Hey, guys. It's Chelsea from
The Financial Diet, and this week's video
is sponsored by Digit. And, today, we are going to
talk about myths versus reality about building wealth. Here at TFD, we do
often like to talk about how the game is
often pretty stacked in favor of people who
were born into wealth. In America, that is still
the number-one predictor of your eventual wealth. And for as much as we talk about
being the land of opportunity, social mobility in this
country is actually fairly low compared to other
developed nations. And, to be honest, a lot of
our videos that talk about this are bummers. But the overall
point is to reinforce that, while we should all
be making the best and most optimized choices that we can
within the context we have, we should also not beat up
on ourselves that we're not able to keep up with people
who were born on third when we weren't even in the dugout. Keeping perspective
about the macro situation is very important, but it's
also important not to fall into despair and to feel that
the only way you could possibly build financial
stability for yourself is by being born into it. So this video is really
all about dispelling some of the myths about wealth
and getting into some brass tacks about how you can leverage
these insights to help build your own financial security. Number one is that
wealth building requires a windfall of cash. If romantic comedies
like Gilmore Girls or the incessant Millennial
builds first home by inheriting a bunch of
money from their grandparents articles are to be believed,
the only way for us to get a foothold in life is
for some old wealthy relative to die and leave us a bunch of
money, or to win the lottery. But, in reality, outside
of the occasional windfall, the most reliable
way to build wealth is by small, consistent
contributions over time. And waiting around for
any kind of windfall or feeling that it
is what you need to start building
real wealth can be incredibly counterproductive
because, while it may not be that uncommon to receive
something when a parent or relative passes away, getting
a life-changing inheritance is not the norm. The wealthiest 1% of Americans
receive an average inheritance of $719,000, while the bottom
50% averages just $7,900. And that's just
the average amounts for people who receive an
inheritance in the first place, which is not most people. According to data from the
Federal Reserve, only 9.5% of individuals who have parents
without a college degree expect to receive
an inheritance, while 23.6% of individuals
who have parents with a degree expect to receive assets
passed down to them. And think about
playing the lottery. We're fed stories all the time
about people striking it rich, but rarely hear about the
millions and millions who spend hundreds a year
on lottery tickets and never win more
than a few dollars. It's a function of what's called
the availability bias, which causes us to overestimate
our odds based on previous examples. To help put things
into perspective, you're more likely to
get killed by fireworks than you are to win the
Powerball $750 million prize. But our cultural
narratives around getting rich quick and the
extent to which it's highlighted
in our pop culture can give the impression
that a windfall is what is standing between
us and building wealth. But waiting around for
it is a dire mistake, and underestimating the value
of regular, small, consistent contributions is
what often leads people to wait way too
long to start saving for things like retirement. Don't Google inheritance
laws in your state. Google compound interest. Which leads us to
our second myth, which is that you
need to be hands-on in order to build wealth. A lot of us hold off
on taking control of our longer-term finances
because we mistakenly believe that we need to
be really good with money or, God forbid, good with
math in order to build long-term wealth effectively. But this kind of gatekeeping
is intentional and really helps the already rich keep
their monopoly on the market, while helping grifters
who basically don't do much of anything
step in to help you manage your money for you. Remember that one of the
most powerful things you can do to increase your
savings is to automate them so that you never even
see the money being diverted from your check. And when it comes to
savvy, long-term investing, the "set it and
forget it" method into a well-diversified
portfolio is generally the best way to go. But, spoiler alert,
there are tons of tools available
out there to help you build your long-term
wealth slowly and consistently, and finding the right tools is
actually one of the smartest things you can do for
your money because it takes the emotions and
guesswork out of the process. And if you're looking
for a financial tool that does the heavy
lifting for you, you should check out the app Digit. Digit just partnered
with Metabank to build a bank account
called Direct, making it the first all-in-one
financial app that intelligently banks,
budget, saves, and invests for you, no spreadsheets
or mining stock market news required. After signing up,
you'll tell Digit your bills and savings goals,
and you can even set up investing and retirement. Digit will help you guide your
money into separate dedicated accounts little by
little, each day, so that you can make progress on
each of your own specific goals without having to
think about it. Best of all, you'll always
know what's safe to spend. No more mental math in the
grocery store checkout line. A tool like Digit can not
only save you valuable time managing your
finances, but can also help you make better decisions
about your daily spending and help you make progress
on building long-term wealth at the same time. Download Digit today, and
start organizing your finances effortlessly so
that you can feel more secure about your finances
without being more hands-on. Click the link in
our description to get signed up in
just five minutes. The third myth is that
if you work hard and are loyal to your company, you
will be rewarded over time. Now, let's be clear. Your main income is not going
to be the defining feature of your wealth if you're
spending all of it and not able to build
wealth using it. You can be earning
a very high salary and still living
paycheck to paycheck. But increasing your income
is one of the most sure ways to build wealth because,
with more discretionary money to save, the easier it will
be to build that wealth. But those of us
with Boomer parents who had more traditional
careers where they, like, worked for 45 years at the
same insurance company and then got a fancy
pen when they retired may have led us to believe
that the key to increasing our income was to just be
really loyal to one company. But the reality is that,
save for a few exceptional situations,
strategic job-hopping is going to be almost
always the best way to make large increases in your income. According to a study from ADP,
"the biggest beneficiaries are job-hoppers in the
information industry, who realized a 9.7% annual wage
growth; construction workers, with an 8.7% increase; and
professional and business services with an 8.3% premium." Those who stayed
at their companies earned about a 4%
increase in pay. And, on average, those
who chose to switch jobs enjoyed a compensation
growth of 5.3%. Additionally, don't
underestimate the importance of negotiating your salary,
even early on in your career. According to one survey
from ZipRecruiter, 64% of job searchers accept the
first salary they're offered, which can have long-lasting
impacts on their finances. "Because of this
compounding effect, a successful negotiation even
for a small annual increase can be significant. For example, "someone who
negotiated their salary up from $40,000 to $45,000
and enjoyed an annualized rate of growth of 5%
over a 45-year career would earn about $750,000
more during their lifetime than if they'd stuck with
that first opening offer, according to calculations
conducted by ZipRecruiter." Your company doesn't
give a shit about you. Don't give a shit about them. I'm-- listen, I have a company. I give a shit
about my employees, but I'm built different. [LAUGHTER] But, in all seriousness, if that
company needed to cut costs, they would lay your
ass off in a second without batting an eyelash. These hoes ain't loyal. Don't be loyal to them. Go out there and get your money. We hear all the time
at TFD, you're like, oh my God, I've been underpaid
chronically at my job for so long. I switched employers, and
I got like a 35% raise. This happens all the time. The fourth myth is that you
need to own a home in order to build wealth. So owning a home has
pretty much always been viewed as a
solid investment because they do typically
appreciate over time, and you've got to
live somewhere. But while owning
your own home can add to your overall
net worth, it is far from being a clear-cut
wealth-building guarantee. According to Investopedia,
"Because home prices tend to rise over
time, buying a home has traditionally been
viewed as a safe investment. Still, an important
point to consider when looking at a
home as an investment is that it won't ever pay
off unless you sell it. From a practical standpoint,
even if your primary residence doubles in value, it
probably just means that your real estate
taxes have gone up. All of the gains
that you experience are on paper until you
sell the property." And even if the national
housing market is on an incline, there's never a guarantee that
you'll earn money on your home when you sell it. Plus, your specific
home and location matter way more when it comes
to the value of the property. For instance, even with markets
in states like Utah and Arizona booming during the
pandemic, property values in states like Louisiana
and Pennsylvania saw little to no
increase overall. And, additionally, renting has
a lot of financial benefits that aren't discussed enough-- fewer upfront costs
and paperwork, freedom to be more mobile,
not being responsible for maintenance and
repairs, no need to worry about falling home
values, building credit if your landlord reports rent
payments to credit bureaus, and no property tax bills. Owning a home can be
the right move for many. We recently bought
a home, and it was a sound financial decision
as far as we can tell. But, ultimately, it's important
to remember that real estate is speculative. You have no way of knowing
where the market is going to be in your specific location
10, 15 years down the road, or possibly even earlier if
you have to uproot yourself for a job or a lifestyle change. You make the best
educated guess you can, and you get the best
deal that you can afford. But, ultimately, it's not
clear that it will pay off. And, as mentioned, you
have to sell it all in one go in order for you to
realize those gains. There is also,
sometimes, the option of renting out your property,
but, A, that's not always guaranteed to be something
you're allowed to do and, B, it is far from guaranteed
that that will be financially in your interest. Many people are forced
to rent out a property and end up losing money month
to month on their mortgage. Basically, similar to
Boomers teaching us that the key to success
was staying at one company until you die, most Boomers
also taught their children that buying a home was the
only way to build wealth and that they were
throwing their money away if they rented. This was more true in their
era, much less so in ours. The number five myth
is that you need to time the stock market in
order to make money investing. So at TFD, generally,
we never recommend individual stock picking,
and especially not as any kind of major
part of your strategy. If people knew how an
individual stock was going to behave in a given
time, the entire concept of the stock market
wouldn't really make sense. The whole point is that there's
a level of risk in the fact that it is, to some
extent, unpredictable. And those who have
privileged information and are able to time
a stock, that's what sent Martha Stewart to jail. That's called insider trading. You're not allowed to do that. And you may be tempted to
sell off a bunch of assets when you see the
market take a dip, but it's important to remember
that all of those gains and losses you're seeing are
entirely theoretical until you sell. And trying to time
the market in that way can almost guarantee
that you lose money. "Timing the market can
be incredibly difficult, and investors who
engage in market timing invariably miss some of the
best days of the market. Historically, six of the
10 best days in the market occur within two weeks
of the 10 worst days. According to JP Morgan's
Asset Management Guide to Retirement 2019, an investor
with $10,000 in the S&P 500 index who stayed fully
invested between January 4, 1999 and December 31, 2018
would have about $30,000. An investor who missed 10 of
the best days in the market each year would
have under $15,000. And a very skittish investor
who missed 30 of the best days would have less than what he
or she started with, $6,213 to be exact." Basically, the more time your
money has to grow, the better. You need to be able to
weather those downturns so you can hit those upturns. And predicting what
is going to happen is something even the
experts can't really do, again, unless
they're trading in privileged information. Which is why the [MUTED]
is Congress still allowed to trade stocks? Anyway, we'll link you in the
description to a recent video by our resident investing
expert Amanda Holden, which dives into this concept
more thoroughly. The sixth myth is that you need
an advanced degree in order to build wealth. This video, brought
to you by your girl Chelsea Fagan, who doesn't
even have an associate's degree and went to a community college. Aha. I don't know where anyone who
works at TFD went to college. They could have all gone to
Hamburger University or Trump University, and I would
be none the wiser. It doesn't matter to me. So, listen, while
some industries still do require a college education
or higher-- and, listen, there are probably some jobs
that I wouldn't want someone doing if they didn't
have the proper training. Like, I don't want a fellow
Anne Arundel Community College dropout to be performing
brain surgery on me. There is no rule that you
can't invest your money or increase your income
without a degree. Because, while it is true
that our country does tend to be stratified
along educational lines, as according to the Survey
of Consumer Finances, "The mean high school graduate
has a net worth of just over $300,000, while
the mean college graduate has a net worth
that is five times higher. Having a college degree
is not a guarantee that a person will be wealthy. In fact, thanks to the
overwhelming student loan crisis, it can often
be the opposite. The top decile of
wealth distribution, which owns a little over
3/4 of all household wealth, is overwhelmingly
college-educated. Those with a high school degree
or less make up less than 10% of this decile. In the lower deciles, you see
a pretty reliable pattern, where the lower the decile
is, the less educated it is. The exception to this
is the poorest decile, which overwhelmingly
consists of college graduates and individuals who
had some college. Student debt, no doubt, explains
the anomaly at the bottom." This is not to say that you
should not seek a degree. It is, however, to
say that it should be treated, first and foremost,
as an economic proposition. The closer you can get to really
making a cost-benefit analysis of your specific degree from
your specific school and even the specific college within
that school in how it's ranked, the average job acquisition and
starting salary of graduates from the program, all of the
information you can possibly use as well as, of
course, doing whatever you can to minimize the amount
of debt you have to take on is essential because just
viewing a college education as a ticket to
financial prosperity isn't really accurate and
hasn't been for some time. The last myth is that you
can build wealth by just keeping your money in savings. A lot of us are very risk-averse
when it comes to money, and that's understandable. As we talked about
in a recent video, many people who grew up poor
become incredibly cautious, to their own detriment when it
comes to money later in life, even if they're earning enough
not to have to be that way. But the reality is that savings
accounts were simply not designed to actually
or substantially grow our money over time. As of November 2021,
the average savings account interest rate
in the US was 0.06%. But let's say you find
a basically mythical high-interest savings account
with a 1.5% interest rate. If you save $6,000 a year, which
is the current IRA contribution limit, starting this year and
give your account 30 years to grow, you will save a
total of around $180,000 and end up with $234,611
thanks to interest. But if you save the same
amount in an investment account earning 8%
interest, you'll end up with $740,075 in 30
years, nearly three times as much without doing
anything differently except putting your money into
a different type of account. A lot of people,
especially people from financial instability,
can overemphasize being conservative. But keeping your
money in a savings account as opposed to
putting it in the market isn't actually conservative. It's actually quite risky in
terms of the missed opportunity of all the gains you could have
realized with average market interest. And if you're looking
to get started putting your money in
the right accounts, we highly recommend
you check out Digit at the link in our description. As always, guys, thank
you for watching, and don't forget to hit
the Subscribe button and to come back every
Monday, Tuesday, and Thursday for new and awesome videos. Goodbye.
