Live Below Your Means – Part 1 of 4

The number one reason why Americans have a hard time making ends meet is that they don’t live below their means.  Our culture has a “buy it now and pay later” mentality.  All this living at or above your means is costing yourself financial freedom.

In part 1 of 4 of this series I will explore a typical example of a semi-major purchase.

Buying furniture is something that we all need to do.  After all, we need places to sit, eat, and sleep.  However, many people when they need a new couch, buy the best couch they can afford.  They have the mentality that since they can afford it, they should buy it.  Should you?  Let’s crunch some numbers:

$2000 in discretionary funds

Scenario #1
 
Today:

$2000 – Brand new leather couch purchased

10 Years Later:

$0 – Leather couch is in the trash

Scenario #2

$1000 – Less expensive couch purchased
$1000 – Invested into stock market earning an average return of 10%

10 Years Later:

$0       – Leather couch is trash
$2500 – Investment has now grown approx 250%

As you can see in scenario #1 you only bought a depreciating consumable good.  You now need another couch and none of your money worked for you.

In scenario #2 you also bought a couch, a depreciating consumable good, but one that was below your means.  You then invested the remaining $1000 you had and 10 years later, that investment was worth $2500.  You allowed your money to work for you.

You may be thinking “big whoop, you now have $2500 more after ten years.  $2500 after ten years is chump change for such a long time”.  If you are thinking this, you are missing the point.

What about the $1000 you could save and invest the next year, and every year thereafter for the next ten years.  Your original investments will be, on average, worth $2500 10 years later every single year.  So you now have thousands of dollars in investments, not just $2500.

In part 2 of 4 in this series, I will be writing about savings in everyday purchases.

* Note that I rounded numbers in some instances to make it easier to follow.

Written by admin on June 30th, 2006 with 3 comments.
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A Dollar Is Not A Dollar

People have a habit of spending money in small amounts and justifying the cost by using the “it’s only a dollar” rationale.  Well I have news for you.  A dollar is NOT a dollar.

I know what you are thinking.  Is this one of those 1+1=3 things?  Nope, a dollar is not a dollar because attached to the value of a dollar is an opportunity for that dollar to be invested into more dollars.

Here is how it works:

Say you are at the grocery store and you see a huge chocolate chip cookie on sale for $1.  You decide to buy it even though you don’t need it.  Because, hey it’s only a dollar and look at that cookie, it’s huge!

However, if you took that dollar and invested it in the stock market, it would earn an average return of 10%.  If you took all the profits from that dollar and reinvested it, that dollar would be:

$1.61   in 5 years
$2.59   in 10 years
$4.18   in 15 years
$6.73   in 20 years
$10.83 in 25 years
$17.44 in 30 years

As you can see the cookie did not cost you $1 as it was priced.  It costs a heck of a lot more than that if you look at what that dollar could do in the long run when properly invested.

Next time you are tempted to buy something frivolous, think about how much it is really costing you.  Is it still worth it?

Written by admin on June 29th, 2006 with 4 comments.
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