MONEY Master the Game: 7 Simple Steps to Financial Freedom (8 page)

We all know the drag of taxes, to some degree, but few realize just how big a bite taxes take from our ability to achieve financial freedom. Sophisticated investors have always known this: it’s not what you earn, it’s what you keep that matters.

The greatest investors in the world understand the importance of tax efficiency. Just how destructive can taxes be when compounded over time?

Let’s try a metaphor: say you’ve got one dollar, and somehow you’re able to double it every year for 20 years. We all know this game. It’s called compounding, right?

After year one, you’ve doubled your dollar to $2.

Year two: $4.

Year three: $8.

Year four: $16.

Year five: $32.

If you had to guess, what do you think your dollar has grown to by year 20?

Don’t cheat and peek ahead. Take a moment and guess.

Through the magic of compounding, in just two decades your dollar turns into (drumroll, please): $1,048,576! That’s the incredible power of compounding!

As investors, we want to tap into this power. But, of course, the game is not that simple. In the real world, Caesar wants to be paid first. The tax man is looking for his piece. So what’s the impact of taxes on the same scenario? Once again, take a guess. If you’re fortunate enough to pay only 33% in taxes per year, what do you think your dollar has now grown to after taxes in 20 years?

Again, take a moment and really guess.

Well, if the tax-free number was $1,048,576 . . . hmmm. With 33% tax, would that be about $750,000? Or even $500,000? Think again, Kemosabe.

Now let’s look at the next column and see the incredible dollar-draining power when we take out money for our taxes each year before compounding—doubling our account. Assuming an annual tax rate of 33%, at the end of those same 20 years, the actual net amount you’ll end up with is just over $28,000!

That’s right, $28,000! A difference of over $1 million—and that doesn’t even account for state taxes!
In some states, such as California, New York, and New Jersey, you can expect the total to be significantly smaller still.

Sure, this dollar-doubling, dollar-draining scenario is based on returns you’ll never see in the real world—but it illustrates what can happen when we neglect to consider the impact of taxes in our financial planning.

Given the way things are going in Washington, do you think taxes are going to be higher or lower in the coming years?

(You don’t even have to answer that one!)

In section 5, I’m going to give you the “in” that until now was available only to sophisticated investors or ultra-high-net-worth individuals. I’m going to show you what the smartest investors already do—how to take taxes out of the equation, using what the
New York Times
calls “the insider’s secret for the affluent.” It’s an IRS-approved method to grow your money tax free, and you don’t have to be rich or famous to take advantage of it. It could literally help you achieve
your
financial independence 25% to 50% faster, depending upon your tax bracket.

No person is free who is not master of himself.

—EPICTETUS

But plan or no plan, the future is coming on fast. According to the Center for Retirement Research, 53% of American households are “at risk” for not having enough money in retirement to maintain their living standards. That’s more than half! And remember, more than a third of workers have less than $1,000 saved up for retirement (not including pensions and the price of their home), while 60% have less than $25,000.

How can this be? We can’t blame it all on the economy. The savings crisis started long before the recent crash. In 2005 the personal savings rate was 1.5% in the United States. In 2013 it was 2.2% (after topping 5.5% at the height of the meltdown). What’s wrong with this picture? We don’t live in isolation.
We know we need to save more and invest. So why don’t we do it? What’s holding us back?

Let’s start by admitting that human beings don’t always act rationally. Some of us spend money on lottery tickets even if we know the odds of winning the Powerball jackpot are 1 in 175 million, and that we are 251 times more likely to be hit by lightning. In fact, here’s a statistic that will blow your mind: the average American household spends $1,000 a year on lotteries. Now, my first reaction when I heard this from my friend Shlomo Benartzi, the celebrated professor of behavioral finance at UCLA, was, “That’s not possible!” In fact, I was recently at a seminar and asked the audience how many had bought a lottery ticket. In a room of 5,000 people, fewer than 50 raised their hands. If only 50 people out of 5,000 are doing it and the average is $1,000, then there are plenty of people buying
way
more. By the way, the record is held by Singapore, where the average household spends $4,000 a year. Do you have any idea what $1,000, $2,000, $3,000, $4,000 set aside and compounded over time could be worth to you? In the next chapter, you’re going to discover how little money it takes to have a half million to one million dollars or more in retirement that requires almost no time to manage.

So let’s turn to behavioral economics and see if we can’t find some little tricks that could make the difference between poverty and wealth. Behavioral economists try to figure out why we make the financial mistakes we
do and how to correct them without even our conscious awareness. Pretty cool, huh?

Dan Ariely, renowned professor of behavioral economics at Duke University, studies how our brains fool us regularly. Human beings evolved to depend on our sight, and a huge part of our brain is dedicated to vision. But how often do our eyes deceive us? Have a look at the two tables below.

If I asked you which table is longer, the narrow one on the left or the fat one on the right, most people would naturally pick the one on the left. And if you were one of them, you’d be wrong. The lengths of both tables are exactly the same (go on, measure them if you don’t believe me). Okay, let’s try it again.

Which table is longer this time? Wouldn’t you bet anything that the one on the left is still longer? You know the answer, and yet your brain continues to deceive you. The one on the left still looks longer. Your eyes haven’t caught up with your brain. “Our intuition is fooling us in a repeatable, predictable, consistent way,” Ariely said at a memorable TED Talk. “And there is almost nothing we can do about it.”

So if we make these mistakes with vision, which in theory we’re decent at, what’s the chance that we don’t make even more mistakes in areas we’re not as good at—financial decision making, for example? Whether or not we think we make good financial decisions, or poor ones, we assume
we’re in control of the decisions we do make.
Science would suggest we’re not.

Just like the visual illusions we’re susceptible to, Ariely told me later in an interview that he chalks up many of our decision-making mistakes to “cognitive illusions.” A case in point: If you were to walk into your local Department of Motor Vehicles tomorrow and be asked the question “Do you want to donate your organs?” what do you think you would say? Some of us would immediately say yes, and think ourselves selfless and noble. Others might pause or balk or be turned off by the gruesomeness of the question and decline. Or maybe you’d punt and say you need time to think about it. Regardless, you’d assume that your decision is based on free will. You are a competent and capable adult, qualified to determine whether or not to donate your organs to save a life.

But here’s the thing: a lot of it depends on where you live. If you are in Germany, there’s about a one-in-eight chance you’ll donate your organs—about 12% of the population does. Whereas in Austria, Germany’s next-door neighbor, 99% of people donate their organs. In Sweden, 89% donate, but in Denmark, the rate is only 4%. What gives? Why such a disparity?

Could it be about religion, or a fear factor? Is it based on culture? It turns out the answer is none of the above. The huge disparity in donor rates has absolutely nothing to do with you personally or your cultural heritage. It has everything to do with the wording on the form at the DMV.

In countries with the lowest donor rates, like Denmark, there is a small
box that says, “Check here if you want to participate in the organ donor program.” In countries with the highest rates, like Sweden, the form says, “Check here if you
don’t
want to participate in the organ donor program.”

That’s the secret! Nobody likes to check boxes. It’s not that we don’t want to donate our organs. That little bit of inertia makes all the difference in the world!

If a problem is too overwhelming, we tend to just freeze and do nothing. Or we do what’s been decided for us. It’s not our fault. It’s the way we’re wired. The problem with organ donation is not that people don’t care, it’s that they care so much. The decision is difficult and complicated, and many of us don’t know what to do.
“And because we have no idea what to do, we just stick with whatever is chosen for us,” says Ariely.

This same sense of inertia, or picking what has been chosen for us, helps explain why only a third of American workers ever take advantage of available retirement plans. It explains why so few of us have made a financial plan for our futures. It seems complicated. We’re not sure what to do, so we punt, or we do nothing at all.

Ariely told me that when it comes to the physical world, we understand our limitations and build around them. We use steps, ramps, and elevators. “But for some reason, when we design things like health care and retirement and stock markets, we somehow forget the idea that we are limited,” he said. “I think that if we understood our cognitive limitations in the same way that we understand our physical limitations, even though they don’t stare us in the face in the same way, we could design a better world.”

Remember what Ray Dalio said about going into the jungle, that the first thing he asked himself was,
“What don’t I know?”
If you know your limitations, you can adapt and succeed. If you don’t know them, you’re going to get hurt.

My goal in this book is to wake people up and give them the knowledge and the tools to take immediate control of their financial lives. So I’ve created a plan that won’t trip you up because it’s too complex, or too hard, or time intensive. Why? Because, as we’ve seen from those DMV forms,
complexity is the enemy of execution.
That’s why I’ve divided this plan into 7 Simple Steps and created a powerful new smart phone app, completely free, to guide you through them. You can download it right now by going
to
www.tonyrobbins.com/masterthegame
. You can check off your progress as you go, and celebrate your victories along the way. The app will support you, answer your questions, and even give you a nudge when you need it. Because you’re going to get excited and have the best intentions, and then a few distractions or an attack of inertia can knock you off target. This automated system is designed to prevent that. And guess what?
Once you’re done, you’re done. After your plan is in place, you’ll have to spend only an hour or so once or twice a year to make sure you’re on course.
So there’s no excuse not to stay on the path to a lifetime of financial security, independence, and freedom—and have plenty of time to enjoy the things that really matter to you!

Hopefully, by now your mind is churning. I know I’ve given you a lot to think about so far, but I’m committed to creating lasting breakthroughs in your financial life, and I want you to get a clear picture of the road ahead. So let’s take a quick walk through the 7 Simple Steps to Financial Freedom.

If you belong to a generation raised on blogs and tweets, my guess is that you’re saying: “Why don’t you just put these 7 Steps—and, for that matter, the whole book!—in one paragraph for me, or even an infographic?” I could do that. But
knowing
information is not the same as
owning
it and following through. Information without execution is poverty. Remember: we’re drowning in information, but we’re starving for wisdom.