Hi, welcome to FinancialFreedomRadio.com. Last week we talked about eroding factors and how they could devastate your financial world. Most financial planners don’t understand them and we’re going to talk about them and you will. Stay tuned.
From Philadelphia, the home of the Liberty Bell, Financial Freedom Radio starts now. Here’s your host, Raymond Jewell.
Welcome back. We’ve been talking about eroding factors and we’ve been talking a lot of hidden costs and everything. I’m not shooting at financial planners for being the type of people, they’re good people, but they just don’t know. They could cost you a lot of money over your financial life. So we’re gonna talk about it. We keep exploring this. You can go back and watch a couple of these videos and you’ll see the continuity there. We’re trying to maintain continuity and keep building on the last episode. Before we get started, let’s check in with our producer, Steve, and see how he’s doing. Hey, Steve how are you?
Hey Ray. How are you? I’m doing good, thanks.
Are you still quarantined?
We’re still quarantined. I think we’re starting to open up a little bit here though. So it’s long overdue and much welcomed.
I live in Naples as you know and we drove downtown. There were some people walking around. Some had masks on and some didn’t. So we stopped and we had a little Italian ice place that we like and got gelato. We sat outside for a little bit and then came home.
Yeah, I’m ready to go out on a date again with my wife. That would be nice.
As long as I’m still healthy and well. So far so good. Knock on wood. So we’re gonna dig in today and feel free to chime in, Steve, if you have anything you want to add. I know that you like to give me a simplified perspective a lot of times. I get deep into what Steve calls technobabble. I don’t mean to do that, but as an economist, I tend to assume you know. So when I start going down these roads of technobabble he likes to step in and stop me.
I like to dumb it down for me.
Dumb it down. That’s a better word. I didn’t want to say that. Technological change. This is something that’s very serious. We’ve got technological change, planned obsolescence, financial expenses, lost opportunity cost, interest rate declines, stock market declines, interest charges, and loan lawsuits. That’s a few of the eroding factors we’re gonna go through today. Let’s start with technological change. This is very important in that most people don’t pay a whole lot of attention to it. If you look in 1980, thinking that you are going to end up spending probably $1000 a year or more on a telephone and the bill…
That would have been crazy.
I know we’re upgrading computers. So when you look at it, it takes a big bite out of your financial world. If you haven’t planned on it, it can suck up a huge amount of dollars of wealth. Just think about it. If you’re spending two or three thousand dollars a year on new technology, new innovations, to make your life easier or because you’ve just got to have those iPads. I’m just as guilty of it as everybody. If that’s not in your financial plan, that’s gonna erode away a lot of wealth. Now we’re talking about creating wealth for you to live on over your lifetime. In retirement, a lot of times, people don’t pay a whole lot of attention to the latter, retirement, but you want to enjoy it now, enjoy it later, and leave it to your family. So many times, we keep putting off for later. As we talked last week, we have one exponential curve in life and that’s where it starts and just grows to the top. That exponential curve is the only one we have in our lifetime. So we have to do it right or we keep starting over. When we start over, we have less time. The issue is that we don’t plan for all the eroding factors. We don’t plan to enjoy it now and enjoy it later. We’re just enjoying it now without worrying about later. We let so many dollars flow through our hands over our lifetime that we really don’t understand.
Most people are losing 10-20% of wealth over their lifetime and they don’t know it. So we want to try and identify it. Our models actually give you the tools to see where they are and see how devastating they’re going to be in their future and how you can offset it. It’s a macro view. So when we look at technological change, we want to make sure that we programmed into our life a design that will allow us to enjoy it without sacrificing the future. In my lifetime, I’ve gone through DVDs, DVRs and Betamax movies. It’s just amazing the technology that we’ve actually seen in our lifetime and it’s amazing how we’ve progressed from the reel-to-reel to where we are today. But people don’t plan for that. Can you imagine how much money you could recoup if you were able to at least have dollars budgeted for that?
So that’s one of the eroding factors. Another one is planned obsolescence. We’ve talked about these before. It’s kind of a cousin of technological change. Planned obsolescence is when products are designed to have a shorter lifespan than what is possible. Years ago, washing machines ran forever and it was just amazing. Refrigerators ran forever. Now 10 years, they’re gone. We went through one washer in 8 eight years. It needed a new motor and the motor was $500. It was cheaper to go buy a new washer.
Printers are the same way.
I look at my printer over here in that corner. I’m having trouble with it, but it was $49. I’d do that 2 or 3 times a year because they’d crap out. It’s an aftermarket that these product developers planted to their products, into their R&D. It lasts so long and then they have to decide whether you’re going to replace it and run the risk of you replacing it with something different or maybe have a fix that is priced just under the replacement. So it’s crazy. My favorite one is my wife’s Range Rover Sport. She has these little temperature knobs and they get really sticky and gooey because the coating they put on the knobs when it heats up, it gets sticking. It gets dirt and dust all on it. So I wanted to replace a knob. I called Land Rover and I said I’d like to have the knobs. Oh, you’ve got to replace the whole assembly which is $700. I said it’s just three knobs. So I went on YouTube, that’s my education center for advanced education by the way. I took a butter knife and I popped it off as per YouTube and put them in some hot water and goof off. It took it off and I put them back on, but do you think that they would have told me that at Land Rover? So planned obsolescence, products breaking down, life expectancy of the products has to be planned on in your financial plan.
Finally, financial expenses. This is one that most people don’t understand. When you actually figure it out, it’s mind-boggling. There are fees and all sorts of hidden charges in financial products. So when you go and buy a mutual fund, you’ve got all sorts of upfront fees. You’ve got commissions, you’ve got back-in fees, you’ve got front-end fees, you’ve got annual fees. When you break them out, they are huge. If you went to a financial planner, you’d pay them an upfront fee and then you’d pay them an annual fee with built-in inflation kickers in it. A lot of people don’t go to financial planners because they’re afraid of the cost, but yet they’ll put money in mutual funds and the mutual funds suck up fees. You have to be a genius to understand when you read the prospectus of where the fees are. I asked several clients one time that had mutual funds. I said, you read the prospectus? They said no because it’s that thick. So you’ve got to be a financial genius to read the thing. It has all sorts of fees and hidden charges, everything. So they’re paying all this money and they don’t even know it.
What’s the lost opportunity cost to that? We’ve talked about lost opportunity costs. When you pay money and you get nothing in return, what’s the cost of spending that money? So, if you’re getting growth in one hand you’re spending fees and your lost opportunity cost and out of the other hand, are you really getting the rate of return that you think you’re getting? You may get a rate of return here, but you paid taxes and fees and everything out of this pocket overtime. It doesn’t show up here. So when you look at fees and charges, you want to break them out. You want to understand where they are. You can ask the financial guy, but they don’t want to tell you. Nine times out of ten, they may not know.Remember, there are four rules. They’ve gotta get your money, get it on a systematic and ongoing basis, hang onto it for as long as possible and give it back as little as possible. They violate those rules, they’re out of business. So lost opportunity costs. We’ve talked about that many times before. Eroding factors and the lost opportunity cost are huge. Interest rate declines. You just saw that didn’t you, Steve?
A little bit, yeah.
You want to share that with us?
So it’s kind of a sad story, but yeah. Ray was walking me through his consultation stuff that he does. We were talking about it would probably be a good idea for me to get a savings account because I don’t have a savings account, I have an emergency fund. Putting that emergency fund in a savings account to get some interest would be a good thing. So I went and I researched and I found…
You have a savings account, but it was interest-bearing.
Right. So I went and I did the research and I found a savings account with a 1.5% interest rate which is unheard of today. Normally it’s .1.2 1% of your money will give you an interest. So this 1.5 was huge. So I put the money in the very next week. After I put the money in, they said oh yeah, by the way, we’re dropping our rate to 1.3, but it’s still very competitive. I’m like, it’s ridiculous.
It’s nuts. So interest rates decline. I’ve been doing this for 40 years. I’ve seen interest rates go up and down and up and down.
I remember, when you get 5 or 8% on a savings account. I remember that my mom had me create a savings account and I was getting 5%. I was tickled.
Then we’ve stock market declines. We just saw that. So people put their money in the markets and then they check it everyday. Well why do you check something everyday? Because you know it’s going to go up and down. By the time you figure that it’s gone up or down, it’s too late. The damage has already happened on the downside and on the plus side things to the positive have already happened. So one of the things that we want to look at are the fluctuations in the stock market, a good place for you to have your money. Are you going to give your money to somebody that you’ve never met before and let them invest your money for you? That’s what you do when you call Schwab or you call mirror trade or any of these places that advertise on TV. You’re turning your money over to somebody that you’ve never met before and let them manage your money, but let me ask you this. If your brother inlaw showed up or your sister or brother or a family friend said to you, hey would you give me $10,000? I’m going to invest it for you. You wouldn’t let them. Yet, you’re giving it to somebody that you don’t even know. Sometimes there’s a fancy guy on TV, some actor, that’s saying well I’ve given my money to this company for years and blah blah blah. Or Ameritrade has Dolf Lungram or whatever his name is on one of their ads. What’s that got to do with investing? You give your money to people you don’t even know and you expect them to do the right thing? Let that kick around for a while.
Stock market declines we saw. Interest rate charges and loans. We pay interest on all sorts of stuff for the use of people’s money. Being a bank is a very profitable thing. So we pay people money to use their money, their stuff, to buy things that we finance. What’s all those charges going to cost us? So, we want to know whether what we’re spending is a lot or not. Our simulation models actually bring that out. Lawsuits. We hope we never get sued because that can cost us a lot of money. So we want you to understand that a sound offense is a good defense. Financial planners do not understand eroding factors. They don’t understand when your money’s getting eroded away. They don’t understand how to offset them. They only understand how to get your money, get it on a systematic and ongoing basis, hang on to it for as long as possible, and give it back as little as possible. They work for financial institutions. So a good header today would be financial planners do not understand eroding factors, or a more harsher one would be “Financial Planners are ignorant of the eroding factors” depending on how crazy we want to be with our headline.
That being said, we’re gonna wrap it up for now. Next week, we’re going to talk about inaccurate and misleading information. We’re building the basis for the model. We’re building a basis so you can understand your financial world. If you go back and you watch these in sequence, these videos, these shows, you will see a progression of information. We hope that if you made it this far, please ask your friends to come and watch our show, to tell their friends so that we can build our viewer base. Also push that little bell. That little bell will ring when we put a new show up. So I want to thank you all for coming, downloading, and watching FinancialFreedomRadio.com. Have a great week, great weekend, take care, and God bless.
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