Blog | Personal Finance

Simple is as Simple Does

Why most money “experts” are too smart for your own good

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I have a friend who admits that when he was writing papers in college, he often didn’t understand what he was writing about. So, he would use big words and long sentences to hide that fact. He figured it would make him look smart and surprisingly, it worked. He graduated top of his class.

Another friend of mine worked in churches for a long time. He told me that he once saw in the notes of a very popular preacher something like this in the margins of the paper, “Weak point. Yell here.”

What is the point of these two stories? You often can’t trust an “authority” on a subject just because they are winsome. At some point, you have to actually understand and make up your own mind.

Finance is easy?

This is especially true when it comes to the financial services industry. A recent report by VisibleThread, “a company that offers tools to analyse how well corporate websites communicate,” reveals that the websites of 69 global money managers were some of the most jargon-riddled around.

“We broadly got poor readability and poor accessibility—a jargon-laden result,” they said. To the point of my friend who wrote long sentences when he didn’t know what he was talking about, VisibleThread found, “Long sentences made up 25 per cent of the written material that was examined, compared with a target level of 5 percent of clearly written content.”

“The Globe and Mail” columnist Rob Carrick writes that the underlying reasons for the financial industry using so much jargon and so many long sentences is a desire to impress clients by sounding lofty and because, “There’s also a power dynamic at work here—staying incomprehensible helps the investment industry perpetuate the idea that it, and it alone, can manage your money.”

Hiding something

While Carrick is probably right, I think there’s another reason. The personal finance industry has many hidden fees that eat deeply into the returns of those that use their services. In fact, Warren Buffett estimates that brokerage fees decimated over $100 billion in wealth over the last decade.

Want to know the worst part?

Most people don’t even know that they are paying these fees. As Tony Robbins wrote in his book “Unshakable,”

The nonprofit organization AARP published a report in which it found that 71% of Americans believe they pay no fees at all to have a 401(k) plan. (Put another way, more than 7 out of 10 people in America today are completely unaware that they are even being charged a fee to participate in their 401(k) plan!)

92% admit that they have no idea how much they’re actually paying.

The question you must ask yourself is what does it profit the financial industry to write in such complicated ways? By doing so, they prey on those who have little-to-no financial intelligence. They want you to not understand because they can then continue to charge high fees.

My rich dad used to say, “Do you know why they call them brokers? Because they’re broker than you.” Millions of people trust their hard-earned money to brokers, but the reality is that most brokers are simply salespeople for large financial firms that want your money not to provide returns but to charge fees.

As Jack Bogle, the founder of the low-cost index fund Vanguard, shares in Robbin’s book:

“Let’s assume the stock market gives a 7% return over 50 years,” he began. At that rate, because of the power of compounding, “each dollar goes up to 30 dollars.” But the average fund charges you about 2% per year in costs, which drops your average annual return to 5%. At that rate, “you get 10 dollars. So 10 dollars versus 30 dollars. You put 100% of the capital, you took 100% of the risks and you got 33% of the return!”

In plain English, that’s a bad deal.

Gain true financial understanding

A long time ago, I made the decision to try and write my books and articles at a seventh-grade level. I did this because I wanted to take the mystery out of financial education. The mission of Rich Dad is to help improve the financial lives of millions of people. I can’t do that by writing in a complicated way about things that are really quite simple to understand.

For instance, accountants use complicated models to make it seem like your house, cars, and other items are really assets. But I use a simple model that makes sense in the real world. An asset is something that puts money in your pocket, and a liability is something that takes money out. By those definitions, a house and a car are liabilities, not assets—unless they are rentals that bring you money each month. Then, they are assets.

Thus, someone who rents a house on Airbnb and covers their expenses with the income has an asset. Or rental car company that covers the cost of their cars with rental income has cars that are assets. But your personal house and care are simply liabilities.

A lifetime of learning

However, just because something is simple doesn’t mean that it is easy. It’s actually harder to take something and make it simple. And once you understand something simply, it’s not always easy to put it into practice.

Thus, while it’s simple to understand the difference between an asset and a liability, it’s not easy to spend your life building a cash-flowing portfolio of assets. It takes a lot of work to become an expert on finding and acquiring great assets, but it’s also a lot of fun. It may be simple, but it also takes practice.

I’ve spent my life learning how money works and continue to do so. My commitment to you is to continue sharing my knowledge, making it as clear and simple as possible. Your commitment should be to get true understanding and to dedicate your life to learning as well. That is the true path to being rich.

Original publish date: July 10, 2018

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