The consumer, the ower and the owner

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.

Happy Day After Christmas! Do you feel like you’re getting rich slower?

Yes, ’twas the season for all kinds of holiday traditions, including, of course, Coca-Cola commercials. They’ve been a part of the holidays since the 1920s, and may have even played a role in shaping our current image of Santa. Readers of my vintage will remember the classic “I’d Like to Buy the World a Coke” commercial in which a bunch of singing hippies with candles form a Christmas tree. (I should have put “hippies” on my Christmas list.)

I bring up Coke because I think it’s the perfect demonstration of the three types of people in our economy: the consumer, the ower (i.e., someone who owes money – I know it’s not a real word, but I like it anyway), and the owner. Of course, we’re each a bit of all three, but the more you’re like the last one – which requires limiting your behaviors of the first two – the brighter your financial future.

Here’s why…

1. The consumer

As you may have heard, almost two-thirds of our economy is driven by consumption. That includes a broad range of expenses, from buying stuff to paying for services. It’s not all bad; in fact, most of it is necessary. When economists talk about “consumption,” they’re talking about everything from food and shelter to utilities and health care. It’s tough to get through life without that stuff.

But we also know that a lot of consumption doesn’t add much value to our lives, and it certainly isn’t necessary. I’ve recently taught a couple of classes about money to elementary- and high-school students, and I’ve brought with me a bag of 37 empty Coke cans and bottles. (Fun fact from AdAge: Each American, on average, consumes 44.7 gallons of soft drinks each year.)

Assuming an average cost of one dollar per beverage, the bag represented $37 worth of spent money. But it has since been consumed. Where did it all go? Well, I didn’t go to medical school (despite being pre-med in college), but I’m pretty sure most of it eventually was deposited in the public sewage system, with a bit of it hanging around long enough to decay some tooth enamel or add some extra jiggle to a belly or thigh. But most of what remains of that $37 is a bag of garbage.

For those who drink a Coke or other packaged drink (Coca-Cola owns more than 3,500 types of beverages, including juices, teas, and water), that is $365 a year spent on sugary water… which sometimes doesn’t even have the sugar. Plus, you have to buy that with after-tax money; you first must earn $450 to $500 and then pay Uncle Sam and Sister State to be able to spend $365.

And now it’s gone. Which brings us to the lesson of the consumer:

A decade from now… a year from now… even a month from now, you won’t value (or even remember) much of what you buy now.

2. The ower

OK, so spending hundreds of dollars on something that is soon forgotten (except for the deleterious health effects) isn’t the best way to allocate your assets. But it’s not the worst thing in the world. Putting such things on the credit card is much, much worse. Now, you’ve become both a consumer and an ower.

Here’s what the math could look like.

Let’s say you put that $1-a-day Coke habit on a credit card. If you had $365 on your credit card right now, and the interest rate was 15 percent (the current national average), and you paid a monthly payment of $20, it would take you 21 months to pay off all those Cokes, plus you’d have added $52 to the $365 you paid. It is very, very hard to grow your net worth if you spend $417 on something that initially cost $365… and you still don’t have anything to show for it. Which brings us to the lesson of the ower:

If you use a credit card excessively and don’t pay it off every month, you could be paying for today’s purchases several years from now, and not deriving anything of value from those purchases. They’ve become all pain, no pleasure.

3. The owner

What’s better than buying a bunch of Cokes? Buying the company.

Right now, you could own a tiny piece of Coca-Cola the company. Some of you might already. How? By owning shares of Coke stock. When you buy shares of stock in a company, you become a genuine, honest-to-goodness part owner. Right now, a share of Coke trades at around $37 – which is why I brought 37 empty bottles and cans to the classrooms I visited. Someone could buy 37 drinks and have a bag of garbage to show for it, or they can buy a piece of the company.

Now, one share of Coke would make you a very, very, VERY small owner, given that there are 4.5 billion shares of Coke. And practically speaking, it’s difficult to buy just one share – though Coca-Cola, like many companies, has a direct purchase plan that allows you to invest as little as $50. But once you own a share, you enjoy the benefits – and take on the risks – of being a part-owner of the company. As for the benefits, you get:

1. Dividends: The company sends you cash, which, in the case of Coca-Cola, is $1 a year and growing. (Over the past decade, Coke has increased its dividend more than 9 percent, on average, each year.) You can spend the dividend on a Coke, or use it – along with all your other dividends – to buy more shares, which pay more dividends, which allow you to buy more shares, and so on. I have compared dividend reinvestment to owning a garden of money trees that grow more and more cash, because they get bigger and allow you to expand your green-growing garden by buying more trees.

2. Capital gains: Hopefully, the value of the company – and your shares – grows over the years. A dollar invested in Coke in 1982 is worth (as you know) $37 today. Of course, that’s not guaranteed. In fact, Coke stock hit its high of $44 waaaaay back in 1998. In other words, after 14 years, the stock is still down. But that’s the risk of being an owner. However, while that looks like an investor has lost money on Coke over the last 14 years, that wouldn’t be true if she reinvested her dividends, because she’d own many more shares of Coke – actually, becoming a bigger owner – and realized a total return (capital gains plus reinvested dividends) of 30 percent. But even if she hadn’t been reinvesting her dividends, owning a share of Coca-Cola worth $37 is still better, financially, than spending $44 on several six-packs of Coke in 1998.

This brings us to the lesson of the owner:

Spend your money on assets that will pay you and (ideally) be worth more money in the future.

Have a Coke (or a coffee) and a smile

Now, I’m not saying that you shouldn’t buy Coke or other soft drinks. After all, we all need to drink, and sometimes a soda hits the spot. While I’ve given up most sodas for health reasons, my weakness is coffee, especially at this time of year (I love gingerbread lattes!).

But I have tempered my coffee consumption, both in terms of quantity and cost (purchasing lattes only during the holidays).  And, more importantly, I’ve increased my ownership by buying Starbucks stock, which makes me a part-owner of the company.

So to all of those frequenters of Starbucks, I thank you for your business. Please come again.

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This article is about Consumerism, Debt, Investing