S3E12: Everyone Gets This Wrong About Building Wealth
Can you really get rich by cutting costs? Is the 4% rule right for everyone? What are the biggest mistakes we make when it comes to tax? Chris Bourne has worked in the finance industry for over 20 years and is a personal finance Youtuber.
What you should remember from this episode
Chris Bourne is a financial planner and YouTuber. You can check out his course on financial planning with the software a lot of advisors use here.
Although the stock market has always increased over the long term historically, there have still been periods when it has fallen for consecutive years which is a tough place to be as an investor.
Chris has seen intelligent people make bad decisions with money because of psychology. It’s easy to say that you’re happy to ride out the downtowns, but it’s much harder to do in practice when you see your portfolio is down by huge amounts.
Beware the optimism bias - humans think things are likely to be better than they will be.
Chris thinks there’s probably more opportunity for the young today to build wealth than there has been historically (e.g. access to information and investment platforms) but he also thinks there’s more risk in some ways because we could be working for longer so we need to plan well or we’re gonna be in trouble.
He thinks a big misunderstanding of how to build wealth is focusing on cutting costs. He argues that it should be about the value you can create, not the costs you can cut.
He also thinks something that creators (like Damo!) can get wrong is basically framing index funds as good and active investing as bad. It’s more nuanced than that, he argues. If you’re looking at a global fund or the US, he says your best bet is generally an index because the markets are so efficient, and it’s the best in terms of cost - but it’s not true of all markets, e.g. India.
The 4% rule doesn’t come into his thinking as a financial advisor because it is too generic. The 4% rule is a popularised ‘safe withdrawal’ rate, e.g. if you had £1m, you could take out £40k/year without eroding the £1m.
To figure out your financial plan, first think about what you want from life like housing, career, family, etc. then work back from that. What does your dream life cost? What do you need to earn to afford it?
As soon as you’re born you can have a pension and the earlier you can do it the better because compounding over 60 years or however long is hugely valuable.
There are great tax allowances for children - Chris says you can get close to £200k/year that you can put into tax efficient accounts (if you’re a family of two adults and two children).
How should you think about allocation of pensions Vs ISAs in, say, your 30s? It’s down to circumstances and when you want to access that money. He says you should plan your different stages of income. You’d generally allocate more towards ISAs because there are no time locks, but the tax allowances generally make pensions the most powerful vehicle.
