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In this video, Chelsea debunks several myths we carry about wealth-building, from thinking we’ll get rich from one lump sum to thinking you need a “traditional” bank to do it.

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Hey, guys. It's Chelsea from The Financial Diet, and this week's video is sponsored by Digit. And, today, we are going to talk about myths versus reality about building wealth. Here at TFD, we do often like to talk about how the game is often pretty stacked in favor of people who were born into wealth. In America, that is still the number-one predictor of your eventual wealth. And for as much as we talk about being the land of opportunity, social mobility in this country is actually fairly low compared to other developed nations. And, to be honest, a lot of our videos that talk about this are bummers. But the overall point is to reinforce that, while we should all be making the best and most optimized choices that we can within the context we have, we should also not beat up on ourselves that we're not able to keep up with people who were born on third when we weren't even in the dugout. Keeping perspective about the macro situation is very important, but it's also important not to fall into despair and to feel that the only way you could possibly build financial stability for yourself is by being born into it. So this video is really all about dispelling some of the myths about wealth and getting into some brass tacks about how you can leverage these insights to help build your own financial security.


Number one is that wealth building requires a windfall of cash. If romantic comedies like Gilmore Girls or the incessant Millennial builds first home by inheriting a bunch of money from their grandparents articles are to be believed, the only way for us to get a foothold in life is for some old wealthy relative to die and leave us a bunch of money, or to win the lottery. But, in reality, outside of the occasional windfall, the most reliable way to build wealth is by small, consistent contributions over time. And waiting around for any kind of windfall or feeling that it is what you need to start building real wealth can be incredibly counterproductive because, while it may not be that uncommon to receive something when a parent or relative passes away, getting a life-changing inheritance is not the norm. The wealthiest 1% of Americans receive an average inheritance of $719,000, while the bottom 50% averages just $7,900. And that's just the average amounts for people who receive an inheritance in the first place, which is not most people. According to data from the Federal Reserve, only 9.5% of individuals who have parents without a college degree expect to receive an inheritance, while 23.6% of individuals who have parents with a degree expect to receive assets passed down to them. And think about playing the lottery. We're fed stories all the time about people striking it rich, but rarely hear about the millions and millions who spend hundreds a year on lottery tickets and never win more than a few dollars. It's a function of what's called the availability bias, which causes us to overestimate our odds based on previous examples. To help put things into perspective, you're more likely to get killed by fireworks than you are to win the Powerball $750 million prize. But our cultural narratives around getting rich quick and the extent to which it's highlighted in our pop culture can give the impression that a windfall is what is standing between us and building wealth. But waiting around for it is a dire mistake, and underestimating the value of regular, small, consistent contributions is what often leads people to wait way too long to start saving for things like retirement. Don't Google inheritance laws in your state. Google compound interest.


Which leads us to our second myth, which is that you need to be hands-on in order to build wealth. A lot of us hold off on taking control of our longer-term finances because we mistakenly believe that we need to be really good with money or, God forbid, good with math in order to build long-term wealth effectively. But this kind of gatekeeping is intentional and really helps the already rich keep their monopoly on the market, while helping grifters who basically don't do much of anything step in to help you manage your money for you. Remember that one of the most powerful things you can do to increase your savings is to automate them so that you never even see the money being diverted from your check. And when it comes to savvy, long-term investing, the "set it and forget it" method into a well-diversified portfolio is generally the best way to go. But, spoiler alert, there are tons of tools available out there to help you build your long-term wealth slowly and consistently, and finding the right tools is actually one of the smartest things you can do for your money because it takes the emotions and guesswork out of the process. And if you're looking for a financial tool that does the heavy lifting for you, you should check out the app Digit. Digit just partnered with Metabank to build a bank account called Direct, making it the first all-in-one financial app that intelligently banks, budget, saves, and invests for you, no spreadsheets or mining stock market news required. After signing up, you'll tell Digit your bills and savings goals, and you can even set up investing and retirement. Digit will help you guide your money into separate dedicated accounts little by little, each day, so that you can make progress on each of your own specific goals without having to think about it. Best of all, you'll always know what's safe to spend. No more mental math in the grocery store checkout line. A tool like Digit can not only save you valuable time managing your finances, but can also help you make better decisions about your daily spending and help you make progress on building long-term wealth at the same time. Download Digit today, and start organizing your finances effortlessly so that you can feel more secure about your finances without being more hands-on. Click the link in our description to get signed up in just five minutes.


The third myth is that if you work hard and are loyal to your company, you will be rewarded over time. Now, let's be clear. Your main income is not going to be the defining feature of your wealth if you're spending all of it and not able to build wealth using it. You can be earning a very high salary and still living paycheck to paycheck. But increasing your income is one of the most sure ways to build wealth because, with more discretionary money to save, the easier it will be to build that wealth. But those of us with Boomer parents who had more traditional careers where they, like, worked for 45 years at the same insurance company and then got a fancy pen when they retired may have led us to believe that the key to increasing our income was to just be really loyal to one company. But the reality is that, save for a few exceptional situations, strategic job-hopping is going to be almost always the best way to make large increases in your income. According to a study from ADP, "the biggest beneficiaries are job-hoppers in the information industry, who realized a 9.7% annual wage growth; construction workers, with an 8.7% increase; and professional and business services with an 8.3% premium." Those who stayed at their companies earned about a 4% increase in pay. And, on average, those who chose to switch jobs enjoyed a compensation growth of 5.3%. Additionally, don't underestimate the importance of negotiating your salary, even early on in your career. According to one survey from ZipRecruiter, 64% of job searchers accept the first salary they're offered, which can have long-lasting impacts on their finances. "Because of this compounding effect, a successful negotiation even for a small annual increase can be significant. For example, "someone who negotiated their salary up from $40,000 to $45,000 and enjoyed an annualized rate of growth of 5% over a 45-year career would earn about $750,000 more during their lifetime than if they'd stuck with that first opening offer, according to calculations conducted by ZipRecruiter." Your company doesn't give a shit about you. Don't give a shit about them. I'm-- listen, I have a company. I give a shit about my employees, but I'm built different. [LAUGHTER] But, in all seriousness, if that company needed to cut costs, they would lay your ass off in a second without batting an eyelash. These hoes ain't loyal. Don't be loyal to them. Go out there and get your money. We hear all the time at TFD, you're like, oh my God, I've been underpaid chronically at my job for so long. I switched employers, and I got like a 35% raise. This happens all the time.


The fourth myth is that you need to own a home in order to build wealth. So owning a home has pretty much always been viewed as a solid investment because they do typically appreciate over time, and you've got to live somewhere. But while owning your own home can add to your overall net worth, it is far from being a clear-cut wealth-building guarantee. According to Investopedia, "Because home prices tend to rise over time, buying a home has traditionally been viewed as a safe investment. Still, an important point to consider when looking at a home as an investment is that it won't ever pay off unless you sell it. From a practical standpoint, even if your primary residence doubles in value, it probably just means that your real estate taxes have gone up. All of the gains that you experience are on paper until you sell the property." And even if the national housing market is on an incline, there's never a guarantee that you'll earn money on your home when you sell it. Plus, your specific home and location matter way more when it comes to the value of the property. For instance, even with markets in states like Utah and Arizona booming during the pandemic, property values in states like Louisiana and Pennsylvania saw little to no increase overall. And, additionally, renting has a lot of financial benefits that aren't discussed enough-- fewer upfront costs and paperwork, freedom to be more mobile, not being responsible for maintenance and repairs, no need to worry about falling home values, building credit if your landlord reports rent payments to credit bureaus, and no property tax bills. Owning a home can be the right move for many. We recently bought a home, and it was a sound financial decision as far as we can tell. But, ultimately, it's important to remember that real estate is speculative. You have no way of knowing where the market is going to be in your specific location 10, 15 years down the road, or possibly even earlier if you have to uproot yourself for a job or a lifestyle change. You make the best educated guess you can, and you get the best deal that you can afford. But, ultimately, it's not clear that it will pay off. And, as mentioned, you have to sell it all in one go in order for you to realize those gains. There is also, sometimes, the option of renting out your property, but, A, that's not always guaranteed to be something you're allowed to do and, B, it is far from guaranteed that that will be financially in your interest. Many people are forced to rent out a property and end up losing money month to month on their mortgage. Basically, similar to Boomers teaching us that the key to success was staying at one company until you die, most Boomers also taught their children that buying a home was the only way to build wealth and that they were throwing their money away if they rented. This was more true in their era, much less so in ours.


The number five myth is that you need to time the stock market in order to make money investing. So at TFD, generally, we never recommend individual stock picking, and especially not as any kind of major part of your strategy. If people knew how an individual stock was going to behave in a given time, the entire concept of the stock market wouldn't really make sense. The whole point is that there's a level of risk in the fact that it is, to some extent, unpredictable. And those who have privileged information and are able to time a stock, that's what sent Martha Stewart to jail. That's called insider trading. You're not allowed to do that. And you may be tempted to sell off a bunch of assets when you see the market take a dip, but it's important to remember that all of those gains and losses you're seeing are entirely theoretical until you sell. And trying to time the market in that way can almost guarantee that you lose money. "Timing the market can be incredibly difficult, and investors who engage in market timing invariably miss some of the best days of the market. Historically, six of the 10 best days in the market occur within two weeks of the 10 worst days. According to JP Morgan's Asset Management Guide to Retirement 2019, an investor with $10,000 in the S&P 500 index who stayed fully invested between January 4, 1999 and December 31, 2018 would have about $30,000. An investor who missed 10 of the best days in the market each year would have under $15,000. And a very skittish investor who missed 30 of the best days would have less than what he or she started with, $6,213 to be exact." Basically, the more time your money has to grow, the better. You need to be able to weather those downturns so you can hit those upturns. And predicting what is going to happen is something even the experts can't really do, again, unless they're trading in privileged information. Which is why the [MUTED] is Congress still allowed to trade stocks? Anyway, we'll link you in the description to a recent video by our resident investing expert Amanda Holden, which dives into this concept more thoroughly.


The sixth myth is that you need an advanced degree in order to build wealth. This video, brought to you by your girl Chelsea Fagan, who doesn't even have an associate's degree and went to a community college. Aha. I don't know where anyone who works at TFD went to college. They could have all gone to Hamburger University or Trump University, and I would be none the wiser. It doesn't matter to me. So, listen, while some industries still do require a college education or higher-- and, listen, there are probably some jobs that I wouldn't want someone doing if they didn't have the proper training. Like, I don't want a fellow Anne Arundel Community College dropout to be performing brain surgery on me. There is no rule that you can't invest your money or increase your income without a degree. Because, while it is true that our country does tend to be stratified along educational lines, as according to the Survey of Consumer Finances, "The mean high school graduate has a net worth of just over $300,000, while the mean college graduate has a net worth that is five times higher. Having a college degree is not a guarantee that a person will be wealthy. In fact, thanks to the overwhelming student loan crisis, it can often be the opposite. The top decile of wealth distribution, which owns a little over 3/4 of all household wealth, is overwhelmingly college-educated. Those with a high school degree or less make up less than 10% of this decile. In the lower deciles, you see a pretty reliable pattern, where the lower the decile is, the less educated it is. The exception to this is the poorest decile, which overwhelmingly consists of college graduates and individuals who had some college. Student debt, no doubt, explains the anomaly at the bottom." This is not to say that you should not seek a degree. It is, however, to say that it should be treated, first and foremost, as an economic proposition. The closer you can get to really making a cost-benefit analysis of your specific degree from your specific school and even the specific college within that school in how it's ranked, the average job acquisition and starting salary of graduates from the program, all of the information you can possibly use as well as, of course, doing whatever you can to minimize the amount of debt you have to take on is essential because just viewing a college education as a ticket to financial prosperity isn't really accurate and hasn't been for some time.


The last myth is that you can build wealth by just keeping your money in savings. A lot of us are very risk-averse when it comes to money, and that's understandable. As we talked about in a recent video, many people who grew up poor become incredibly cautious, to their own detriment when it comes to money later in life, even if they're earning enough not to have to be that way. But the reality is that savings accounts were simply not designed to actually or substantially grow our money over time. As of November 2021, the average savings account interest rate in the US was 0.06%. But let's say you find a basically mythical high-interest savings account with a 1.5% interest rate. If you save $6,000 a year, which is the current IRA contribution limit, starting this year and give your account 30 years to grow, you will save a total of around $180,000 and end up with $234,611 thanks to interest. But if you save the same amount in an investment account earning 8% interest, you'll end up with $740,075 in 30 years, nearly three times as much without doing anything differently except putting your money into a different type of account. A lot of people, especially people from financial instability, can overemphasize being conservative. But keeping your money in a savings account as opposed to putting it in the market isn't actually conservative. It's actually quite risky in terms of the missed opportunity of all the gains you could have realized with average market interest. And if you're looking to get started putting your money in the right accounts, we highly recommend you check out Digit at the link in our description.


 As always, guys, thank you for watching, and don't forget to hit the Subscribe button and to come back every Monday, Tuesday, and Thursday for new and awesome videos. Goodbye.