Low costs – the effortless way to creating wealth!

Yes, low costs are the key to creating wealth. This is especially true if you want to make sure it happens without you busting your balls to climb the career ladder, solely focusing on money. Actually, even if you do, there’s no guarantee that you will have money nor wealth just because you make a lot of money. I know a lot of people with good salaries who still feel they have a lack of money…

I would personally chose financial security and a stress-free life over being in the rat race, enabling me to retire one day with money in my pocket. Who knows what might happen along the way if we don’t take care of ourselves? Health is always nr. 1 and this simple idea of low costs is something we can use all our lives to make sure we have a financially free and happy time as retired. If we learn to follow this simple principle, most likely we will never have any financial issues or feelings of insecurity regardless of how high our income is.

Cost awareness

The key thing I want to get across here is that most, if not all, wealthy people understand the importance of low costs and the effect it will have on their wealth. Some cost we might have to take but most of the time there are alternatives which might be just as good or even better. It’s just about being aware of what you get for your money without being stingy.

We all live different lives and have different expenses but some of them are generic and below I will just show you three commonalities and what difference it can make over time to the financial quality of your life. Some of these things are so simple yet so powerful when applied.

The simple way to do it

I have written several posts on the matter of staying on top of your costs and making sure you know what you get for your money. Many times we can get the same thing at a much lower cost and that of course means more money in your pocket! Below I will show a few simple examples and relate to the individual posts covering these topics.

The fees you pay on your investments

In the post “Are you giving away HALF you PENSION (in investment fees)?” I talk about the fact that for every 1% you pay in fees per year, roughly 20% of your pension pot gets taken away from you. This assumes you are invested for roughly thirty years and your investment returns are around 8% per year.

You can clearly see the impact of fees and in case the fees are even higher (in many instances they are), you give away even more of your money!

What to do?

In this case, keeping low costs is crucial. Make sure you pay as little as possible for the service you get. If you don’t get a lot of service for your money, replace your investment adviser and potentially also your expensive holdings. My generic comment is to know all your costs, find the cheapest alternative and use Exchange Traded Funds (ETFs) when possible. Over very long time, most fund managers who are running mutual funds (with high costs) will not be able to deliver better returns than cheaper ETFs. If you are long-term, you only have to do this once, and then just keep on doing your investments. The difference to your account will most likely be substantial as you can see in the above picture. A really sad example would be someone who pays 3% every year, that person will have roughly half as much as they could have had if they had only bothered to look at this once!

If you are unsure about what to do, have a look at our Wealth Section for more info and I would also recommend you to discuss this matter with a friend who knows about investments and actually has money. Don’t listen to people who say they know things but don’t have any money. Also discuss with your financial fiduciary but make sure you know your costs and keep them low because over time they will have a tremendous impact on the size of your retirement fund or freedom fund as I prefer calling it!

When you have done this once, you never have to do it again and the potential additional money in your pocket can be hundreds of thousands of dollars!

Where you buy your groceries

I have written a post on this topic called “Eat the healthy stuff but be smart about it and pocket the difference!”. I know this sounds crazy and it is but still it’s true! When doing my regular grocery shopping I became aware of the fact that I could buy the exact same products in two different grocery stores. These two chains have the same owner but there are some differentiating factors between the two stores and how they are marketed. One is marketed as a low cost store whilst the other is marketed as a high end store.

As the owners are introducing more and more of their own branded products, which are sold in both stores, the discrepancy in price on average is an astonishing 20%!

By looking at the average US family of four and how much they spend on food every month, I ran some numbers. Again, we are now talking about the exact same products just bought in different stores. So I am not telling you to buy different products or change your eating habits at all, just making an active choice as to in which shop you buy your groceries.

The average US family spends around 900 USD on food (it will of course vary but I will use this number) and by just buying their groceries in a cheaper store they should be able to save around 20% which equals 180 USD per month. If the average family does this for 30 years and invests the money in the stock market and the returns are 10% per annum, this would be the amount in their account as shown in the chart below.

A grand total of 355,000 USD without changing anything in terms of what they consume, only where they buy their products! This is pretty mind blowing as you would not be changing anything really, the only difference is the 355,000 USD one could have had in an account instead of giving it away to the “wrong” grocery store!

What to do?

Check what you buy and see if there is another store offering the same (or equivalent) products at a lower cost. If there is, why not start doing your weekly shopping from them instead?

I am much aware of the fact that the level of every family’s consumption can differ quite a bit but it doesn’t really matter if it’s more or less, it’s still money that should stay in your account! Just check your statement for the last few months and you will know roughly how much it is and how much you could put away in an investment account. This is money you would not have at all unless you change your purchasing habits, so anything counts and as you can see, it can become a significant amount over time!

Buying a new car or not…

Another interesting and important topic is from my post “Buying a new car – Wake the fck up!”. It might sound harsh but when looking at the numbers it dawned on me how crazy it is to buy a new car using financing versus instead saving to buy a second-hand car.

In this post I was not taking any running costs into consideration but solely the financing cost and the depreciation of the value of the car. My assumption was that you would hold the car for 10 years and then sell it. The person who uses financing to purchase the car will have had a total cost of around 47,000 USD. The person on the other hand buying a second-hand car for 10,000 USD (instead of a new one for 40,000 USD) and paying in cash, would have incurred a total cost of around 5,000 USD.

The person who paid in cash would of course have had to save money to buy the car in the first place. Let’s assume they could save 300 USD per month to buy this car and it then took them around three years to have enough money in their savings account.

The person who used financing would have had a monthly cost of 47,000 / 120 = 392 USD (again only taking depreciation and financing costs into consideration.

The person paying cash would have incurred a monthly cost of 5,000 / 120 = 42 USD.

In this example I’ve had to make some assumptions but I do think they are pretty realistic. The real question then is how much you think it’s worth driving a new car (especially if you are bound to it and yet not financially free)?

Let’s say the above buyers are twin brothers with the same income and general expenses in life. Their car purchasing starts at the age of 25 and every ten years they upgrade their cars. Well, the spender would always be buying on credit and his cost would be the same (if car prices and cost of financing remain the same).

The brother paying cash, early on decides to instead invest the difference towards his retirement fund (smart guy) and he manages to get the average historical stock market return of 10% per year. Every month he invests 350 USD (392-42) and does so for forty years (to simplify my calculations I won’t take his paltry 5,000 withdrawal every ten years into account).

I hope you are sitting down because this is the difference between these two twins as retirement age comes up……..

1,860,000 USD, even I almost fell out of my chair! Again, the numbers would have been even more outrageous had they been purchasing cars more frequently (even more expensive), still this is insane! If you don’t believe the numbers, do them for yourself using the calculator on www.investor.gov.

What to do?

Well, just decide if you want to become a millionaire or not by starting to consider the importance to you of having a new car (or not). If a new car is more important to you than having around half a million at retirement, then maybe it is more important to you. In the US, the average household owns 1,9 cars. If you are one of these families, do you need both cars? I would really suggest you to have a think about it as most people can’t even tell the difference between a one year old car versus a second-hand car which is ten years old but well taken care of. It is of course your call and maybe there is a soft spot in between these two alternatives, but awareness as to the astronomical costs of buying new cars should now be flagrant.

Read the full post on this topic, discuss it with a friend or just go through your own historical numbers and how much it has cost you and is currently costing you to own that car of yours. Is it more important to keeping up with the Joneses than being able to live a life of financial security and a rich retirement? That is a question only you can answer but I know how I feel about it.

Alternative cost?

In finance people often talk about alternative cost and simply put it just means what you could have done instead with your money. So if you spend 100 USD today, the alternative cost could be you investing that 100 USD or 50 USD towards your pension and generating a return over time. In this simple example, that 50-100 USD you save today would be worth X in 30 year’s time when you retire and that future value would be your alternative cost.

A multimillionaire, yes you!

By just looking at the potential savings from buying a second-hand car and buying your groceries from a different store, you could become a multimillionaire!

The assumptions of the investment returns still apply but that is something we can’t control. What you can do is to decide whether you want to significantly improve your chances of becoming a millionaire or potentially even a multimillionaire or not!

This is not about making insane amounts of money, it’s something all of us can (albeit at different levels) accomplish quite easily! Adjust your mindset to one of low costs and create slightly different routines like driving your nice second-hand car to your new grocery shop with a big smile knowing that you are on the road of becoming a f***ing millionaire!

This is the result you could get from investing that 180+350 USD per month. It might be a long time but does it really matter? You will know that you always have money and so will your family. If you eventually decide to spend it or not, I don’t know but the journey will be an enjoyable one seeing your account growing like this.

In this example I chose not to take into account the massive saving that lowering your fees could bring to your investments as the amount we invest can differ dramatically. Your fees are still an absolute must to be on top of as 10-50% of YOUR money might be eaten away by your fees over time. So if nothing else, at least make sure you take a look at all the fees you pay for financial services and investments!

I am not in a position to give any financial advise so this is just to show what could become a reality given my assumptions and estimates. Before you make any financial investments, discuss them with your financial fiduciary so that they are suitable to you, your needs and situation.