This is a good question and I've learned many ways to explain this over the years. Since this is a blog, I'll outline my lengthier way of answering this question.
The $100 of Income Story
This $100 represents ALL the money you are ever going to earn and accumulate in your entire life.
35% (or $35) will go to various forms of TAXES:
"But David, I'm not in the 35% tax bracket." It's not just your tax bracket that I'm talking about.
Income Taxes (This is Any Income Subject To Taxation: Wages, Commissions, Bonuses, Interest Income, Gambling, etc.)
Capital Gains Taxes on Whatever You Do Successfully That Qualifies For This "More Favorable" Tax, such as selling your appreciated home, etc.
Property Taxes (No Longer Deductible! See? A Stealth Tax Increase! After all, "Only RICH people itemize!", right? Oh, yes, it was offset by the higher standard deduction... but how long will THAT last? And will Congress reinstate this deduction? Probably not the way they're spending.)
Sales Taxes on Almost Everything You Buy
Estate Taxes on Your Wealth, Business Interests, and Property When You Pass Away (Currently Subject To Estates Greater than $5-10 million... But Can And Will Change)
Government Fees & Surcharges (Just look up IRMAA and Medicare)
By the way, could this figure go higher? Much higher. In fact, I believe that the less one is usually dependent on banks and lending... the more they are paying to the IRS. And those who don't write larger checks to the IRS... usually are writing equivalent checks to their banks and lenders.
Another 35% (or $35) will go to various Lost Opportunity Costs:
What is a "Lost Opportunity Cost"? These are things you pay for where you get no additional return or enjoyment out of them.
Bank Interest on Debt:
Credit Cards
Auto Loans / Leases
Renting / Leasing
Student Loans
Mortgage / Home Equity (home equity interest no longer deductible)
Insurance:
Term life insurance
Unnecessary riders (options on your policies)
Low deductibles
Long-Term Benefits
Supplemental Insurance
Financial Losses & Fees:
Stock Market Losses
401(k) & Mutual Fund Fees
New Cars vs Used Cars
Mortgage Pre-Payment / Principal Spend-Down
Not Maximizing Financial Aid for Children's College
Now you have 30% (or $30) left to enjoy your lifestyle:
Now, out of that original $100... minus $35 (taxes) and minus $35 (lost opportunity costs)... we're left with $30 left to live on and enjoy your life.
But not so fast! Don't count up your money just yet!
At some point, someone called a "Financial Advisor" comes into your life and says that you need to save 15% of your wealth so you can have a decent retirement.
So... $100 - $35 (taxes) - $35 (lost opportunity costs) - $15 (retirement) =
$15 to live on.
But what will that $15 in savings do for you?
That same "financial advisor" says something like, "You could probably get 5% on your own. But I'm smart. I can get you 8% (after my fees). I can't guarantee it, but I have these charts that show the average returns for the past 20+ years."
8% - 5% = 3% difference increase
3% of $15 = 45 cents
Through all of that... your advisor wants to help you increase your total situation... by 45 cents!!
But David... how are YOU different?
Imagine if... we can save JUST 3% from what you paid in taxes and lost opportunity costs... and we put THAT money to work for you instead - without stock market risks or additional fees on that money AND you can LIVE on the remaining $30 (not just $15)?
$70 (taxes & lost opportunity costs) x 3% = $2.10
A 4.67x more effective financial strategy!!!
This is why I believe that there is greater opportunity in avoiding the losses than there is in chasing rates of return by just being more efficient with what we have.