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3 Dangers of Ignoring Your True Cost of Living

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Understanding your true cost of living is one of the most commonly overlooked concepts. That’s because traditional planning does little to examine lost opportunity costs, much less offset them. But how can you reach your full financial potential when you don’t attempt to overcome one of the biggest wealth eroding factors you’ll encounter?

Lost Opportunity Cost

First, you have to understand just what I mean when I say “lost opportunity cost.” In relation to finance, it represents the actual amount of money you lose when making a financial decision. A great way to illustrate this is by using David Bach’s Latte Factor®.

Let’s say that every week-day morning you stop and buy a Venti Vanilla Latte from Starbucks on your way to work. This specific beverage will cost you $4.85. We’ll round that to $5 just for simplicity. This means that you are spending roughly $960 a year on coffee. Say you usually buy lunch three days a week as well, and spend about $10 every time. That’s $1,440 a year on lunches. Add this to the $960 you’re spending on coffee and you have a combined total of $2,400 a year.

So, what are coffee and lunches costing you? The answer isn’t $2,400.

What if you had invested that money instead?

Investing $2,400 annually earning 5% growth produces a gross value in 10 years of $30,351. In 30 years, it produces a gross value of $162,671.

THAT’S your true cost of living. THAT’S lost opportunity cost. See why you need to understand it, account for it and offset it?

3 Dangers of Ignoring Your True Cost of Living

There are three dangers that arise from ignoring your true cost of living:

1. Widespread wealth erosion. What we just examined is only one small area of your life. What about new technologies, goods and services that are created almost daily? I can barely keep up with having the latest and greatest in computers, smart phones and iPads. And now my kids are demanding the best when it comes to these gadgets. What about the planned obsolescence of everyday items, like appliances and cars? These products are made to break down so that you will have to buy them again. What about insurance premiums, investment fees, commissions and taxes? Add all of this lost opportunity cost to the previous totals and you can see your true cost of living.

2. The inability to recapture lost dollars. Two of the most common forms of lost opportunity cost are insurance premiums and financial fees/taxes. People have high insurance premiums because they want low deductibles. But if you were saving the ideal rate of 15%-20% of your income, you would have enough liquidity to cover expenses. Then you could raise you deductible and possible lower your premium costs. All fees associated with any investment account should be completely transparent, and justifiable based on the return and size of the account. Taxes can drastically reduce your net return as well; make sure that your investment accounts are tax managed to help control this erosion. Once you discover the areas where you may be spending money inefficiently, you can then recapture those dollars and put your money back to work for you.

3. Not reaching your full financial potential. Almost every decision you make can result in lost opportunity cost. This makes it one of the largest wealth eroding factors you will encounter and one of the biggest threats to your financial success, now and in the future. If you saw someone casually throw a $100 bill in the trash can, wouldn’t you think they may be a little crazy? Well, if you do nothing to mitigate this risk, you might as well join them. Doing nothing to mitigate this risk can result in you forfeiting millions of dollar over your lifetime.

How a Financial Model Can Help

This doesn’t mean you have to restrict yourself from your favorite coffee, dining out, taking that dream vacation or purchasing things you want. But it does mean that you need to understand your true cost of living, which can be hard to do in traditional financial planning.

A financial model can pick up where tradition falls short. For example, our digital financial model, JB Wealth Builder, can allow you to see where your money is actually going. It can diagnose problem areas where you may be spending money inefficiently. You can then evaluate your degree of lost opportunity cost, and implement strategies to recapture that money and put it back to work.

This can help you remain in the proper financial position where you are able to enjoy the sweet indulgences of life, but also have a financial backbone capable of helping you reach your full financial potential.

How to Lose Your Money in 5 Different Ways

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It’s easier to lose money than it is to accumulate it. This is because accumulating wealth requires you to make a conscious effort. Losing your wealth doesn’t require much thought at all.

You don’t build wealth without some form of discipline, good habits that you practice religiously and that inch you closer toward your goals. This is the conscious effort. Often, the conscious effort tends to disappear once you’ve achieved success. This is the part where you want to enjoy all the hard work you’ve put into building the life you’ve dreamt of. Your conscious effort can even disappear while you’re still working toward your goals. Reaching new milestones of financial success can enable you to do things you couldn’t do previously; it’s easy to get swept up in your newfound freedom. This is why it can feel like you’re constantly taking one step forward and two steps back.

5 Ways to Lose Your Money

The things that can prevent you from reaching your full financial potential are the same things that can wipe out your wealth once you’ve accumulated it. Here are five ways to lose your money in both instances:

1. Not protecting yourself for your full economic value. People want to pay as little insurance costs as possible for the minimum amount of coverage. Most think that leaving enough behind to cover the mortgage or a few years of their salary is sufficient. But your full economic value is worth much more than this. It’s worth the money you will now and in the future, your net worth now and in the future and your legacy now and in the future. Protecting yourself means protecting against premature death or disability, accounting for excess liability coverage and properly structuring your estate. Failing to do any of these things can leave your wealth exposed to a handful of threats.

2. Failing to offset taxes and inflation. These are two of the biggest wealth eroding factors that are out of your control. First, your money needs to outpace inflation, which is the natural erosion of your money’s purchasing power. For example, if inflation is 3%, then your $10,000 this year will only be worth $9,700 next year. Investing your money is a way to offset inflation. While the goal of most investors is to achieve the most efficient after-tax returns, many of them forget to evaluate the tax implications of their portfolio as a whole. Your return doesn’t mean much if you lose most of it to taxes.

3. Living beyond your means. One of the simplest, cardinal get rich rules is to spend less than you earn. Sure, you may have the huge dream home or the exotic foreign car, but if you can’t truly afford it, this doesn’t make you rich. It makes you house poor and car poor, two of the best ways to lose your money faster than you can earn it. It also probably means that you’re building up a substantial amount of wealth. Here’s another cardinal get rich rule: If you have to finance it, you probably can’t afford it. Debt detracts from your net worth, from your ability to save and achieve your goals.

4. Not saving enough money. If you’re not consistently saving a substantial portion of your income every month, then you’re violating another cardinal get rich rule: Pay yourself first. With American savings rates teetering around 5%, it may seem drastic that I’m telling you to aim for a savings rate of 15% – 20%. But this is what funds your core liquidity, your ability to save for and achieve short-term goals. It also funds your future, and includes saving into different unqualified and qualified investment accounts for retirement, your child’s college tuition, and more.

5. Lacking a defined investment philosophy. One of the best things you can do for yourself before you start investing is to create an Investment Policy Statement. This is a guiding statement of how you will invest according to your values and desires, your most important financial goals. Otherwise, you can find yourself making emotionally charged decisions and engaging in bad investor behavior. This includes stock picking, market timing and forecasting, following investment trends and more. Investors who engage in these behaviors often get burned big time.

Why Does it Matter to You?

If you want to reach your full financial potential, you must understand how each of these five things can deter your success. For instance, protection isn’t just about insurance. It’s about protecting your life’s work from the numerous threats that can destroy it. Inflation alone is enough to erode your wealth. You have to put fear of the market to the wayside, and let your money work for you. Taxes will have a direct effect on the real returns your money produces and can significantly erode them. Include low-turnover and tax-managed investments in your portfolio. We can also offer our clients Separately Managed Accounts, which offer the greatest level of tax control.

Acting rich doesn’t count for much of anything. Most of the truly wealthy people would more than likely tell you that they would rather defy society’s image of being rich than being deceptively poor. Neglecting to pay yourself first means that you may lack the funds to achieve your most important goals or living a reduced lifestyle in retirement. Engaging in bad investor behavior can also guarantee these things. But how can you avoid it? How do you know if you’re making the right investment decision? Easy, refer to your Investment Policy Statement. If an investment doesn’t meet its criteria, then you shouldn’t invest. Period.

Building wealth is no small task, but the work doesn’t end there. If you can’t sustain your wealth, then all your hard work means nothing. Sustaining your wealth is where the real work happens.

10 Picks from the Jarred Bunch Bookshelf

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“If you want to be successful, you have to stay teachable.”

This is one of the most important sayings you might ever hear. It’s simple and true. I’ve long believed that if you’re always the smartest person in the room, there’s a big problem. You’re not challenging yourself to grow into a better person.

Success doesn’t just happen, it’s learned. Who better to learn success from than those who have already achieved it and then some? That’s how you grow into a better version of yourself. I’ve spent the last 13 years learning how to be successful from others. And I have no intention to stop learning, or to stop being successful. Neither should you.

Ask any uber-successful person, and you will probably find that they are voracious readers in their spare time. Reading the experiences, thoughts and work of others is one of the best ways to learn. Former President George W. Bush used to engage colleagues in reading challenges; he read almost 100 books a year during his time in office. Warren Buffet is far from shy when it comes to acknowledging his ever-growing reading list. Taking the time to read is a key ingredient in becoming a more successful person in life and business.

These 10 picks from the Jarred Bunch bookshelf helped us inch closer to success and can do the same for you:

Rich Dad Poor Dad, by Robert Kiyosaki. This real-life tale compares the author’s biological father (the poor dad) against the father of his childhood best friend (the rich dad). It will open your eyes to the divide among those who live in scarcity mode, as opposed to those who live with an abundance mindset. Two fundamental concepts will come to you from this book: An abundance mindset and an attitude cultivated in fearless entrepreneurship.

L.E.A.P: Lifetime Economic Acceleration Process, by Robert Castiglione. A big influencer in the financial industry for almost 30 years, Castiglione created a blueprint for how to accelerate wealth building and sustain it for life. The cornerstone of this book lies in his quest to morph traditional financial planning into something better for the new age. You’ll uncover several foundation elements for reaching your full financial potential here.

The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. At 10 years old, Buffett was already visiting Wall Street, engaging a senior partner at Goldman Sachs in a conversation that resulted in the partner asking Buffett which stock he liked. Even if you not an entrepreneur, Buffett’s biography has applicable insight. Appropriately titled “The Snowball,” Schroeder depicts how Buffett never quit striving for success; he worked tirelessly to make things for himself bigger and better. It winds between tales of lessons learned, goals crushed and immense respect earned.

Crush It, by Gary Vaynerchuk. Vaynerchuk is the CEO of VaynerMedia, entrepreneur, motivational speaker, author and up-and-coming digital marketing mogul. Crush It will teach you the three golden rules to success: 1) Love your family, 2) Work incredibly hard, 3) Live your passion. Instead of measuring success based on how big your business is or how much money you have, you’ll learn to measure it based on how happy you are, and how satisfied you feel with what you’re doing every day.

Start With Why, by Simon Sinek. As Sinek points out, there is a distinct difference between leaders and those who lead. Leaders have found their “why,” their way of thinking, acting and communicating that enables them to inspire those around them. He explores the effect of motivating people through inspiration rather than manipulating people into action. Try your hand at becoming an inspirational leader by starting with your “why,” not “how” or “what.”

The Random Walk Guide to Investing, by Burton G. Malkiel. Based on the previous literary hit, A Random Walk Down Wall Street, Malkiel introduces his ten-point plan for success. This concise guide aims to take the mystery out of personal finance, and cuts through the thick jargon to make for an easy to read and follow piece. Confidence and knowledge to make better investment decisions are both by-products you’ll experience thanks to this book.

The Slight Edge, by Jeff Olson. If you’re looking to gain the extra edge in life, Olson’s book is a great addition to your library. He centers the book on your own personal philosophy and how you think, exploring the difference between entitled and value-driven attitudes. You’ll find a greater appreciation for the three gifts in life: 1) Love, 2) Money, 3) Wisdom. And you’ll gain a deeper understanding of why wisdom is the hardest gift to earn.

The Elements of Investing, by Charles D. Ellis & Burton G. Malkiel. Despite what the title may indicate, you won’t find much in the way of specific investment advice in this book. That’s one of the reasons why I like it. What you will find are the foundational elements you need to have in place in order to make good investment choices, along with a few general principles on how to invest. The book is simple and concise, but powerful in helping you understand the importance of building a sound foundation before you start investing.

The Compound Effect, by Darren Hardy. There are two key lessons you’ll learn from Hardy: You can reap huge rewards from small, seemingly insignificant actions and always take 100% responsibility for everything that happens to you. He also demonstrates the importance of aligning your values with your actions and goals, and why you need to design the life you want first, and the business you want second.

Thinking Fast and Slow, by Daniel Kahneman. If you’re a fast thinker, Kahneman would say that the “automatic” part of your brain is winning the fight for control against its “conscious” counterpart. Kahneman explores this struggle, and teaches the many ways in which this can lead to errors in memory, judgement and decisions. While you may always think fast, this book can help you learn how to successfully balance the art of thinking slow for improved cognitive functioning.

Younger Next Year, by Henry Lodge, M.D. and Chris Crowley. This co-authored book by doctor and patient creates a framework that explains why the things we all know we should do (eat right, exercise, etc.) are mandated by the laws of biology. You should make it point to live a healthy lifestyle as part of a successful lifestyle, according to Lodge and Crowley. The co-authors demonstrate why regular activity – now and especially when you’re older – is a demand of human evolution, not the fitness industry.

Do Your Financial Actions Support Your Most Important Values?

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This is probably one of the most important questions you should be asking yourself when it comes to your finances. When your most important values and your financial actions aren’t correlated, you can easily lose focus of your “why.” Your strategies may not truly be working toward your goals. And many times you won’t realize it until life happens.

Discovering Your “Why” Behind Money

One of the first things you have to discover is your “why” behind money. Yes, we both know that you need money to live. But dig deeper than that.

Think about money in relation to the things that matter most to you, like sending your kids to college, starting a business or taking family vacations. Based on this, what purpose would you say money serves in your life? What does it enable you to do? If these desires are important to you, then money enables you to do a number of things: To give your children an education that puts them ahead in life, to take advantage of an opportunity to better yourself and to foster quality time with your family making memories. See how money serves a greater purpose than just “living?”

Your Most Important Values

Your values are what you believe are important in the way you go about your daily life. They should be used to guide your priorities and your daily actions. People whose values are aligned with their behavior tend to be much more satisfied and content with their lives. If you’re behaving in a way that doesn’t match your values, life can feel out-of-whack, unsatisfying and stressful. Life in general is more enjoyable when you make a conscious effort to honor your values. The same is true for your financial life: Consciously honoring your values can make for a much smoother, fulfilling ride.

After you determine what purpose money serves in your life, you can identify the corresponding values it helps you fulfill. Let’s go back to our previous example. In this instance, some of the values that money helps you fulfill would be education, hard work, ambition, fun and family. Organize your values in terms of their importance, so that you can clearly see your top five values.

Do Your Financial Actions Support Your Most Important Values?

This brings us to the ultimate discovery question: Are your values aligned with your financial actions?

If family is your number one value, but you’ve failed to adequately protect yourself against death or loss of income, these actions – or inactions – don’t support your number one value. What if you’re only saving 5% of your income and funneling the rest into qualified retirement accounts? You can find yourself without the necessary liquidity to pay tuition, take advantage of opportunities or to pay for vacations. These actions clearly don’t support your values of education, ambition or fun.

See why this is an important question to ask yourself?

Why Does it Matter to You?

Without taking the time to consciously acknowledge your most important values, you can find yourself suffering the consequences when life happens. Values should play the same role in your financial life that they play in your daily life: They should guide your financial actions and priorities.

Not only should this be the first stop on your financial journey, but it’s one that you should revisit regularly. Aligning your values and financial actions can first help you see what strategies would be most prudent for you to implement. Reviewing your values as you reach different milestones helps ensure those strategies are always working to your benefit.

This worksheet is a great place to start. This step-by-step guide will walk you through everything we just discussed here, from discovering your “why” behind money, to identifying your most important values and gauging whether or not your financial actions support them, to creating an action plan to better align the two.

Investing Lessons from Market Bubbles

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We all know that money plays on emotions, and that emotions drive behavior. And it says a lot about this very fact when the scientist responsible for the law of gravity can be swept up in an investment that for a time, defied the laws of science. Sir Isaac Newton may have been one of the most gifted minds in the scientific community, but in his day to day life, he wasn’t much more than a gullible participant in one of the biggest market bubbles of the early 1700s.

Even Smarties Can be Suckers

No matter how advanced your intellectual capabilities may be, there is a sobering fact that unites investors everywhere: We’re suckers for a good get rich quick strategy. Throughout history, financial bubbles have tugged at the cords of greed, seducing investors with their promises of instant gratification.

The bubble that got Newton was the South Sea Bubble of 1720. It was centered on a company that was promised a trade monopoly by the British government for taking over the debt that was the result of the war against France. The investment grapevines blazed and the press continued to fuel the fire. The South Sea Company shares grew almost eight-fold between January and mid-July 1720. But just as all good things come to an end, the bubble burst in September of that year. By October, share prices had dwindled to their January price.

So what does Newton and other investors from the South Sea Bubble have in common with investing victims of modern day bubbles? Quite a bit according to Richard Dale, a London-based economist, author and historian.

Investing Lessons to be Learned from Market Bubbles

Dale recently gave an interview to MarketWatch where he points out investing lessons from the South Sea bubble that can still apply to the modern investor/market bubble. Here are a few of them:

MarketWatch: How did Isaac Newton get lured into such a disastrous investment?

Dale: Newton invested around £3,500 in early 1720 and sold out in late April of that year having doubled his money. However, like so many others, he was induced to get back into the market in the summer of 1720 at the height of the bubble and ended up losing £20,000, around £3 million in today’s money.

MarketWatch: What modern-day financial bubble is most similar to the South Sea Bubble?

Dale: From the standpoint of the South Sea directors, the bubble represented a giant Ponzi scheme (e.g. Bernie Madoff) in that it proposed to pay dividends not from profits but from sales of new shares for cash. From the point of view of investment behavior, the bubble resembles the dot.com boom/bust when the valuations of dot.com companies lost any connection with underlying value or realistic profit projections. (The Bank for International Settlements pointed this out at the time). I don’t think much has changed. Bubbles are inherently instances of how crowds can go crazy.

It’s exactly the same mentality. ‘You gotta play the game while the game is going on.’ The fear of losing out and losing market share, that mentality of knowingly taking some pretty big risks because everyone else seems to be doing the same, seems to be a feature of markets from time to time.

MarketWatch: So it is pretty easy to get sucked into a bubble?

Dale: I think even way back in 1720, the people that got sucked in, in many cases, were very ordinary people. You didn’t have to be rich. Mini bubbles were developing. It was the poor man’s bubble. For a penny you could buy a share subscription. Everyone was being sucked in at that time…I think one of the features today is one of the ordinary returns from conventional safe investments is now so low that people are inclined to look for riskier alternatives.

MarketWatch: What are signs that an investor is involved in a venture that could end badly?

Dale: There are different things…It’s painful to watch when people are offered higher-than-normal returns, and higher returns than you could reasonably expect. They tend to fall for it time and again. That happens and people lose their money. You only offer supernormal returns if you’re offering supernormal risks.

What we’re seeing all the time with these is that …investors are offered good returns when good returns are hard to come by. That’s not going to change…Madoff was a slightly more sophisticated one because returns were not that out of the ordinary. That kind of thing is just going to go on and on. People are greedy and will jump at the prospects of better-than-normal rates of return.

MarketWatch: What else drives people to get involved in risky financial ventures?

Dale: In some cases, it is the desire to be brave and do something different, the excitement. Or it is a retired person wanting to do something interesting, make their lives rather exciting…high risk, high return. There are plenty of savvy investors who are prepared to take a high risk, but once you get to a certain stage you don’t need to do that. Some people just don’t know they’re taking the risk…a lot of people are very financially naive. It is unfortunate, but that is the case.

Why Does it Matter to You?

At their core, market bubbles from all time periods have the same effect on investors: They convince them they’re onto something groundbreaking only to have it blow up in their face. A good way to avoid being swept up in the market mania is to create an Investment Policy Statement.

This statement will guide how you invest by aligning your money with your values and goal for reaching your full financial potential. If an investment doesn’t match the criteria of your IPS – which many found in market bubbles won’t – then you shouldn’t invest in it. Period.

5 Goal Hacks to Help You Achieve More

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Sometimes, life can become hectic. The path you’re traveling down that was so crystal clear when you began your journey can suddenly seem cloudy and uncertain. I’ve found that it’s in times like these where revisiting my most important goals is crucial. It’s easy to dream, in fact I would encourage you to never stop dreaming. But if we don’t stop and break those dreams down into an action plan on a regular basis, that’s when your vision becomes unclear.

Cautiously vs. Courageously

I believe that there are two ways to live life: Cautiously and courageously. Living cautiously isn’t necessarily a bad thing; you can still live a very happy, enjoyable life. For me, the disconnect happens when causation stops us from challenging ourselves, from becoming a better, more successful version of ourselves.

Living courageously includes striving toward lofty – perhaps even what seem would deem crazy – dreams. In dreams lie an inherent abundance mindset, we can see the potential in ourselves of where we are today and the unlimited growth we’re capable of. But just to dream isn’t enough. We have to put together an action plan of how our dreams will come to fruition.

For me, the turning point in dreaming big was our recent decision to free ourselves from the chains of our broker dealer, from the Wall Street powerhouses. Now that we can be a true representative of our clients, the opportunities to better serve people are unfolding daily. The potential of our team to make a positive impact in people’s lives is greater than I could’ve imagined.

However, I’ve realized that in dreaming big and capitalizing on big opportunities, breaking these down into attainable goals is crucial for our success.

5 Goal Hacks to Help You Achieve More

Here are five goal hacks that have greatly helped me over the years, and even more so recently, in not only setting goals but actually achieving them:

1. Make time to reflect and think. As simple as it sounds, people will routinely say they don’t have time to stop and think. But taking the time to stop and think about where you are and where you’re trying to go is important. It doesn’t have to happen daily; it can be a monthly, quarterly or even yearly exercise. Allocate this time to yourself and your thoughts. Shut off your phone, leave your normal routine, travel somewhere or simply shut the office door. Tune out the noise and get back in touch with your dreams.

2. Hold yourself accountable and write it down. Again, simple but extremely essential. Remember in school when you thought writing down all of those notes was a waste of time? Well in case it hasn’t hit you by now, it certainly wasn’t. It’s scientifically proven that we are more likely to retain information when we write it down. The same is true when it comes to your goals. Not only does this evoke a certain level of personal accountability, but I would even encourage you to take it one step further and find an accountability partner. In a recent study, 70% of participants who wrote down their goals and sent weekly updates to their selected peers reported getting them done, compared to only 35% who didn’t write them down.

3. Organize and categorize. Sometimes our own goals can seem overwhelming or disjointed, like they’re scattered all over the place. I know that this has been true with our team lately, with all of the changes we’ve encountered and opportunities we want to take advantage of. First, we needed to categorize our different goals, and give them a home. Then we needed to organize them in order of importance. You wouldn’t believe the impact this had, and how much it simplified things. What initially seemed daunting became a simplified process for each individual goal.

4. Assign deadlines. One of the most important steps in goal setting is applying a timeline. This is the backbone of your action plan, and is what keeps your goals in-tact. When you set hard deadlines, it keeps you motivated to stay focused and disciplined as you work toward your goal. Set up checkpoints along the way as well. These demonstrate whether or not progress is being made and if there are any obstacles that need to be addressed. Don’t forget, a goal without a plan is simply a wish. A comprehensive timeline gives your goals a tangible framework for achieving them.

5. Go backwards. It might sound weird, but I’ve found that working backwards can be highly beneficial. When I write down a goal, I then write down the ultimate end result that I am aiming for. Then I back into the starting point. It’s always easy to dream, but sometimes it’s not as easy to recognize all of the steps it will take to get there or what could go wrong. This is where working backwards helps me the most. Not only does it help me visualize an action plan, but it helps me identify obstacles that could deter our success early on. This is helpful for proactive planning, because I already have an idea of what can hinder the process and how to overcome it.