Social Media tends to be a hub for fear of missing out (FOMO) and jealousy. This is true even when it comes to finances. Nearly half of Gen Z social media users (those aged 18 to 25) reported negative feelings about their finances after seeing a social media post, according to a recent survey from Bankrate. In fact, 1 in 3 of all US adults report the same negative feelings, which is a higher percentage than any other aspect of their life including appearance, careers, personal relationships, and hobbies.
The ‘Joneses’ Advisor
These negative feelings being reported are a cause for concern considering almost no personal financial skills are taught in schools and social media tends to distort reality by allowing users to put their best foot forward or present an unrealistic version of themselves. This can lead to a “keeping up with the joneses” kind of competition. You don’t know if the person posting funded that vacation with debt or circumstances that do not apply to you.
What is even more concerning is that this “keeping up with the joneses” mentality seems to also apply to financial and tax advice. Phrases like “use the same strategies as the ultra-rich” or “what they don’t want you to know” are common in posts about investment or tax planning, often posted by people without a professional license who have nothing to lose and a large social media following to gain.
These posts can convince people there are big secrets to wealth building that are being leaked. They become dissatisfied with their current advisors (if they are working with one at all) and a search for one that will provide gimmicks and loopholes to the luxury lifestyle they see on social media.
Just like when you buy a vehicle be the coolest in your friend group, this path provides no results at an extremely high cost.
The Path to Financial Freedom
The social media version of financial freedom shows users that you can trick your way there or get lucky. It is actually part of their business model. If there is a chance your post can go “viral” and engaging with people on the platform can grow your following, you’ll spend more time scrolling and help the platform make more money. The University of Michigan posted a great article on how social media mirrors gambling.
The true wealthy understand that there are no tricks. Building a fortune takes consistent effort and sacrifice over a long period of time. You’ve got to be willing to spend less than you make, find good opportunities to invest the margin, and continue to do this over a long time horizon. Author of ‘Rich Dad Poor Dad’ Robert T. Kiyosaki reminds us that “it’s not about how much money you make, but how much money you keep.”
The financial freedom calculation is when passive income generated from investments exceeds your living expenses. Here are some tangible steps to get started on a real path to financial freedom:
STEP 1: Understand your living expenses
The first step to financial freedom is not flashy investments or tax strategies, it is getting an understanding of your living expenses. What are they right now? Is there anything that should be added or cut? What will these be in five to ten years to consider family growth or life stage?
STEP 2: Create margin
There has to be money left at the end of the month to invest in order to achieve financial freedom. This is the uncomfortable step because it often means making sacrifices.
The best advice when creating margin is to look at percentages instead of numbers. The average person spends over 30% of their income on rent or their mortgage, and other large expenses might come into view such as car payments, alcohol/bars, and internet shopping. It is very likely that by considering the items that take up the largest percentage of your monthly income, you may be able to create substantial margin without giving up your favorite restaurants, hobbies, and entertainment.
It is also important to understand that it is more efficient to create margin by cutting expenses, rather than increasing your income. This is due to the taxes on each additional dollar earned. For example, if you're in a 25% tax bracket, you would need to earn $1.33 in additional income to have $1 after taxes. In contrast, cutting $1 in expenses saves you the full $1.
If you want to create massive margin, check out Chapter 4 of ‘Set For Life’ by Scott Trench, where he discusses how you can make your first real estate investment and live rent and mortgage free!
STEP 3: Consistently Invest
Everyone will have a different preference on how quickly they achieve financial freedom. That is because there are many levers at play. First, very low living expenses will mean financial freedom can be attained with less invested assets. Assuming a 5% safe withdrawal rate and only $3,000/mo in spending, you would only need $720,000 of invested assets to be living on passive income. However, someone who needs $15,000/mo will need $3,600,000. (Monthly Needs x 12) / 0.05
The next lever is the margin in your budget. If you can save $10,000 per month, it will take 6 years to become financially free in the first scenario ($3,000/mo at a 5% safe withdrawal rate). However, if you can only save $1,000 per month, it will take 60 years. On average, those who save the commonly recommended 10% of their income will need to work and save consistently for 51 years to achieve financial freedom, and those who save 70% of their income will be able to do it in less than 10 years.
The last lever is the safe withdrawal rate. A 10% safe withdrawal rate will create financial freedom faster than 5%. Be cautious when calculating your safe withdrawal rate as it should achieve two main goals: 1) it allows you to reinvest and continue to grow your asset base and, 2) it is consistent with your investment’s historical performance. Many people who have control over their investments, such as business owners and real estate investors, can get away with higher safe withdrawal rates due to typically higher return-on-investment. Those who invest in completely passive vehicles such as the stock market may need to use lower safe withdrawal rates.
When should I get advice?
During your journey of wealth building, it is smart to get professional advice for your investment and tax planning. Be cautious in taking generalized advice when the source is coming from someone trying to grow a following or make a sale. There are excellent investments and tax strategies that may not apply to your financial situation or be consistent with your life goals, and some may even come at the detriment of those goals.
Since investment and tax planning are unique to each individual and business, three phases are recommended for getting professional advice.
Phase 1 (just getting started, $0 - $100,000 net worth, $0 - $50,000 business profit):
To Do: At this stage it is extremely important to do your own research and reflecting. Read books and articles from trusted sources and look at your saving and spending patterns. You may reach out to advisors at this point, but do so asking for suggestions on books and articles to read.
Goal: You will create a strong foundation of the basics for financial success. It is unfortunate that basic investing, budgeting, and tax concepts are not taught in schools, but you will gain this knowledge and start to see some traction.
Phase 2 (gaining traction, $100,000 - $1,000,000 net worth, $50,000 - $250,000 business profit):
To Do: Now it is time to interview investment and tax advisors. Before you do, make sure you have a clear understanding of your business and personal goals. You are not ready for phase 2 if you are unclear about the path you would like to take, and your plan will reflect that. Many people who are frustrated with their advisors should consider if they have clearly communicated their goals.
Goal: You will learn more advanced strategies that are specific to your financial situation and goals from advisors who have dedicated their career to creating plans for people like you. You’ll also be able to ignore the noise of salesmen giving financial advice on social media.
Phase 3 (protect your wealth, $1,000,000+ net worth, $250,000+ business profit):
To Do: Now you will use your advisors to protect your wealth. This includes reinvesting to continue to grow your net worth, staying current on tax opportunities specific to you and your goals, legal protection, and if you are a business owner this may include exit planning.
Goal: Continue to grow your net worth while protecting and enjoying what you’ve built. (Don’t forget to enjoy the journey!)
Conclusion
Financial and tax advice is not a one-size-fits-all, which is why you won’t find many credentialed advisors giving tips on social media. When you hear something interesting that would benefit your financial goals, vet the person giving the advice. What is their background? Do they have any credentials? Then, run the strategy by multiple people, including a credentialed expert who doesn’t make money selling that strategy.
Be extra weary of anyone hoping to sell you something by flashing their lavish lifestyle on social media and their investments. They are getting rich from selling you a course, not their investments. Studies show that actual millionaires downplay their wealth.
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