Money Is Just Not That Hard

So we’re back on money.  Or maybe we never left.  I feel like this is just going to go everywhere because there are so many divergent paths that this topic can take but I’ll try to stay focused…

Money, or more specifically, people’s perception of money irritates me.  We’ll start by blaming social media because it’s science.  Social media is great.  It really is.  It’s become a network that allows people from all over the world to connect over shared interests.  Social media also allows people to stay connected locally(or abroad) without a ton of effort so that the events happening in their lives can be shared more frequently than if they only had telephone communication or email, for example.  But let’s be honest.  Social media is like the once a year posed family photo where everyone is dressed up perfectly and groomed and smiling and utterly happy and content even though they may hate each other!  But they are putting on that perfect front and mailing that photo to all their family and friends at Xmas time to show everyone how perfect they are.  And it’s a load of crap.  For all it’s remarkable positives, social media is, for the most part, a lie.  The only content people post shows their vacation or new clothes or amazing house or perfect family or blah, blah, blah…  You won’t get a glimpse into the real lives of these people where the shit’s hitting the fan and so we all end up with this weird sort of envy/inadequacy complex because our lives aren’t “perfect”.  Now let’s loop this all the way back to money and the problem that arises.  “Keeping up with the Joneses”.  That’s it.  People are led to believe that everyone else’s lives are perfect and it’s because they have these cool new material possessions or take these awesome vacations or live this opulent lifestyle and that’s what happiness is.  This false idea of what happiness is leads us to make poor financial decisions because we try to emulate that behavior….and that’s stupid.  Plain and simple.  Stupid.

“Spending money you don’t have for things you don’t need to impress people you don’t like(or even know)” – “Actor Walter Slezak’s version of “keeping up with the Joneses” circa 1959(we’ve obviously made a ton of progress haven’t we in nearly 60 years?)

How many purchases that are put on credit cards or paid for with loans are a legitimate “need” and not just a want?  There is a real misconception and misunderstanding regarding the difference in those two terms.  Needs are shelter, food, water, and clothing.  Those are the absolute basics that we need to survive.  You can get into sub-categories like transportation to help meet some of those major needs but it’s there you can start to get in the weeds with people justifying taking out a loan for an expensive car because they “need” to get to work.  Ok, so you need to get to work but did you “need” to take out a loan to buy a brand new $25,000 car when you make $45,000 year instead of finding an affordable, reliable used car for much less money?  Of course not!  But there is an image that people have to keep up.  God forbid somebody looks at your car and makes fun of you because it doesn’t cost enough.  Here’s the funny thing about cars.  Provided they get you from point A to point B, the rest is just luxury.  Literally.  Everything else like power seats, individual climate control, sun roof, fancy tires, and all the other add-on pieces are just ways for the car dealer to get you to SPEND EXTRA MONEY!  Cars are a big example but this type of thing applies to almost every other consumer purchase we make.  Let’s use coffee.  Keurig is great and makes these awesome single serve coffee pods that you can just take, stick in the machine, hit a button, and you get the perfect sized cup of coffee for you in seconds.  Except for the fact that I can buy a pretty generic coffee maker and make perfect coffee for me for a fraction of the cost of one of those Keurig K-Cups.  And I would know because for years I had a Keurig and thought it was the greatest thing since slice bread.  Until I did the math.  I realized that over the course of the year, I was spending over $700/year on just K-cups!!  It blew me away…I immediately made the switch over to a drip coffee maker and now spend about $20/month at home on my coffee and I drink a LOT of coffee.  I saved over $450/year on just coffee.

The average American is losing and/or wasting money on a daily basis by just not paying attention to what they are spending their money on.  It’s startling when you begin to add up the numbers and cost on the things you don’t really even give a thought about swiping the debit card for.  Try going a week and just pay cash for things.  IT’S HARD!  Or pick something that you purchase with regularity and add up the yearly expense and see what that number is.  I bet you’ll surprise yourself and maybe think twice about the specific purchase.  And always, always ask yourself, “Is this a need or a want?”

My whole point with this is that with a little education and understanding, people will understand that they have more money than they think they do.  And if those sample people utilized the right tools, that money that they “find” will be able to grow into a much larger sum of money down the road with consistency and patience.  My favorite term ever is “compound interest”.

Compound interest is, by definition, the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest. -Wikipedia

CI is an investing philosophy that has a proven track record of success with consistency and patience and there are hundreds, if not thousands, of different calculators online that will allow you to play with numbers to see where your investing may take you.  I’ll give a couple of examples and then a link to a calculator I like to use that you can enter your own information to see what kind of results you get.  With these calculations, I’m going to make a couple of assumptions and guides.  1.  I’m going to use 7% annual rate of return.  The S&P 500’s rate of return from 1950-2009 is 7% adjusted for inflation and not including dividend reinvestment(if dividend reinvestment were included, that percentage rate of return would be higher).  2.  I’m using a holding period of 20 years assuming someone who started these scenarios at 25 and continued till they are 45.  3.  Interest is compounded quarterly  4.  Starting with a $0 balance from day one

Scenario 1 – Investing $1/day

-After 20 years, investing that $1/day would turn into $15,970.97.  Your actual contribution was only $7,299 which means you gained $8,671.97 in interest over that span!  Not bad for just $365/year

Scenario 2 – Investing $20/week

-$20/week turns into $46,092.19 in 20 years and your actual contribution was only $20,840!  The rest was interest gained!

Scenario 3 – Investing $150/month

-$150/month turns into $80,033.05 in 20 years!  Your actual contribution was only $36,450.

Scenario 4(my coffee example) – $450/year

-My $450/year that I saved by making my coffee in bulk instead of buying K-Cups turns into $20,179.69 after 20 years.  My actual investment was only $9000.

(The link to the online calculator I used is at the end of this post)

I only bring up and walk through these examples because even small changes and lifestyle adjustments can add up to big dollars over time but it take discipline and consistency.  There’s a lot of smart people in the world.  But it’s very hard to try and outsmart the stock market.  Most people fail.  But if you follow the numbers, your chances of success are much, much higher of being able to have the lifestyle you want later in life because you committed to being smart with your money early in life.

To quote Dave Ramsey, “To live like no one else, you must first live like no one else.”  Commit to the hard work and consistency now and you will set yourself up for wealth and success later in life.

Compound Interest Calculator (Daily To Yearly)

 

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