Money is on the brain this week. It is official — the early bird does get the worm. I recently came across a Dave Ramsey money article that especially peaked my interest. It basically is the simple truth about money that almost all of us probably know. Yet, the visual he shared just hits you smack in the face.
I do not want to steal the visual from his website, so I will explain and link back to his site for the full picture. Meet Ben and Arthur. Ben starts investing at age 19 and puts $2000 in an account each year for 8 years straight and then does absolutely nothing with the account until he retires at the age of 65. A total investment from the ages of 19-26 of $16,000. A lot of money to put away in those early years of his life. Arthur begins investing $2000 when he is 27 years old and continues to put $2000 away from 27 to when he retires at age 65. Arthur invests a total of $78,000 over 39 years. A difference in $62,000 in the amount that was actually put away between Ben and Arthur.
The result: at age 65 Ben has $2,288,996 and Arthur has $1,532,166. Ben came out $700,000 ahead by starting 8 years earlier and only put away $16,000. Compounding interest is an amazing thing. How do we spread the word? I do not know many 19 year olds that a) care about investing, b) truly understand compounding interest, c) have $2000 a year they can or want to spare.
Why not have a prerequisite that you have to complete a personal finance class to make it out of freshman year of college (no matter what your major). Or maybe it is a class that every high school graduate must take (since many might never go to college). The class could teach many types of life skills, and maybe those that truly understand it might actually decide not to purchase that video game they are dying to have and rather put a bit more into their retirement.
To think that all it took was $16,000 for 8 years, rather than $78,000 for 39 years. If I only knew when I was 19 what I know now, I might have made very different choices, especially thinking of that $700,000 difference at age 65. How do we make compounding interest sexy?
Last night I had a much-needed night with a good friend. A night away from the normal day-to-day to reconnect and be reminded of what is really important. An interesting analogy was brought up during our conversation about how a great relationship is like a great financial portfolio. Ponder this with me:
_You get what you put into it. Think of it like a mutual fund or an IRA. If you continue to feed and put money into the account it will continue to grow for you. If you leave it, and never watch or nurture it then it will sit and never do anything. The same is true for relationships – whether a friendship, or a romantic relationship, you get back what you put into it. Think about how you are investing, whether financial or personal.
_Over time your investment grows. I think of the friendships that I have had over time. Some continue to grow and others have a strange nostalgia that make us want to hold on to what we remember. Sort of like keeping money in a savings account. These days it does not really matter how much money you have in a savings account, you are not going to get much return on your investment. The friendships and financial accounts that are worth keeping will grow for us over time. Those that we no longer benefit from should be divested from our lives.
_Never put your eggs in one basket. You always want to make sure you diversify your friendships and your financial portfolio. It does not mean you must have a ton of friends. You can have a few that are deep and important relationships, but make sure you do not limit yourself. Shit happens, and sometimes that means that putting our eggs in one basket can devastate our future, whether pertaining to finances or our relationships. Diversify your friendships, so that you have different support mechanisms when something or someone fails you.
_Be grateful for what you have. Regardless of how many friends you have, or how amazing your romantic relationships are, be grateful for what you have right in front of you. We forget that our lives are often so much better than we can ever imagine, we just forget to look at the shiny spots. I imagine we all can be more thankful for the wealth we have in our life, whether via relationships or finances.
A happy evening, with much food for thought pondering ideas of wealth, gratitude, and all that we have right in front of us. Hopefully this makes you think about how you fuel your finances and relationships.
Do you ever justify a purchase? Do you think to yourself, I worked hard this week, I deserve this purchase. Or, you might think about how you did not go out to dinner and a movie with friends last week, so you can buy this expensive coat. I justify purchases. Often it is that I should not purchase a specific item, either because we do not need it, or because I believe it is too expensive. Other times, I tell myself, if I purchase this, I will not purchase something else. Or, if I do not purchase something I can save for something better later.
“‘Opportunity cost’ is a term from economics that refers to what we give up when we make a decision. For instance, if you and your spouse spend $40 on a Mexican dinner one Friday night and then go to the movies ($20), your opportunity cost might be a $60 sushi dinner plus some television at home. The sushi-and-TV combo is the next-best thing you could have done with the same amount of time and money. Or if you love both shopping and hiking, then the opportunity cost of a Saturday afternoon at the mall might be the forgone opportunity to hike through a nearby park.” page 42
Is that how you make decisions in your life? Do you ever think about the opportunity cost for the choices you make? It is not always a bad way to make decisions. Chris and I spent a few years feeling stuck in the condo we owned. We knew we could not sell it due to the year we purchased it and the market, so we stayed put and continued to save for our future. Last fall we saw a window and found a house we fell in love with instantly. If we had not spent all those years saving, we would not have been able to make the move into our current home. I look at that as our opportunity cost. We stayed in a home for a few years and saved in order to now live in a home we love. It worked for us.
Is that how you look at money and decisions? Is it easier to have the opportunity right in front of you now, so you can see the instant gratification? Does that help you look into the future, or is what you want right now the only way to live? If you are diligent today, tomorrow, and the next day, could that give you more options in a few years? Yes. I can tell you that waiting often gives you more options, but not always. We have to listen for what makes the most sense in each situation. It will be different for everyone.