Gotta be honest with you, the title of this article is 100% clickbait and there is a reason for that, if you read until the end you will see that lots of people are allowing some kind of businesses to earn +20% every single year without even noticing it... And the bad part of the history, is that those that pay the expenses are the ones who are getting broke every year because of that.

If I wasn't clear enough this is not an article where I teach you how to earn that percentage on you investment, is about how lots of people (and maybe you too) are paying that amount to others.

In articles before, I mentioned about creating a fund and how much we will need to have a decent amount after a long period of time, in all of them I always mentioned a 7% return and probably you will ask how can I get more?. Well unfortunately that's not the point of this article (but maybe you could open a similar business from the example eh ;D), in this article we are going to talk how daily tools are screwing people while the owners of those tools are making +20% on their investment.

Credit cards: The common devil

Don't get me wrong, I know credit cards are a powerful tool if they are used correctly but we need to be honest: The majority of people don't know how to use them without getting broke.

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
- Albert Einstein

I will never get tired of what Albert Einstein said. Why? well because what he said is one of the things that separates wealthy people from those who aren't. Credit cards are the best example of this and is where we can learn a lot.

Firs, what is a credit card? You will say it's a tool to get money you don't have and yeah we all know that but... What is a credit card? Well, it's the product banks use to get richer while the majority of people get broke and I know this sounds a little anti-establishment guy (which I'm not) but it's an easy way to see it.

A credit card is the perfect example of what Albert Einstein said because He who understands it (The bank), earns it. He who doesn’t (Most of the credit cards users), pays it.

Let's run some numbers to understand it better. Let's imagine you listened to me and you decided to start your fund for your family, you started digging and you found out that earning more than 10% (cashflow) a year constantly is kind of risky so you decided to buy good quality dividend stocks but you saw that you will only get between 2% and 3% from those companies.

So you calculate your returns and you saw that your USD$ 10,000 will need 178 years to reach our target of USD$ 800,000. At that point you started saying "Goddammit that kid on internet fooled me, it's impossible to get the amounts he said" and you went to the store to buy a 82" 8k OLED TV with your credit card because you realized life is too short to think about money, funds, returns and all that shit... And that my little friend, is what Albert said.

How much money I'm giving to my bank?

Well, that useless TV you got with your credit card will make you happy so why should you bother about it right? Happiness is priceless right?.

Let's imagine that useless TV costed you USD$ 5,000 and the bank will let you pay it in a period of 12 months paying only USD$ 500 each month just because you are the perfect client and you always pay on time... Well, your bank will earn 20% on their investment in a year, you should be proud of it right?

Is not only with credit cards

Believe it or not, every day a new system to give credit to people is being cooked and credit is not a bad thing alone but is a dangerous tool if is not used in a correct way...

And that applies to all kind of consumer credits, let's take the example of a car. You wanted to buy a car and you had USD$ 5,000 in your bank account, but the car you want costs USD$ 25,000 so you put those USD$ 5,000 as a down payment and pay USD$ 430 each month for 60 months...

At the end of that period you will have a car which value will probably be only USD$ 15,000 and you will have spent USD$ 25,800 + USD$ 5,000 (the down payment). You spent USD$ 30,800 and you ended up with a USD$ 15,000 liability... What's the percentage you got on your investment? Well, at least your dealer got +20% on their investment.

Do you see a path in these examples? If not, I'm referring to credit used in a non-investment way. If instead of buying the car you put those USD$ 5,000 in a place where at least you get a modest 4% per year and you also add USD$ 430 each month (same amount you would be paying to the car dealer), you will have a total of USD$ 34,540.24 in the same period of time... What is better? a USD$ 34,540.24 fund which grows every single year or a car which price is only USD$ 15,000?

There are two ways to conquer and enslave a nation. One is by the sword and the other is by debt.
- John Adams

Pay on time, avoid paying interest to anyone but you

If you pay on time you shouldn't be charged, follow this: If you can't pay it in cash, most likely you can't afford it and you should not use a credit... I know not all stuff can be purchased with cash like houses but those are different kind of products and sure we will talk about them later.

Imagine how much money people loose every year just because they use credit to buy stuff that won't generate wealth overtime, will you waste your money too? Take care.

Cool, I want to start putting some money in a family fund but how can I know how much do I need to invest into it?. There is no general answer and it will depend on how much money you ear, how much money can you save and specially how much money do you need to afford your lifestyle.

In my previous post (check it here) I mentioned that if we want to build a pension for our children we only need to invest an amount of money when they born and let it grow over the years. I also mentioned that I prefer to actively invest money into the fund so it grows even more... But the example I gave was the "regular" example most of the people use to calculate a pension for someone who lives in the United States, what about those that don't? how do I know if that amount is enough? could be lower? Let's figure out.

How much does my lifestyle cost me every month?

First thing you should calculate is the amount of money you need each month to survive. To do this take a piece of paper and write every expense you do during the month, from the tip you give to the delivery guy up to the rent you pay (which is probably your biggest expense).

After you have this number, compare it to the amount of money you spent the month before, if you track all of your expenses this shouldn't be a problem... And if you aren't tracking then what are you waiting for?

After you have compared them you should try to separate your needs and take that number but to be honest at this point it doesn't really matter because this initial number will change multiple times so let's keep it simple for now. The idea is that you should constantly track your expenses and knowing exactly how much do you need each month.

I know how much I need each month... now what?

As soon as you know how much money you need we can start running the numbers. For example, imagine that you live in a mid range city in Colombia and you need USD$ 500 to live each month (I choose Colombia so you can compare this number with the ones I said in my last post).

These USD$ 500 will be enough to pay the rent, food, services and a couple of useless expenses... How do we calculate the amount we need? Well, it depends but to keep it simple let's imagine our fund is giving us a 5% of it's value in dividends each year.

If we need USD$ 500 each month, it means we need USD$ 6000 per year so if we want to know how much do we need invested we can do a simple math: (100 * (500 * 12)) / 5 = 120000... And we have found that to earn USD$ 6000 from our fund ever year we will need USD$ 120,000 invested.

Wait... Don't forget that lovely government wants his cut too.

Because we are earning money from our fund, we need to pay taxes and that means we actually need more money invested (and we will pay more taxes too but well... taxes).

Let's assume you will pay 20% in taxes (I have no idea how much taxes you pay in Colombia so I picked 20% since it's a common tax in many places). Now let's update our formula to include it: (100 * ((500 * 12)/(1-0.20))) / 5 = 150000. Now we know that we actually need USD$ 150,000 invested, from this we are going to earn USD$ 7,500 each year and we are going to pay 20% of it in taxes (which is USD$ 1,500). After paying our taxes we are going to have our expected USD$ 6,000.

There are ways to optimize this and pay less taxes with offshore business/foundations but it's expensive and it's easier to just move to a tax heaven instead.

Let's calculate how much should we invest to reach our goal

We already know the amount we need invested in our fund to afford our lifestyle, now we are going to calculate how much do we need to invest each month to reach that goal.

Your child's pension

If we only want to invest to build a pension for our kid, we should invest it as soon as possible (even better if you start before the birth date) so we have a long period of time earning a compound interest. How much will your child need in 65 years? well if you currently need USD$ 500 to live, let's say USD$ 1,811 will be enough (this is the a mount of inflation at 2% per year in 65 years).

Let's run the numbers: (100 * (1811 * 12/(1-0.20))) / 5 = 543300. So from this fund of USD$ 543,300 invested, your child will receive a 5% every year and that's USD$ 27,165 and will pay 20% in taxes (USD$ 5,433). At the end a total of USD$ 21,732 will be in his hands each year (which is USD$ 1,811 to spend each month).

Ok, now that we know how much it's needed, how can we reach that amount of money? We have two ways: Single or Multiple investments (To be honest, there are more but basically all can be separate in these two categories). Let's see both ways and we will be using a 7% of grow per year like in my last post.

• Single investment: This method is a single investment we do when our child is born and we will let the investment grow over 65 years without touching it. To reach the USD$ 543,300 we will need to invest USD$ 6,684.89.

• Multiple investment: This method means we will be investing money during a period of time, if we start when our child is born and we stop after 65 years... we will need to invest each month the little amount of USD$ 38.27

Is that easy?

Believe it or not... It's that easy. Some people will say that we don't actually need that amount because we can just liquidate our funds and live from that. And yes that's true, if we do that we will need an smaller fund but to me that's not the point of a family fund. The idea of building this fund is to build something that it last for generations, if we start liquidating the funds then we are destroying that future (plus we will need to pay taxes when we liquidate the funds).

I hope this helps in your journey, we will go deeper into this subject in future posts because we still need to learn how to earn that 7% annually, how to avoid taxes in your fund, how to protect it against others and more. Take care.

Saving enough money for the moment we can't work anymore is not an easy task, many people rely on governments, the help from others or even have many kids so they take care of them when they are old... But, what if I tell you that you can build a pension for your children before they born with an easy plan, would you believe me? Spoiler: you should.

If you're reading this is probably that no one in your family did this for you and that's ok, nobody did it for me either but hey! It's never too late to start a new goal right?

But why not just using the government's pension?

Well, if you want a short answer I will say: Because you should not trust your government... But I'm not here to throw bad stuff about the government (or at least not in this article) so let me explain you why relying in the government maybe is not a secure bet.

Our government can go to a war

Let's jump into the first issue we could face: Instability. Governments are famous for one thing, they fight each others. So if we want to rely on them then we also need to know that there is the possibility our country starts a fight we can't win (somebody said Vietnam?) and as a consequence our pension is affected too.

Our government can destroy our country

Another reasons our country could go south is the changes between rulers, presidents always make changes but that doesn't mean all of them will be in the correct direction. Let's take the example of Venezuela (from where I am), it was one of the most advanced countries in Latin America where people could live and live without too much issues...

But then in 1998, Chavez won the presidency and so the disaster started. The country went from the Latin American dream to the most dangerous, corrupted and poor country in the region. All this in just two decades in a country where oil was as abundant as arepas in the street so imagine you bet the future of your family in a country where in just 20 years the currency went from 1 US Dollar = 564.5 Bs to 1 US Dollar = 184,058,800,000,000 Bs (probably when you read this it's already an old number and it's worst now).

These are probably the best examples of why it's dangerous to bet in just one country, some countries haven't faced this and I hope they never will but I'm not the one who is going to risk my family's future.

We're lucky, we were born in Venezuela and we know how bad a country could go... It means we learned we can't blindly believe in a country.

The investment approach

If you're from Latin America it's probably you have heard that investors baaad and the "pueblo" goood... Nothing more useless than that in our goal, investing is the way to go and you will see why. My strategy is not something I invented and is not even something new, it's just a well kept secret that only the elite, the 1%, the illuminati, the lizard people, those who rules everything you think and every you do could ever known... You know where I'm going with this right? If not then no problem, sometimes I just like to say stuff without mayor reasons.

Straight to the point

The idea with the investment approach is that we invest some money and this money grows enough so our children will have a pension to live from when they are old and they will never need to worry about it. This is possible to achieve in multiple ways but I mention the easiest one and also my way to do it.

But before explain it, we need to understand how is this possible. The magic in this strategy is the compound interest and the time, you will see that a little amount of money can grow into millions if is compounded enough time.

"Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it".
Albert Einstein

The easy method: One index, one investment.

The easiest method is investing in the stock market through ETFs, these ETFs need to target indexes and of course those indexes needs to be from good economies. Let's take the S&P500, one of the most famous indexes in the world which tracks the most important companies in the biggest market today (the US market). This index has growth on average 7% per year since it was created (it includes "inflation", more on this later) so we will take this number as a base for our examples... BUT we always need to remember that nothing in the life is secure and that 7% could be different in the future (and that's why I have my strategy, I will tech you that too).

Some experts say that only USD$ 6,500 are needed for your children but because I'm not that optimist I will take a bigger amount: USD$ 10,000.

If we invest USD$ 10,000 in the S&P500 (to be honest it could be everywhere you can reach a 7% annualized in the long term) when they born and we wait 65 years your child will have USD$ 812,728.61 for its retirement which I believe is enough to live... Magic.

And don't believe me, believe the numbers. Here is a chart of how the price of this index has increased over the years.

So, in theory the only thing you need to do to secure your kid's pension is investing USD$ 10,000 the same day comes to this world and you will be happy because when your child is 65 years old he will have enough money to spend... To good to be true? Well kind of and it's because All that glitters is not gold so let's talk about the main issue we could face with this One index, one investment strategy.

Single point of failure

We know that this index tracks 500 companies so we are diversified right? well... not that much. See, if we only invest in this index we are betting that the US market will continue growing every year during the next 65 years at the same rate. If we only bet in one country's market... isn't that the same of hoping our government will take care of us? Some people will say it's similar, it's up to you.

Also, if we only invest in one kind of asset (an ETF in this case), it means we are exposed to only one kind of asset which isn't recommended either... And to be honest, this strategy relies to much in the S&P500 which is not a good approach in my opinion BUT it helps us understand why investing in the right market and waiting is so profitable (at least big names like Warren Buffet recommend people to just buy the S&P 500).

The active approach: Continuous investment.

The main idea with all these strategies is to get at least 7% BUT why should we only invest once in those 65 years? What if we invest more money each month? The answer is that the money will grow a lot more... Let's see some examples:

• USD$ 10,000 to start and USD$ 25 every month: Our kid's fund will grow up to USD$ 1,167,657.85 at the end of 65 years. Just because we invested USD$ 25 more every month the fund increased 30% more.
• USD$ 10,000 to start and USD$ 100 every month: The fund will be USD$ 2,232,445.58 in 65 years, more than double of the money your kids will have if you don't invest more money.

Don't believe me? Check this picture:

The family's fund.

But... why only thinking about our children? why not building a whole family's fund? Well, that's my goal. Maybe we don't have enough money and probably we won't be able to enjoy the profits from this fund, but if we follow this plan and we keep constantly adding money to this fund we can build wealth and our next generations will have a fund from where they can get money to live, they will have more opportunities and will have an easier life just because we decide to start it...

Don't know about you but to me that's a pleasure, it's a pleasure to know that we can change our grandchildren's life and they will have a tool we didn't have. One think to have in mind is that we also need to secure this funds so no one in our family could ever waste it and I will talk about it later in another post, how to secure it, how to avoid inherit taxes, etc... It's a big subject and there is a lot knowledge we can get out there.

Of course, this is not a fast way to get rich... but it's the easiest way and it's the method millionaires have been using for decades. Take care.