Six powerful forces will determine the sum of your future wealth: three “Wealth Builders” and three “Wealth Killers.” Their impact will pull you and your money in different directions—often at the same time—working either to grow or shrink your wealth. Small variations in any one of these opposing forces can have an enormous influence on your ultimate results.
All else being equal, the more money you save and invest, the more you end up with…right? Of course. Saving and investing more today, and regularly over time, means more wealth, perhaps significantly more wealth, in the future. But while that may be obvious, it isn’t easy. Saving is hard work!
Investing is a long-term game. Decades long. Assuming a positive rate of return on investment, the longer the time period over which you save and invest, the better.
OK, another obvious point: The higher the rate of return on your investments, the better your result. Of course, higher rates of return come with risk. In order to achieve better long-term rates of return, investors must accept more volatile short-term results.
Powered by the magic of compounding and fuelled by reinvestment, the combination of longer time periods and high rates of return can produce incredible outcomes. But what about those Wealth Killers?
Often only partially disclosed or buried deep in the fine print, investment fees are “stealth” Wealth Killers. Without realizing it, millions of Canadian mutual fund investors are losing up to 50% or more of their lifetime investment returns to fees.
Just like fees, taxes can severely undermine wealth-building magic. And the complexity of our Canadian tax rules seems to stretch to infinity. But there are a few simple steps you can easily take, such as using TFSAs and RRSPs, to minimize the wealth-killing impact of taxes.
Consumer prices tend to go up over time and, as the years pass, it takes more money to buy the same goods and services. You have no ability to influence inflation; you simply have to beat it.