed of and the jealousy of wanting to also make money has you jump into it that is the perfect setup for the next downturn where you'll see people go through all those negative emotions the anxiety fear desperation panic and then they reach the depression point of just selling giving up there you know they just think this is horrible and then we go through the whole cycle again but Daniel has blessed us that he actually put numbers on what a market cycle feels like and then what it feels like to actually do it right through diversification because so many people are skipping that step right now because we are in the upside or the optimistic side of investing yeah and we all know that one of the things that people get so nervous about is when we talk about diversification we talk about spreading out risk and coming further down on the risk Spectrum we have to sacrifice some rate of return is the common thought process well then we thought this was sort of interesting and Daniel put this together from August of 2000 until September of 2002 the S P 500 lost about 46 percent now if you are in a diversified portfolio and we just did a 60 40 standard portfolio 60 s p 40 tenure treasury you would have only been down about 23 so you'd be thinking at that point in time oh I lost money I was Diversified I guess I didn't lose as much but I'm still negative well then from October 2002 until October 2007 S P 500 made 90 over that time period the 60 40 portfolio made about 62.9 percent now hit pause because a lot of you guys you're gonna hear that and be like I'm kind of jealous of the people who were just 100 equity and you know right into the index I only made 60 they made 90 this diversification thing's disappointed that's what that's what why am I doing this even if you lost money because I've had clients I had clients that I picked up during this period I started my first company in 2002 and I had I still remember this family that still I work with the Widow where they came in scared to death because we just made it through the.com bubble and then I did the risk profile on the husband and the wife and they came back as very scared so we came up with a very good Diversified portfolio and then 2003 happened Market made a lot of money they made good money but he goes hey maybe I can kick up that risk profile a little bit because of course of course because everybody through greed because remember there's two marketing there's emotions there's the the fear when you're going down and then there's the greed when it's going up and people will see the 90 man 60 seems like it's kind of weak sauce why are we doing this more we're going to show you why this is important okay so now fast forward from November of 2007 until February of 2009 S P 500 lost 52.6 percent the Diversified 60 40 only lost about 29.6 but you're still thinking at that point in time oh man I lost money right I didn't get that big run up that the s p had and now I've lost money again well then we look from March of 2009 all the way through December of 2019. and over that 10-year period over that decade the S P 500 would have made 339 the 60 40 portfolio would have again not made that top upside it would have made about 214.5 percent so you're thinking man every downturn I lose money in every upswing I make money but man not as much as the market until you stretch out and look at the total picture over that total return period from August of 2000 until December of 2019 the S P 500 would have gone up about 113 percent the 60 40 portfolio went up 176.6 if you look at a hundred thousand dollars investing the hundred thousand dollars that was just in the S P 500 would have done great it'd be worth 200 and almost thirteen thousand dollars but the Diversified portfolio that wasn't on the wild roller coaster is worth almost 277 thousand dollars this is why we diversify over the long term what sits in the background is is not how much you make it's how much you keep that's right the end of a long because realize you're on a marathon on of Building Wealth and it's so easy to get distracted and that's why I mean all the skill sets I think that create wealth is just understanding this is a long journey that if you just get some basic fundamentals and good management styles set up you'll be successful just don't basically destruct yourself self-destruct in a way that you getting your own way of this simple process of creating wealth in the long term Building Wealth is surprisingly simple but it's not easy right the steps are pretty well known that's what our entire show is about is how do you build wealth how do you accumulate it becomes a little more difficult to make sure that you maintain your wealth and that you preserve your wealth and so what we hope is that as we kind of walk through these three areas where we see wealth get taken out where we see wealth get devastated you'll be aware of that and you can start making decisions as you approach your financial Life Financial lifestyle and Circumstance so that your wealth will actually stand and withstand the test of time so I want to challenge you harness your inner Dave Grohl and ask yourself are you paranoid are you living The Frugal lifestyle that lets you live on less than you make that's that's not the traditional American way right now because we're very much pushed by consumer purchases and other things you can tell by our savings rates how paranoid how Frugal use that skill set to protect your wealth as you're on this journey I'm your host Brian Preston Mr Bo Hansen money got team out

Channel: The Money Guy Show

Views: 54,247

Keywords: money guy show, debt, budget, cash, real estate, insurance, how to make money, save, credit card, compound interest, buying house, buy stock, success, personal finance, 3 Biggest Ways Millionaires Lose Their Wealth [And You Could Too!]

Id: CZhqpyWrZ1c

Length: 60min 19sec (3619 seconds)

Published: Fri Nov 05 2021