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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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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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.
