This is a post from staff writer Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.
Do you buy things that disappear or reproduce?
That’s the question that first prompted me to think hard about my financial future, way back in the mid-1990s. It came from a radio call-in program years ago when I was an elementary school teacher making $18,000 a year. The host explained how a caller could improve her finances. “The next time you want to buy something, instead consider buying stock in the company that makes it. Rather than buy a Coke, buy a share of Coke stock.”
I didn’t think much about money back then, other than being aware that I didn’t have much. I didn’t know much about stocks, IRAs, or the Fed. But the host explained how most of what we buy depreciates and eventually disappears forever. That also means, it then occurred to me, that the time I spent working to make the money that bought those items was essentially wasted; I worked so I could buy what amounted to nothing.
Contrast that, the host continued, with spending money on an asset, which has the potential to increase in value and, in most cases, can’t be consumed. (Well, sure, you could eat a share of stock, but check the carb count first.) You are spending your money on something that eventually can return the favor by paying you money. Do that enough, and you won’t need to work since your money will be doing all the work for you.
The sum of thousands of decisions
The crossroads of your financial future is your spending. It is the determinant of how much you keep, and how much someone else gets. For many, the flip side of spending is saving — but “saving” sounds so boring. It smacks of self-denial, which is why people have trouble doing it. Yet saving is spending, just on something that ideally appreciates rather than depreciates — something that reproduces instead of disappears. This is important before retirement (“I could buy that item, or I could buy the stock”) and in retirement (“To buy that item, I’ll have to sell stock”).
There are certainly great uses of money that can’t be put in a portfolio. A vacation, a great bed, Handerpants (the underpants for your hands!) — they all have their “appreciating” aspects that provide lifelong value. But if you spend the next few weeks observing where you’re inclined to spend money, I suspect you’ll find yourself spending money on goods or services that may not be worth the long-term price you’ll pay.
Go ahead, buy a company – or a few
Of course, you don’t have buy stocks with the money you put away for the future. But the point I’m making here is this: You can buy a product, or a piece of the company that makes it. Because that’s what a share of stock is: a real-life, honest-to-goodness ownership stake in a company. You’re not just buying a piece of paper; you’re buying a business.
So the next time you’re tempted to spend money on something you don’t absolutely need, you could consider buying the stock instead — or consider a “match” by investing as much in a company as you spend. Of course, you have to take commissions into account. We at The Motley Fool recommend that you don’t buy a stock unless you can keep the transaction cost at or below 2% of the trade. If your discount broker charges $10 a trade, then you should invest at least $500. Thus, it makes sense to deposit the cash somewhere first – perhaps a “stock jar” – until you’ve accumulated enough to ensure that most of you money goes to buying the business and not paying the broker.
Of course, basing your investment decisions on where you spend your money is not exactly the optimal strategy (though it’s better than spending rather than investing). As always, buying the right asset at the right price is important. Investors who bought shares of Coke when they were at their high of $88 in 1998 probably aren’t too happy that, 14 years later, it sits at $70. But they’re still better off than anyone who bought $88 worth of fizzy sugar water in 1998. Plus, if they reinvested their dividends along the way, they still have realized a positive total return, and have accumulated more shares that pay even bigger dividends. In 1998, Coke paid $0.60 a share in dividends; in 2011, the company paid $1.88 a share – more than three times as much – which can be used to buy even more shares, which pay more dividends, which buy more shares, and so on.
If you’re not comfortable with buying an individual company, buy a broad-market index fund, exchange-traded fund (ETF), or mutual fund. In fact, that is the best strategy for many people. You’ll be buying little pieces of hundreds of companies that provide goods and services all over the world.
So spend like mad — on assets. Maybe you can replace the “buyer’s high” you get from making a purchase with an “investor’s high” that will keep your net worth growing.
This article is about Investing