The #1 Wealth KILLER

Albert Einstein once referred to compound
interest as the 8th wonder of the world. Saying he who understands it earns it; he
who doesn’t pays it. And he couldn’t have been more right. Today we’re going to be looking at the miracle
that is compound interest and how it relates to the #1 killer of your wealth. Let’s get started. So the #1 wealth killer is debt. Yeah, I know, big shocker. But it’s really true and today we’re going
to look at why that is. The long and short of it is that having too
much debt limits your most powerful wealth-building tool… your income. Now you may think that paying off your debt
instead of investing would be a bad idea because compound interest is so powerful. And compound interest is powerful. It’s so powerful that I made an entire video
dedicated to it. It’s also one of the first examples financial
advisors will use with prospective clients. The example usually goes something like this:
Jane invests $100 a month ($1,200 a year) from the age of 18 to the age of 25. She earns 10% per year on average with her
investments. By the time she stops investing at the age
of 25, she will have a little over $15,000 in her nest egg. Over the course of the next 45 years, those
investments will continue to grow. Assuming that it continues to grow at an average
annualized rate of 10% per year she will end up with $1.1 million in her portfolio at age
70. That’s all achieved with eight years of investing
$100 a month. Jane becomes a millionaire by investing $9,600
of her own money. On the other hand, we have John. John doesn’t start investing at age 18. Instead, he starts at the age of 26 (just
after Jane had finished all of her investing). He also invests $100 a month. However, unlike Jane, he does it from the
age of 26 all the way until the age of 70. John invests $54,000 of his own money over
the course of those years and ends up with a nest egg of just under $950,000. So John ends up with approximately $150,000
less than Jane. This is in spite of the fact that he invested
six times more of his own money than she did. What’s more, is that even if you extended
this example further John will never catch up with Jane. If John kept working and investing $100 a
month all the way to the age of 100 Jane would still have more money than him. In fact, her lead would be even larger than
it was when they were 70. At the age of 100, Jane would have $19.2 million
to her name. John would have $16.7 million. That’s pretty incredible. It’s why Albert Einstein called compound interest
the 8th Wonder of the world. However, comparing someone whose income is
being consumed by debt payments against someone who is debt-free isn’t going to be an apples-to-apples
comparison. One is able to invest a little and the other
is able to invest a lot. Let’s take a look back at the example we just
went over. Jane invests $100 a month for 7 years starting
at the age of 18. She ends up with a net worth of about $1.1
million at the age of 70. Just for the sake of keeping the examples
consistent let’s say that John still doesn’t invest for those first eight years because
he’s paying off debt. If, by paying off that debt, he managed to
free up an extra $200 a year (less than $17 a month) for investing he’d come out ahead
of Jane by the time they’re both 70. If he freed up any more than that he would
pass Jane even earlier. And given the state of the average American
debt situation, $17 a month in payments is a remarkably conservative estimate. According to articles in business insider,
CNBC, and Forbes the average American debt situation looks like this: About $9,000 in credit card debt which is
often split between several cards. $30,000 in student loan debt. And assuming a used vehicle was bought a little
over $21,000 on a car loan. That’s around $60,000 in total debt. If we assume 18% interest on the credit cards
and 4.5% interest on the other loans and terms of 5 and 10 years on the car loan and student
loan respectively, the minimum payments could be roughly $900 a month. Freeing up that much cashflow could make a
tremendous difference in the previous example. Let’s look back at John’s situation from before
and assume that his household’s debt situation was that of the average American. John uses his $100 a month of excess cash
flow to pay off these debts. Based on the numbers it would take him roughly
six years to become debt-free. This is assuming he did not work any extra
hours or sell anything to get out of debt faster. Once he was debt-free he would have almost
$1,000 a month left over to invest. If he starts the process of becoming debt-free
at the age of 18 when Jane was starting to invest he would have become debt-free by his
24th birthday. If he then turned around and started investing
the full $1,000 a month he would actually be further along in his investments by his
25th birthday then Jane was. Granted this is largely because he has invested
more money than Jane has at this point. Jane by her 25th birthday had only invested
$8,400. That’s quite a bit less than John’s $12,000
but think of the potential payoff of this down the road if John keepS investing that
money. He’ll also likely be able to lead a much
better lifestyle than Jane in the present due to his lower monthly expenses. Jane may eventually equal him in that regard
if she gets her debts paid off, but for those first several years after John is debt-free,
it is worth noting. Remember, compound interest is an incredibly
powerful mathematical force. But it can work just as hard against you as
it can for you. So it’s important to make sure that compound
interest is your ally in your finances, not your enemy. So with that being said how do we avoid this
killer of wealth? First, if you’re lucky enough to not have
any debt right now research some ways to ensure that you keep it that way. If you’re planning to go to college look into
ESA or 529 plans. They are ways to start saving for college
while lowering your tax burden (which is always a nice perk). Also, look into scholarship opportunities
or PSEO. Don’t be afraid to have a summer job and work
during the school year part-time. For the record, this can also be a good option
in high school to give yourself a head start financially so long as it doesn’t take away
from your studies too much. Make sure that you always have an emergency
fund. It should contain three to six months worth
of expenses so that you don’t have to take on debt for those moments when life happens. Make sure you have insurance for those catastrophes
that you wouldn’t be able to cover with your savings. Catastrophic health emergencies are a good
candidate for this. If you’re already in debt, learn about how
people have paid off their debts. Then choose the strategy that is most likely
to get you (and keep you) completely out of debt. Three of the most popular strategies are the
debt snowball, debt avalanche, and debt tsunami. I have done videos on all three of those and
they will be linked in the description. The debt snowball is the one made famous by
financial personalities such as Dave Ramsey. It has you order your debts from smallest
to largest balance and pay them off in that order regardless of the interest rates on
those debts. The plus side is the momentum you can build
up for yourself by quickly wiping out those bills. The downside is it isn’t the most mathematically
efficient way to get out of debt, all else being equal. The debt avalanche is the more mathematically
efficient option if you can stick to it. It has you order your debts from highest to
lowest interest rate and pay them off in that order. This is regardless of the size of the loan
itself. The upside is the fact that you’ll be paying
less in interest. The downside is in some situations it may
take quite a while to get rid of that first bill. For those who are more motivated by seeing
the balances of the debts themselves going down this may not be much of an issue. For those that are more motivated by the lowering
of bills, this could be an issue in some situations. The debt tsunami has you order your debts
from the most emotionally stressful to the least emotionally stressful and pay them off
in that order. In some cases, this could mean paying off
the largest balance that also has the lowest interest rate first. However in my experience that is not commonly
how it goes. Most of the people that I’ve seen use this
strategy tend to use it because there are personal loans between family or friends that
are causing a lot of stress in the relationship. The person with the debt uses the tsunami
to get rid of that loan first and then often switches to a different strategy such as the
snowball or avalanche. Which is another viable option for many people. There’s nothing stopping you from starting
with one strategy that will help get you going and then switching to another that will work
for you longer-term. I know a lot of people who have started with
the snowball to get themselves some momentum and then switched to the avalanche once they
were on a roll so that they could save on interest. Another thing I would recommend looking into
is the power of the debt snowflake. If you haven’t heard, the debt snowflake is
a strategy where you find ways to free up money (or just happened to find the money)
that you can put towards your debt payoff strategy. The nice thing about it is it works well with
any of the other three strategies I mentioned. While by itself it isn’t game-changing it
does help your primary strategy do its job a little better. And as we know every little bit helps. If you need more motivation make sure to check
out Dave Ramsey’s YouTube channel and their debt-free screams playlist. It’s filled with a lot of amazing stories
of people paying off loads of debt on various levels of income and getting to see their
relief when they are finally debt-free is very inspiring. You might also find their Turning Points playlist
interesting. It is essentially interviews of people who
have become debt-free talking about what made them decide to go through that process and
achieve that lifestyle. I’ll leave a link to both playlists in the
description as well.

18 Replies to “The #1 Wealth KILLER”

  1. If young people saved as little as 10% of their gross pay, as soon as they began their working life, they would be set for retirement and would not have to scrimp and go without as they approached retirement age.

  2. The debt tsunami is a new one for me. We are recovering from a slab leak in our house and took Lon some debt to take care of it. It's 18 months same as cash, but it's stressing me out, so I'm going to pay it off immediately. But it's a good lesson for me on the emotional component of debt. Thanks for the video.

  3. The fact that you explained why debt is a huge deterrent and explained how it would be better if you knocked it out and put it into investments would be more beneficial is great. No one explains it this deep.

  4. I think there is a major flaw in your reasoning.

    While you would have X more money to spend each month IF you paid off your debt in full – it would also mean that you spent a boat load of money to do that. This money couldve compunded and given you more money in THE END.

    It's better to pay the minimum payments as long as the return on your investments is greater than the interest in the loan.

  5. savings accounts have very low interest rates. the highest I can find is between 2.5-5% and thats having to lock money away for 3-5 years

  6. Hey bro I watched the ads for you! Love your content and insight. So refreshing to find like minded people on YT when it comes to investing and saving for the future.

  7. Please perform an analysis on the lifetime rate of return on social security (Ramsey quotes -4%). Liked & subscribed.

  8. The Albert Einstein quote is probably the most misquoted financial quote of all time. There is absolutely no record of Einstein saying anything about compound interest.

  9. I'm kinda tired of being told how u could be a millionaire if u started saving up when you're 18. Geez. What are the odds your audience are below 18 who have the means to do that? Is there even an original ideas on compound interest without using the save-up-since-18yo-example here?

  10. #1 wealth killer? Debt?! Hahaha! You want to lose it all? House? Retirement? Savings? Get married…. there you go… your welcome … 😂

  11. Albert Einstein did not refer to compound interest as the greatest force in the universe (or, as cited in this video, the 8th wonder of the world) – that is an urban legend; Google it and you will see this is a lie!

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