After a brief break in July amongst much traveling and summer shenanigans the Man on the Move is now back on the move. Thanks for rejoining me – let’s dive in!
Spending, Saving, Investing
So you go out and make a buck… now what? I see 3 options – you can spend it, save it, or invest it. Let’s take a look at what a dollar today may mean 40 years down the road in these various scenarios, which assume 2.5% average annual inflation for the next 40 years…
This does not take a math genius to figure this one out. You spend it and poof, it’s gone. In 40 years you’ll have $0 and in many cases nothing to show for it cuz you’ve spent on cheap Chinese crap that broke 39 years ago anyway. Moving on…
Ok, that’s a good idea, right? By saving your dollar you can use the money for something you may need later, like 40 years later… If you save your $1 under your mattress or in your piggy bank it will be worth 37 cents in 40 years. That’s a loss of 63% due to Mr. Inflation.
This sounds like a bad idea, so maybe a bank account is better? If you drop it in a bank earning 2.3% interest (a pretty good rate these days) in 40 years your dollar will be worth 92 cents, thanks again to Mr. Inflation riding slightly above your rate of return. Any other ideas?
Let’s say we drop that $1 into the stock market where we can average 10%/year long term. In 40 years our $1 will be worth $18, even when factored against inflation! That’s an increase of 1,800%. Now we’re talking! That 10%/year is roughly the long term historical average of the S&P500…
This is a great illustration of the power of inflation versus the power of compounding interest, and a great look at the difference saving versus investing.
Let’s look at the flip side and consider the cost of borrowing that same $1 over 40 years at a 5% APR. For every $1 you borrow you’ll pay back $2.31 over 40 years. That’s a loss of 131% against your original capital – definitely NOT the way to get rich.
This comes into play when you consider a standard $250,000 mortgage at 5% APR over 30 years means you’ll pay about $250,000 in interest as you re-pay that $250,000 principal alongside it. That’s a cool 1/2 million total…
Rule of 72
As you consider spending, saving, and investing your money remember the rule of 72. It’s an easy way to gauge the long term effect on your financial future. Divide 72 by a fixed rate of return and you’ll see how many years it would take to double your money. One dollar invested at 6% interest today will take 12 years to become $2. See how it works? Now consider $2 today will be worth around $1.54 in that same 12 years after inflation and you’ll see the importance of seeking the highest possible returns as you save and invest your money.
Looking back at that 10% long term average of the S&P500 means you stand a good chance of seeing your investments in the market double every 7.2 years. Not. Bad!
That’s all I got for this blog session. Thanks for re-joining me. Look for future episodes of A Man on the Move soon as we look at real world, simple, and effective concepts to save a buck and make two. Cheers!