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
$2000 – Brand new leather couch purchased
10 Years Later:
$0 – Leather couch is in the trash
$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.