To understand the Eroding Factors of Money, we must first understand how money works.
Imagine a bucket of water. You start pouring water into it but you see the water line decrease. What do you do? You try to pour more water in but the level still decreases. You try to pour it faster. However, the water level decreases faster too.
The water represents your money. It's obvious that if you look at the bucket, there must some sort of leak. People often try to resolve this issue by pouring more money into the bucket instead of investigating the cause of the leaks. Even if they do nothing, the leak continues.
The reason is because money is a commodity. It changes value and deteriorates over time. No matter how much or how fast you fill that bucket with money, it will leak...and sometimes at a faster rate.
Focus on plugging those holes first even though the drip of money going into your bucket may slow down. Learn how to manage your money leaks no matter which money management tips you implement.
So what's causing your money bucket to spring leaks? Robert Castiglione, in his book LEAP, identifies these as...
The eroding factors of money can occur while you sleep.
Let's flashback to the year 1960 to see what prices were for some items:
|Gallon of Milk||$0.49|
|Gallon of Regular Gas||$0.31|
For some of you, those were the good old days. But more accurately, those were the days of a stronger dollar. Because of inflation, today's buying power of the dollar has dropped dramatically. And it won't get any stronger in the future. It's the time value of money.
Generally, inflation is caused by the high rates of growth in the economy's money supply. So, when the government pumps more money into the economy, it weakens the dollar. This means that your money's rate of return has to keep up with the rate of inflation in order to maintain its buying power.
One other thing: inflation isn't tax deductible.
Imagine this: most families work from January to mid-May for the government. This is just to cover their taxes. The more you earn, the more you pay in taxes (if you don't utilize our tax saving tips). Learn how to decrease them instead.
If you remember the VHS, it became the standard format for consumer viewing and recording in the 1990s. However, by 2006, most major film studios stopped releasing new productions in this format. The DVD format took over the market.
So what does this mean to the consumer? Changes in technology erode your money because you have to either pay to keep up or be left behind.
Since 2000, my wife has had 5 different cell phones. Its not that she mishandled them, but they just broke down. Companies improve their products over time making previous ones obsolete.
Products aren't designed to last long. I could tell you that my wife's phones weren't built to last five years. They probably weren't built to even last 2 years. Companies know and plan on this for consumers to purchase their new products as the previous ones become obsolete.
If the total amount of our personal accounts drop below a certain amount, we are charged a fee. If I sell some of our stocks via a broker, we are charged a fee. If we use a real estate agent to purchase a property, we pay a commission.
Fees, commissions, premiums, and charges can cut into your returns.
If you pay $100 towards tax, you not only lose that $100, but you also lose the interest that you would have received if you had invested that money.
One of the eroding factors of money that catch people off guard is lost opportunity.
Have you ever considered the lost opportunity costs on auto, home, health, disability, and other insurance policies? If they never pay a claim, then those dollars (and the interest it could have earned) are lost forever.
But if you don't get in a wreck, if your home doesn't burn down, and you don't get disabled, that's a good thing, right?
There is even lost opportunity in savings vehicles like college savings plans. Plans like these lock up your money for only one use. This slows down the multiplier effect of money. We want our money to more than one thing.
If you depend on a certain interest rate in order to meet your financial goals and the interest rate declines, then it may be harder for you to make ends meet.
One of the things that my parents fear is investing. They are afraid that they will lose their money. So they put their money in a savings account. But this strategy can still erode their money because if the interest rate declines, then that's less money it can earn.
Among the eroding factors of money, I think this greatly misunderstood.
This is where the topic of "averages" can be damaging to your wealth.
Let's say that you invest $100 dollars in an investment. With a 50% decline, you are left with $50. But then with a 100% increase, you are back to $100 dollars.
So what's the average rate of return?
Here, the average rate of return is +25%. But you haven't gained anything! You are back to where you started. In fact, you may have lost money due to inflation.
Don't let averages fool you.
I'm sure a lot of people have fallen into this scenario:
Let's say that it's time for a new car. You find one for $15,000. You go to the dealership and finance the vehicle with the maker's finance company for 6.00% APR.
But you also have $15,000 in your savings account (or maybe a 401k retirement plan). You are getting a 3% return. So what you have just done, regardless of financial institution, is borrow your own money for a negative -3% return.
Imagine your car, home, savings, 401k investments, and other retirement accounts gone in an instant. If your wealth is not protected from creditors and lawsuits, then your wealth will be a target if you are deemed liable in an accident to someone else.
We live in a litigious society, so it is possible to fall into this situation. You can't avoid all accidents, but you can take measure to protect your assets.
Money management tips are incomplete if they do not take into account these money leaks.
Remember, it's not all about how much you make. It's also about how much you keep. Learn how to manage your money by stopping the leaks.
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