The Truth About Money: What Financial Gurus Won’t Tell You
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Disclaimer: Anything you read here should not be taken as financial advice. I’m not a financial advisor. Please research and consult a certified financial expert if you want personalized advice.
Some crazy things have been happening in the crypto world over the past few weeks.
If you haven’t been following the news, FTX exchange’s founder Sam Bankman-Fried (aka. SBF) secretly transferred $10 billion of customer funds to his own trading company Alameda Research.
At its peak in July 2021, FTX had over one million users and was the third-largest cryptocurrency exchange by volume.
The crypto exchange saw its valuation implode from $32B to $0 in a single day!
Bankman-Fried consequently stepped down as CEO of FTX, which is headquartered in the Bahamas, after the crypto exchange filed for Chapter 11 bankruptcy protection on 11 November.
There were even rumours that he’d disappeared to Argentina to escape questioning (and possible arrest for fraud) in the Bahamas, where he was last seen. (Latest reports reveal that he’s still there in the Bahamas.)
The part that really sucks is that real people lost hard-earned cash in this whole thing because they had bought into the hype.
@MMCrypto I lost 19k … i know its not much to you but that hurt me.
— Pimpo$ter (@imposteraliens)
Nov 13, 2022
@MMCrypto probably not a big one if you look on other customers lose – tho 15K (11.5K tried to withdraw and 3.5K left cash) – about 1 and half year of savings to fund this account – everything is gone now.
— LordOFinance (@TheLordOFinance)
Nov 13, 2022
And this is where we have an issue.
Some finance gurus, aka. YouTubers and Tiktok “influencers”, unknowingly (or knowingly) promoted FTX exchange to their millions of viewers, resulting in many people losing money.
Whilst they might not have known about the fraud inside the company, these individuals knew that they were getting paid a commission for every person they directed to FTX.
The problem with financial advice
There is a lot of conflicting information online about personal finances and financial gurus who make a lot of money by selling information and advice. The challenge is that we can’t always rely on what they’re saying because they’re being paid to say it.
“If you go to a doctor who has an MD, you can be reasonably sure that they’re educated, tested, and qualified, and the advice they give you is very likely good advice. In the finance world, there are things like CFP and CFA credentials, but there’s no requirement that you (financial advisors) have them. There’s a lot of advice out there that’s either bad advice or it’s good advice for one person but not for you.”
“The two areas of your life that will impact everyone, whether you like them or not, are health and money. The fact that we don’t teach those fields in school makes it so people who are not gullible in any other area of their life kinda get taken for a ride very often.”
We saw a clear example of this recently with the Finance YouTubers promoting FTX crypto exchange and other cryptocurrency projects. CNBC found that some online personalities get paid thousands to endorse dubious projects.
Celebrities from different fields, such as tennis, reality TV, basketball, and comedy, also joined in the mad rush to profit by endorsing crypto projects.
“Matt Damon started touting crypto investing when Bitcoin was worth twice as much as it is now. Mike Tyson’s NFTs have plunged more than 90% since he introduced his collection. And investors who allege they lost millions on a pump-and-dump scheme are suing (ex-Pro basketballer) Paul Pierce.” – Bloomberg
This problem isn’t limited to folks pushing Crypto, either.
“The rise of social media influencers promoting financial products and investments has even coined the term ‘finfluencers’ (financial influencers).”
Australian ASIC has even social media influencers engaging in financial services to exercise caution.
“The way investors access information is changing. It is crucial that influencers who discuss financial products and services online comply with the financial services laws. If they don’t, they risk substantial penalties and put investors at risk.” – Cathie Armour, ASIC Commissioner .
How did we get here?
1/ The financial industry is designed to incentivize people to prioritize profit over other individuals.
Morgan Housel explains that in the US, there’s a systemic issue:
“Relative to other industries, there’s so much money to be made in finance. And because of that, I think otherwise moral good well-meaning people are introduced to a system where their incentives are to promote certainty or to kind of pull the wool over people’s eyes. Even if they’re good people, not shysters, they’re willing to sell products that are not good for people because they can potentially make so much money themselves.”
Whilst Morgan is talking about the USA, I believe this issue is found in countries like Australia too.
2/ A shockingly high percentage of people are financially illiterate
According to newly released research from the University of Newcastle, more than a third of Australians are financially illiterate.
The report showed that 43% of all young adults aged 18 to 24 years said they could not pay their personal debts.
This all points to an education system that fails to sufficiently educate people about financial literacy and life skills.
3/ Lack of access to good financial education (especially for young people)
According to the non-profit NGPF’s 2022 State of Financial Education Report, 22.7% of high school students in the U.S. have guaranteed access to Personal Finance courses. That means only one-quarter of all students will graduate in 2022 armed with the knowledge they need to manage their finances effectively.
In Australia, financial literacy is not taught as a stand-alone subject in our schools. It’s only taught as part of other subjects such as Maths and Business Studies.
Why do we fall for bad investment and money advice?
Much of it has to do with a lack of financial literacy and understanding of the financial system.
According to a study by Ernst & Young, 43% of Aussies are financially literate – which is higher than the global average of 39%.
Despite this, we still see problems with people falling for bad money advice. So what’s going on?
I believe one of the issues is that we’re not taught about money in school. We might learn about basic things like how to create a budget, but we’re not taught about investing, saving or financial freedom.
And even if we were taught about these things in school, I don’t think it would be enough.
The other issue is that there’s a lot of conflicting information out there. You have financial gurus who are incentivized to sell you products and services. You also have people who are trying to give you unbiased financial advice, but they’re often harder to find.
It can be hard to know who to trust!
According to Morgan, our continuous craving for the “sure bet” can result in us following ineffective money tips and making terrible choices.
“Certainty does not exist in the finance world, but certainty is what sells. So that’s why a lot of the pitches that are online promote this degree of certainty. I think could be really dangerous so that’s that’s a big red flag.”
Seven principles for building wealth
While I won’t offer specific wealth-building strategies or investment vehicles here (again, I’m not a financial advisor), I’ve picked up some principles that have informed my approach to money and personal finance over the years.
1) Spend less than you earn: Start by tracking your expenses to get an idea of where your money is going each month and identify areas you could cut back on.
2) Save a portion of your income: Make sure you’re putting some money away each month to build up an emergency fund to cover unexpected costs or opportunities if they arise.
3) Invest in yourself: Take the time to learn more about personal finance and investing to make better decisions with your money. Your income can grow only to the extent you do.
4) Invest regularly: Whether it’s stocks, bonds, funds, businesses, or real estate – start investing early and often. This will help compound the growth of your wealth over time.
5) Be patient: Investing and building wealth takes time, so be prepared to be patient as you work towards financial freedom.
6) Use leverage to grow your net worth: Leverage can mean borrowing money to invest in assets that increase in value over time (like property). This can help you achieve greater returns than if you invested your own money alone. Another form of leverage is creating software and media that work for you while you sleep.
“The most interesting and the most important form of leverage is this idea of products that have no marginal cost of replication. This is the new form of leverage.” – Naval
7) Save like a pessimist and invest like an optimist.
As Morgan Housel explains:
“In a world where risk is what you don’t see coming, you need to have a level of conservatism in your finances that seems like it’s a little bit too much. Because if you’re only planning for the risk that you can see, you’re going to miss the surprise ten times out of ten.
I want to save my money with the idea that the world’s fragile and my career might be fragile, and I want to be prepared for that so I can endure it. But I invest with the idea that if I can endure it, and put up with all the ups and downs, then if I can stay invested for 50 years, the results will be incredible.”
Watch Morgan’s full interview on Erika Taught Me podcast here:
By following some of these principles, I was able to pay off $18K of personal debt in less than a year.
The above principles won’t make you rich overnight (and I’d be wary of people who claim that their strategies will!). Still, if you apply them consistently and diligently, I believe they will put you on the path to financial freedom.
It’s important to remember that financial success is not a sprint but a marathon. So be sure to take it one day at a time and stay focused on your goal of building wealth.
Where are you on your wealth journey? Are there any principles, resources, or strategies that have helped you? Hit reply and let me know.
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