Financial Truth #1: Money Can’t Buy Happiness
Tonight, I bring you 25 truths about money. Some of these are undeniable facts, while others are truths as I see them in relation to money. Let’s start with the most universal truth: money cannot buy happiness. And indeed, this is true. Money doesn’t buy happiness. However, it can buy you a boat to pull up right beside happiness—an old joke, but it makes a point.
Money can’t buy true, deep, and meaningful happiness, but it does make life easier. Many wealthy people are troubled, tormented, and unhappy. The idea that more money will make you a happier, more content person is a path that likely leads to a dead end. However, money does make certain aspects of life undeniably easier and more flexible. It can reduce stress, alleviate anxiety, and provide peace in certain areas of our lives. There’s a calm and silent strength in knowing your bills are paid, you have an adequate emergency fund, and you possess the resources to handle financial catastrophes. Money can provide a nice house, good clothes, a safe car, and maybe even decent vacations. All these things make life easier, but independently, they don’t truly create happiness. Happiness comes from sources other than money.
Financial Truth #2: Earning Power Is Your Most Valuable Asset
Earning power is your most valuable asset. It’s not your house, your bank account, or your brokerage account. Your earning power is your lifelong annuity—income generated by the fruits of your labor, influenced by how much, how hard, and how smart you work, as well as the occupation and field you choose.
As we enter the workforce and progress in our careers, promotions, increased responsibilities, and possibly management roles contribute to our earning power. These are challenging and complex tasks, so they naturally come with higher rewards and salaries. Your earning power over your lifetime is the engine of your financial plan, formal or not. What you do with your earning power largely determines your success in building a solid financial foundation and growing wealth over time.
Financial Truth #3: Savings Is More Important Than Earning Power
While earning power is your most valuable asset, savings are even more important. It doesn’t matter how much you earn if you spend more than you bring in. If you make $100,000 a year but spend $125,000, you’re not growing your net worth or building wealth; you’re going into debt, a condition that can only last so long before something crashes.
You must capture a portion of your earnings and save it for future use. Savings are crucial for building a solid financial foundation. Without saving, you’ll run out of options as life goes on. So, while earning is vital, the ability to save is even more crucial for long-term financial health.
Financial Truth #4: Investing Is Essential For Growing Wealth
Investing is essential for growing wealth. It’s great to save money—step one is spending less than you earn and saving the difference. But then, you must invest those savings into something that will grow faster than the rate of inflation.
Simply putting money in a bank isn’t enough to stay ahead of inflation long-term. Most bank accounts, while stable, typically offer interest rates lower than inflation, meaning your wealth isn’t growing. That’s where investing comes in. Investing in vehicles with a high probability of outpacing inflation—like common stocks or equities—is key to building wealth and achieving financial independence over time.
Financial Truth #5: Not All Debt Is Bad Debt
Not all debt is bad debt. Most debt requires caution, but some debt can be beneficial. The key is the interest rate. If you have a low-interest rate, that debt can be leveraged to redirect cash flow into higher-earning investments.
For example, mortgage rates are often low. If you can borrow money at 3% and invest in a 401(k) that grows at 7%, 8%, or 9%, you should do that all day long. Take as long as possible to repay that 3% loan, and don’t rush to pay it off.
Financial Truth #6: Financial Success Is 10% Knowledge And 90% Discipline
Financial success is 10% knowledge and 90% discipline. Investor behavior plays a significant role in the success of your portfolio. Knowing what to do and where to invest is one thing; actually doing it and maintaining the discipline to stay invested, is another.
Even when the market declines and it feels like your money is eroding, discipline is crucial. Many people panic and sell at the wrong time. Maintaining discipline in your financial plan is essential for long-term success.
Financial Truth #7: Budgeting Is Key To Financial Control
Budgeting is key to financial control, but most people don’t stick to a budget. Around 99% of people don’t have a budget, don’t want one, or wouldn’t follow it if given to them. However, budgeting at a macro level can be helpful.
Instead of detailed budgeting, try to save a percentage of your gross income—start with 10%. Put it into a 401(k), IRA, or brokerage account, and spend the rest. Over time, increase your savings percentage to 15% or more. This simple strategy can help you accumulate enough to maintain your standard of living in retirement.
Financial Truth #8: Time Is More Valuable Than Money
Time is often more valuable than money, especially in personal finance. It doesn’t take a lot of money to accumulate wealth if you have time. Start saving early, even if it’s just $25 from your first paycheck.
Building the habit of saving, like any good habit, becomes easier over time. With enough time, small amounts of money can grow significantly through compound interest.
Financial Truth #9: Risk And Reward Are Two Sides Of The Same Coin
Risk and reward are two sides of the same coin. You cannot have high rewards without high risks, and low risk typically comes with low reward.
This concept can be difficult to grasp, as many people want high rewards but aren’t willing to accept the associated risks. Understanding that risk and reward go hand in hand is crucial for making informed investment decisions.
Financial Truth #10: Diversification Reduces Risk
Diversifying across different investment vehicles lowers the potential for underperforming your expected rate of return. Diversification is a fundamental principle of good portfolio management, helping to mitigate risk and increase the likelihood of achieving your financial goals.
Financial Truth #11: Inflation Erodes Purchasing Power
Inflation erodes purchasing power, especially in recent years. While inflation has been high, eroding the value of your money, it’s essential to use investment vehicles that outpace inflation to build and grow wealth over time.
Most bank assets don’t keep up with inflation, which is why stocks and other investment vehicles are crucial for growing net worth.
Financial Truth #12: Taxes Are Most People’s Largest Expense
Here’s another one I don’t think I’m going to get any argument on—taxes are most people’s largest expense. Your largest household expense is made up of various taxes: federal tax, state tax, Social Security taxes, city taxes, property taxes, sales taxes—taxes everywhere you turn. Nearly everything is taxed at some level, even if it isn’t an outright tax. There’s usually a tax embedded somewhere in the cost. So, it is prudent to try to minimize taxes where you can. We certainly do that in our practice and in how we build investment portfolios to be tax-efficient. However, under the current tax code, to make money, earn money, or grow money, you’re going to pay some taxes. That’s just a reality. The goal for most people is to grow their net worth over time. To do that, you’re going to have to pay some taxes along the way.
Some people think that if they eliminate all their taxes, they eliminate all their problems. That’s not true. I can do that for you—just give away all your money or lose it all, and you won’t have to pay taxes. But that’s not the name of the game. Taxes are a reality; just be really efficient and mindful of how you structure your affairs to minimize them as much as possible.
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Financial Truth #13: Compound Interest Is The Most Powerful Force In Personal Finance
Tonight, I’m talking about the 25 truths about money, and now we move on to compound interest, perhaps one of the most powerful forces in personal finance. It might be one of the most powerful forces in the world. It’s not love, but compound interest can make people love you if you know how to use it right, that’s for sure.
Compound interest is earning money on your money. Even with basic bank accounts, everyone is familiar with how most bank accounts, though not all these days, pay some nominal amount of interest. If you leave that interest in your bank account, then you have a little bit more in your account. You have what you put in, plus the interest. The next month or quarter, the bank adds more interest on top of the interest they gave you the previous month or quarter. They do this month after month, and so while you’re sitting on the couch eating potato chips, your money keeps compounding and growing over time. If you have enough of it, the compounding gets really significant.
Keeping your money at work consistently for a long period of time and allowing the effects of compounding to work is one of the easiest and most effortless ways to grow your net worth. It is truly passive income. Real estate is often touted as passive income, but that’s one of the biggest marketing schemes ever—real estate is the opposite of passive income. Passive income is putting money in an account and watching the interest compound over time.
I will say we are seeing some decent rates out of position-traded money market funds. So what’s a position-traded money market fund? It’s a stable-value account that doesn’t decline in value but trades like a mutual fund. Most banks have money market funds, but they’re a bank version, and they don’t pay great interest rates in this environment. But Fidelity, Schwab, and Vanguard each have their own house brands of money market mutual funds, and we are seeing about 5% per year on those funds. That’s decent money in this environment, and it’s stable value. While it’s not 100% guaranteed, it’s pretty darn close—about 99%. So, compound that interest in a position-traded money market fund for faster growth.
Financial Truth #14: Emergency Funds Provide Financial Security
Emergency funds provide financial security—you bet they do. That’s why we always recommend it as one of the first things you should do when building a strong financial foundation. Get that emergency fund built up so you don’t have to rely on bad credit card debt when you need car repairs, have medical expenses, or face some other unforeseen life event requiring a significant amount of money. Your emergency fund is that backstop; it’s also your security blanket for sleeping well at night, knowing that you have most of life’s financial travails covered, especially one of the biggest ones—an unexpected job loss.
Emergency funds provide financial security, but they don’t provide much financial growth, and that’s okay. That’s not their primary purpose. It’s okay to have your emergency fund—in fact, it’s preferred—in a bank account or savings account, not your checking account. Checking accounts are transactional, so at least get it into a savings account where you have to transfer money from an app or something like that for your emergency fund.
Financial Truth #15: Retirement Planning Is Crucial For A Comfortable Future
Retirement planning is crucial for a comfortable future, and some key words here are “planning” and “comfortable.” Anyone can retire at any time they want, but that doesn’t mean it’s going to be a comfortable retirement. Most people in this country don’t do retirement planning well, or they don’t do it at all, and that’s a shame. In one of the wealthiest countries on the planet, we are probably one of the least prepared for comfortable retirements.
Our consumer society constantly tempts us to buy, spend, get a bigger house, a nicer car, fancier clothes, more lavish vacations—live for today, worry about tomorrow later. Okay, you can do that. That’s your choice. Most people make that choice. But eventually, the point comes in life where you either don’t want to work anymore, can’t physically work anymore, or someone else decides you’re not going to work for them anymore. That’s when you’ll have to live off your savings, investments, and a little bit of Social Security to live what is probably going to be another third of your life in a traditional form of retirement.
Retirement planning is crucial for a comfortable future. I should add that retirement is evolving. In America, we don’t do life as well as I think Europeans do. They are much more about balancing work and play. We’re more about work, work, work, then play, play, play. I don’t think that’s the best setup, but it is getting better. We’re seeing more semi-retirements, part-time work, early retirements, and a more relaxed retirement concept, instead of just a hard break where you sit on the porch, rock back and forth, and play golf three times a week. That’s not the healthiest retirement. Retirement planning is crucial for a comfortable future.
Financial Truth #16: Financial Independence Is Freedom
Financial independence is freedom. Yes, it is. It’s also power, control, security, and liberation. Financial independence is a lot of healthy, positive things—if used properly. But we have an expression in the industry that large wealth reveals character. So, while having a lot of money, or having enough money to be financially independent, means you’re not depending on anyone else for income or assets. You’ve accumulated enough on your own to maintain and support your lifestyle—that’s financial independence. Having that freedom, power, and control is very liberating, and it opens up a world of possibilities and options that most people will never experience because they don’t desire financial independence. They prefer current consumption, and that’s okay. We are all free to make our own choices.
However, in this country, there’s often resentment and jealousy toward those who are financially independent—those who did the hard work, sacrificed, and lived below their means to achieve a comfortable place of financial independence. And then we just want to take from them. We want to tax them more, right? It’s not fair that they have so much more money than us. The much-maligned one-percenters—those who make high levels of income—do you know how hard it is to be the CEO of a company? It’s really, really hard. Do you know how hard it is to start a small business, keep it afloat, and make a profit to hopefully have enough money to take care of your own retirement? It’s really, really hard to do those things. It takes a ton of discipline, a reasonable amount of intelligence, a bunch of hard work, massive amounts of internal fortitude to overcome risk, grit, determination, and you can’t give up—you can’t quit, you keep pounding the rock. It’s really hard to make a lot of money and be successful. It’s not for everybody, and everyone doesn’t need to be a millionaire to be happy in life, but for those who want that, they deserve it.
Financial Truth #17: Money Is A Tool, Not A Goal
That’s true. It’s not enough just to have money. What the heck are you going to do with it? Money is a tool to enhance your quality of life—something we say on the show and to all our clients. We use money and all our financial resources to harness the power of your money to enhance your quality of life. That’s the real goal of money.
Financial Truth #18: Having More Numbers In An Account Doesn’t Mean A Lot Unless You Can Do Something Meaningful With That Money
Having more numbers in a bank account, on a bank statement, or in a brokerage account doesn’t really mean a lot unless you can do something meaningful with that money. For instance, giving can be more satisfying than receiving. That’s absolutely true. Something we see in our profession a lot is that people who make a lot of money and have a lot of money tend to be some of the most generous and giving people in this country. They’re the ones who set up foundations, donate for a wing in the hospital, or fund the new building at the college. Those who have the most money are often the most generous in giving back to society.
Having more money doesn’t do you a lot of good if you can’t do something meaningful with it. Some people think they’ll just take their money with them, and you know what? If that’s what makes them happy, that’s okay too. But for many of us, the goal is to use that money to enhance our quality of life, to enhance others’ quality of life, and to pass some of it along to the next generation.
Financial Truth #19: Needs And Wants Are Not The Same Thing
Tonight, as we talk about the 25 truths about money and wrap up the final six, let’s focus on this: needs and wants are not the same thing. Do you know the difference? You might think you need those sexy new shoes. I might think I need that $25 cigar and $15 glass of bourbon. But the truth is, I don’t need them—I want them. So, it’s important to distinguish between needs and wants. Be judicious with your wants early on—limit them, restrain them somewhat—and then you can reward yourself later in life when you’re financially stable and have a solid financial foundation.
We want our clients to enjoy the trappings of wealth. We want them to have a vacation home if that’s important to them, to drive nice cars, and to take first-class trips to Europe for three weeks. We want them to experience these things—but responsibly. That means building the financial foundation first and then reaching a place of financial independence, or close to it, where you can spend that money guilt-free and enjoy the fruits of your hard work and sacrifice throughout the financial planning process.
Financial Truth #20: Patience Is A Virtue In Investing
Patience is a virtue in investing—absolutely. Everyone wants to get rich quick, but that’s not how it works. The faster you try to make money or earn returns through investing, the more risk you take, and the more likely you are to end up with nothing. The greater the risk, the greater the potential for loss. So, it’s something to be mindful of. Everyone says they’re comfortable with risk when speaking in general terms—until it actually happens, and they see the value of their volatile investments plummet. That’s when people often reassess their tolerance for risk.
Financial Truth #21: Credit Scores Matter
Credit scores matter—no doubt about it. Your credit report is crucial, not just in personal finance but in many areas of life. It’s certainly used for lending practices. If you have a low credit score or issues on your credit report—due to past-due bills, late payments, or unpaid debts—it’s going to cause problems. You might be denied a car loan or a mortgage, and if you’re approved, you’ll likely face higher interest rates because you’re seen as a higher risk. So, check your credit score and be aware of your credit report. You can access it for free at annualcreditreport.com. Review all three credit bureaus there: TransUnion, Equifax, and Experian.
Financial Truth #22: Secrets Can Ruin Relationships
Secrets can ruin relationships—absolutely. Financial arguments or secrets are one of the leading causes of divorce, probably second only to infidelity. To prevent this, we recommend a system of three accounts: his account, her account, and a joint account. Most of the household money goes into the joint account, and then a small allowance is funneled into each person’s individual account, which they have exclusive control over. So, if she wants to buy three new dresses that look exactly the same, she can do it with her own money—no arguments, no stress. If you want to buy a bunch of parts for your motorcycle that you don’t really need, you can do it too. Most of the money goes into the family pot, covering all the bills, and this system creates marital harmony while reducing the likelihood of financial secrets.
Financial Truth #23: Money Decisions Are Emotional, Not Logical
Money decisions are often emotional, not logical. This is something I learned the hard way after spending a lot of time in undergrad finance classes learning about rational actors and how people are supposed to make logical decisions about their finances. But in reality, most decisions are driven by emotions, not logic.
Financial Truth #24: True Wealth Is Not About Money, It’s About Time, Freedom, And Health
True wealth isn’t about money; it’s about time, freedom, and health. If you have time, freedom, and good health, then you are truly wealthy.
Financial Truth #25: Your Quality Of Life Is A Better Benchmark Than The S&P 500
Finally, the last truth about money: your quality of life is a better benchmark than the S&P 500. Don’t stress comparing your investments to the S&P 500, or the Dow Jones Industrial Average, or about trying to outperform them. What really matters is how well your investments support your standard of living throughout your lifetime.