• Saahil Menon

Money: Stop Spending and Start Investing

Updated: Aug 13, 2019

Money’s an interesting concept, isn’t it? We rave and dream about being financially successful – owning a breathtaking house with a view or cruising the street in a bright convertible – and yet we still don’t do the first thing we can do to get us there? We leave our extra money in the drawer, we unnecessarily binge on fast food, or, worst of all, we spend it on items we won’t even use in 3 months.

Now by no means do I possess a luxurious estate or a sparkly Lamborghini yet, and by no means will one-day’s investing get me there, but I do believe that consistently minimizing wasteful spending and putting that money to work is the first step towards that level of augmented wealth. Even on a small scale, investing for several years has allowed me to freely acquire the valuable products that I admire using my own earnings, which is exactly the independence that I want for you starting TODAY.

If the positive advent of independence still hasn’t convinced you that you should stop spending and start investing, here are 3 pointers that might.

1) Money lying around loses value due to inflationary pressure.

Source 1: (Kiplinger, 2019)

This one was probably the biggest mind-changer for me, because I’ve arguably foregone hundreds of dollars in value when all my money was simply lying dead in my drawer for years; inflation severed its value with each passing day.

Inflation refers to a persistent rise in the price of goods and services over time, and it’s a concept that perpetually exists in our day to day lives. In terms of money, let me put this into perspective:

If you had $500 kept in your drawer for 5 years starting in 2014, that money would be worth $461.07 today, adjusted for inflation. From an investment standpoint, your $500 has yielded a -7.7% return over 5 years, which isn’t where you want to be if you’re looking to make money.

Conversely, let’s consider the very same $500 invested into the S&P500 index in 2014. The S&P is an amalgamation of the top 500 companies in the US, which is why this index is considered a representation of the "market" as whole.

Over the last 5 years, the S&P500 has gained 7.192% each year, which means that your $500 investment would be worth $707.50 today, adjusted for inflation.

Now, you might think:

“But losing $40 over 5 years is nothing!”

“But surely gaining $200 in 5 Years isn’t worth it!”

In retrospect, agreed, $200 over 5 years isn’t much, but you’re forgetting the fact that you gained over $200 from doing absolutely NOTHING except making the original investment. Nothing. Nada. Niente.

You made 200 bucks in purely passive income: i.e. you could be studying, partying, playing sport or any one of the 147 things that you love doing, but your money would still be multiplying every single day.

Passive Income is considered to be the key to wealth according to one of the most influential business books of our time, “Rich Dad, Poor Dad” by Robert Kiyosaki. The book leverages the fact that passive income makes you money in your sleep to convince you that you should be investing the money you’ve successfully saved, and not spending it on commodities that gain you short-lived satisfaction along with negative returns.

Think about it: -7% vs +42%; -$40 vs +$200; negative return vs positive return… which would you choose?

2) Goods lose their value as soon as the transaction ceases.

For you heavy spenders out there, you need to comprehend that you’ve essentially made a loss as soon as you’ve purchased something, especially if it’s a product with high Cost Per Use. This is because the product immediately sheds about 20% of its value as soon as you own it, which is why you should minimize your spending and maximize your investing instead. Wouldn’t you rather own things that grow in value instead of depreciate?

Jack uses $800 that he got for his birthday on buying a new belt and a fanny pack from Offwhite, because he wants to get in on the latest trends and match the fashion of the people around him. Everyone digs his outfits and compliments him on a night out, until a few weeks later, Jack notices his friends’ aren’t rocking the beltpack anymore. Jack doesn’t want to be seen with outdated fashion, so he leaves the pack and the belt in his closet, ready to jump in on the next trend. However, he’s impulsively spent on food and clothes, so Jack has no money saved. He could sell his Offwhite purchases, but he’d have to price them lower than retail. He could wait till his birthday next year, but he’d be sans shopping for so long. Either way, Jack loses.

Jamie gets a lesser $600 for his birthday and immediately gets rid of it too, but he ends up far richer. How? As soon as Jamie grabbed his cash, he used $50 to buy a trading course that took about 2 hours of his time to learn. Jamie quickly comprehends the basic tricks of investing, concretely researches some reliable stocks, and then immediately puts his $550 to work. Now, Jamie goes out to do all the things he vastly enjoys, but with every activity he’s doing, his money is multiplying. Growing. He could actively engage in the markets every day to learn and boost his potential profits, but he could also sit at home and do nothing except make the original investment. Either way, his money is multiplying time after time. Either way, Jamie wins.

Be like Jamie.

Jack's essential losses are why you should avoid spending money on products that will seldom benefit you, and invest that extra cash instead. To know how to successfully avoid impulsive spending and optimize your cash flows, have a look at The Dividend Payout’s first article here.

3) Remember that you will almost always make a loss by spending, but not by investing.

To successfully begin making profits and earning an income each week, you need to adapt this mindset: you will almost always make a loss when you spend money on buying products. Unless you’ve discovered the next vintage craze, the money you spent is as good as gone in terms of gains, because it’s unlikely that someone would be willing to pay a higher-than-retail price for your product.

Now, there’s a chance you could make a loss while investing too, but the probability is far, far lower due to 2 key reasons:

  • Due Diligence:

Before investing in a stock, you can analyze multiple different factors such as the financials of the company, its leadership, its market growth and a plethora of others aspects that'll help you assess the future performance of the stock price. How do you do the equivalent before a purchase of trendy clothes or any other product you plan on reselling?

You can perhaps analyze how many units have been sold, but all that simply depicts is that the product is trendy at the moment, it doesn't suggest anything about future performance. Therefore, the probability of you making money from a market investment is far higher than the potential returns from a product that you have purchased.

  • In the long term, the market always gains:

Even if your stock portfolio takes a hit in the short run, and you suffer small losses, you must comprehend the fact that the market always augments in the long term. Statistically, this can be proven by its performance in the last 10 years:

Figure 1: S&P500 (market) Performance Over 10 Years (Macrotrends, 2019)

As depicted in the figure, the market ameliorates over the long term despite significant dips every now and then. Therefore, you can almost be assured that your investment in the stock market will yield significant reward in the long run, which is far more than I can say for any spending on trendy products or other goods.

Remember this, although you can’t be certain that a market investment will make you money, you can be 99% certain that a spending investment will not.

Overall Sentiment:

Hopefully, what this article has done is enlighten you on the fact that saving money allows you to invest, and investing into securities such as stocks, forex, commodities and funds will allow your money to grow. You will seldom become richer by spending on items or keeping your money hidden between your books: lower-priced reselling and inflation will prevent any and all profit-making there.

Now, despite me claiming that spending on goods is essentially reward-less, it is certainly possible that some purchases can be sold for more in the after-market. One such example is the current craze around vintage wristwatches, as some Rolex and Patek Phillipe pieces are selling at fivefold the retail price, which would’ve allowed previous owners to make a hefty profit.

However, consider the fact that watches are only one product out of hundreds or thousands that actually provided profits after reselling. Even still, only some particular brands and models were able to generate such staggering returns, which means that if you justify buying something trendy by believing it will sell for higher, chances are you’re wrong. You will only gain a profit if someone is ready to purchase your resold product on the gray market at a higher price, which is an extremely rare situation. This is critical: the price and sale of anything is only as valuable as the next person’s willingness and ability to purchase it. Remember that!

This is all to say that spending your money or keeping it locked away will almost assuredly cause you a loss. Your investment would be a certain percentage in the red. However, investing your money into stocks, forex, commodities and funds attains a far higher chance of making you money: i.e. keeping your investment a certain percentage in the green...and hey, who doesn't like a juicy, green profit?

Stay tuned in for the next few articles, as The Dividend Payout will show you easy ways to start earning decent bucks NOW, and then show you how to intelligently invest it.

Let's start ceasing our spending and seeking more investing, TODAY.