Reason 2: Unrealized Gains...worth more than you think...

Continuing from the last post, and with the analogy of accumulating wealth as in trying to fill a leaking plastic bag with water (where water=money) here is reason 2 (this one`s a biggie):

Bob and Mary are married, they work all day and have some sort of financial planning in place, with their savings growing slowly but surely.

At the end of the journey, when they finally retire, they immediately notice that what they saved has lost purchasing power (see previous post) but they are still satisfied, in the end they have a roof above their heads and enough money to pay for regular expenses.

I can already see them sitting on the couch in front of a fireplace...

...saying things like "we are lucky, there is people on the streets you know... yeah our neighbors are going on a cruise voyage around the world next week, but they are rich, we did what we could..."

And indeed they did what they could.... in term of working that is, but...can they say the same thing about financial planning?

Here is the scary thought: what if the right financial planning would have allowed them to join their neighbors on the trip?
What if, while they were working hard, their money was slacking and spilling, robbing them of those comforts all the more appreciated, when energy is no longer the same?

Let`s make an example on $100.000,  Bob and Mary paid every year 23% of capital gain tax already "built in" their performance (banks do this automatically), if their performance was 9% a year how much would have they lost? Around 2 % a year? And what about the interests that 2% that disappeared would have gained if it stayed in? and what would the percentage be on that 2%, 6% or 9%?
You guessed it, they could have got 9%, and next year 9% on that previous 9% and so on in an exponential crescendo.

To give you an idea of the power of compounding (see also Einstein`s quote 3 posts back)
  • $100.000 for 30 years at 9% per annum using simple (not compounded) intrest: $370,000.
  • $100.000 for 30 years at 9% per annum using compounded intrest:              $1,326,767.85
That same thing happens to the money you left out every year at the bank which robbed you of exponential growth during the years, but that is just the tip of the iceberg, the terrifying thing is that the same happens with that 20% you lose due to your bank`s Mirror funds, and all the missed gains because your portfolio wasn`t dynamically managed to take advantage of the market cycles. Add that what you keep is deeply devalued by inflation and no wonder the cruise voyage around the world is going to stay as just a dream.

If while breaking their backs at work their money were instead working as hard for them, with no leaks and maximum efficiency, not only Bob's and Maria's fireplace could look better...

...but the chairs would probably be empty as they would have joined the neighbors by now...

No matter how much you have or add to the pot every year, I can assure you there is always a way to add additional income and move one step up the goals and achievable dreams you can aim in your future.
If you don't want to envy that ever-smiling rich couple and want to "be" that smiling couple yourself, stop the leakage now, pocket everything and feed it to the compound interest machine, your are still in time, but don`t postpone, the more you wait the more water spills out.

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