personal-finance

Wealth Leak - What Is It and How Can You Stop It?

October 14th, 2020

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Do you ever get the feeling that even if you have a budget you stick to, save money, and invest money, you still have a lot of room for improvement? If so you are not alone, and your intuition is probably correct.

I’m Zack, co-founder of Compound Confidence, which is an education platform to help you grow your skills and confidence to become financially free. I’m excited I get to be writing a guest post today for Passiv and for you about this phenomenon of always feeling like you constantly have room for improvement in your financial life.

In fact, this feeling is associated with a real issue: wealth leak. Wealth leak is when you are not utilizing your existing assets to the best of your abilities. An asset is something of value that can make you money (this is not the exact definition but is the one I’d like to use). For example, investments, real estate, and businesses are examples of assets. Now just because you have assets does not mean you are squeezing the most out of them that you can.

A wealth leak is like having a nice juicy orange to make orange juice, but you just give it a light squeeze and then throw it away. Sure, you’ll still get some good juice, but you could have gotten so much more! The wealth leak phenomenon stems from entropy. Entropy shows how systems naturally tend to disorder. This is why even when you feel like you are making a great effort to keep all your assets in order, it always feels like you're fighting an uphill battle.

Not sure if you are experiencing wealth leak? Well, let’s take a look at some common examples.

Common Wealth Leak Examples

Below is a list of common areas people experience wealth leak. Once you start thinking about how chaotic it can be to keep track of all aspects of your finances, I think you could probably double this list.

Common Examples:

  • Losing track of all your expenses and ending up paying $200/month extra on services you don’t even use.
  • You casually invest, but because you don’t consistently do it enough, you end up with too much cash that is not making any money.
  • You buy a home, add value to it, start paying off the mortgage, but don’t look at refinancing opportunities to obtain an optimal capital structure.
  • You forget to max out all your registered investment accounts because there are too many to track.
  • You end up with multiple credit cards to cash in on the opening benefits but then forget to pay each of them off consistently, and just automatically pay the monthly minimums.

These examples I have heard of or experienced myself. This is a real issue. While entropy is a strong force of nature, we need to find a way to combat it. Now, we probably can’t completely stop it, but we can minimize the damage it causes. Let’s take a look at how this can be done.

How can you stop it

Below are the techniques I have found to be the best at minimizing the impact of wealth leak. I try to break down the time to complete each of the activities and explain why they help solve the problem of wealth leak.

The techniques covered are:

  • Set up automated tracking of your investments
  • Set up automated tracking of your expenses
  • Set up automated investing of your portfolio
  • Learn about the different accounts available to utilize
  • Dedicate time on a monthly basis to track your net worth
  • Look for ways to improve

Set up automated tracking of your investments

Time to complete task: ~1.5 hours

Using a service to automatically track your investments. Most brokerages will have a dashboard for this purpose. However, it could turn out between your job, your spouse, your business, and more that you have many accounts under different names or brokerages. In this case, it helps to use a separate service to track everything. We have found Passiv to be very helpful for this particular use case.

Set up automated tracking of your expenses

Time to complete task: ~1.5 hours

The main factor of how far you are away from financial freedom, retirement, or any other financial goal is directly related to how much you spend in your life. The only way to understand how much you spend it by tracking it. Manually tracking can be good as an exercise but is impractical over the long haul. We suggest using automated services such as Mint or YNAB, but feel free to find the option that works best for you.

Set up automated investing of your portfolio

Time to complete task:

  • 2 hours initially
  • 45 minutes every 3-4 months thereafter

Now that everything is being tracked, it is important to ensure you are investing the money you are saving consistently. If you are a self directed investor this can be especially challenging because often life gets in the way and you just forget to keep continually investing.

This is another use case where I have found Passiv extremely helpful, since it has the ability to remind me to keep investing and will automatically make suggestions based on my personal portfolio that I have set up.

For robo-investors services, automatically invest part of your paycheck every X months. I am saying X months here since perhaps every month is too frequent for your liking. However, remember, time in the market is better than trying to time the market. I aim to invest a minimum of 4 times per year, with a minimum amount invested each time.

Learn about the different accounts available to utilize

There are lots of different registered accounts that are there to make your financial life easier. However, there are quite a few of them, both in Canada and the US. Learning about these accounts can help you achieve your financial goals faster. If you are interested in learning about these accounts with in depth visual and analytical examples, consider checking out our personal finance course.

Dedicate time on a monthly basis to track your net worth

Time required: 45 minutes/month

Manually dedicate time on a regular basis to track your net worth and understand where your assets and liabilities lie. All these automated tools are great, but spending as little as 45 minutes a month to review your financial health can do wonders. This includes going through your expenses for the month to see how you did compared to your budget and reviewing the status of your investments.

This is probably the most important point in the article: A short manual review each month coupled with automated tracking and investing tools allows you to minimize the impact of wealth leak.

Look for ways to improve

Time required: 20 minutes/month

Technology is always changing, your life is changing, everything is changing. This is not something to be overwhelmed by. At this point, you have already set yourself up for a lot of success. However, spending 20 minutes/month doing a quick search to see if there are any new tools out there, figuring out if you could be doing something better, or just learning more about the world of personal finance, will help you constantly improve.

Final Remarks

Wealth leak is an uphill battle, but we have learned there are ways to level the playing field.

In summary these are:

  • Set up automated tracking of your investments
  • Set up automated tracking of your expenses
  • Set up automated investing of your portfolio
  • Learn about the different accounts available to utilize
  • Dedicate time on a monthly basis to track your net worth
  • Look for ways to improve

Hopefully you find these techniques helpful for improving your financial situation and making you feel better about all the hard work you are doing.

I highly recommend checking out Passiv to solve the issues related to tracking and automated investing. For more interesting personal finance articles check out Passiv’s blog and perhaps consider hopping over to our blog as well.




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