Published by Robert W. Huntley, CFP®, CHFC®, Founder & Wealth Advisor
Let’s do some math.
$1,000 in 2019 can buy me a nice new shotgun.
I still have a Remington, 12-gauge pump shotgun. It’s a 1976, Model 870 and it still works fine, but it’s a pump and I’d rather have a new automatic.
I’m taking up shooting clays as a hobby and really want to upgrade my shotgun. But years of doing what I do for a living has taught me that I’m not just making a $1,000 spending decision.
If I stay with the gun I already have and choose not to spend my money on a new shotgun, what else might I do with my $1,000?
A classic financial decision, but is this a $1,000 decision I’m making? Or is there another way to look at it?
Suppose I decided to save that $1,000 instead of spending it today. I put it into my IRA or 401(k) plan instead.
- My tax bracket is 25%
- The investment I put the $1,000 into averages 9% per year for the next 30 years
What could my $1,000 grow to?
First, I get a deduction for the $1,000 contribution. That gives me tax savings of 25% of $1,000 or $250 taxes saved. I take that $250 and add it into the 401(k) plan.
If that $1,250 grows for 30 years and averages 9% it becomes $16,584.60!
So, is my decision to buy that shotgun a $1,000 decision or a $16,500 decision?
Sending money ahead to the old person you’ll be one day.
All of us will be an old person one day unless we ‘relocate’ early.
Social safety nets sound great on paper but really, it’s no one else’s responsibility to take care of me in my old age. That’s my responsibility.
I must prioritize sending money ahead to the old person I’ll be one day. I’m married, and I also want to send money ahead to the old person my wife will be one day. I might even want to send some money ahead to my kids and grandkids to give them a leg up in life.
Spending money today rather than saving and investing it is a 1:50 ratio (short term enjoyment vs. long term security). That’s the simple math of the decision. The lost potential growth of a dollar spend is 40 or 50 times the dollar spend today.
Understanding the lost potential from years of tax-deferred compounded is a key to accumulating wealth.
We are emotional creatures & don’t spend based on logic.
I know, I know, we’re still going to buy that shotgun, take that vacation, or grab the latest mobile phone upgrade. We want what we want.
I don’t think most of us will think about purchases like this. However, it is interesting to remind myself of what I’m really doing when I buy that big screen TV, four-wheeler, shotgun, or whatever else I want to enjoy right now. I am spending today dollars plus what they could grow to 10, 20, or 30 times the amount in the future if I saved and invested it instead.
Let’s get real.
The most practical way to manage this without it driving you crazy and making you miserable is to simply commit to saving a doable, but the aggressive percentage of every dollar you earn for the rest of your life.
I feel confident in saying that anyone who starts saving 10% of their annual income in their 20s may be financially independent by the time they reach their 60s.
There. That’s simple. And it doesn’t require a fancy calculator. Just save. Do it regularly. Invest in quality stocks through either ETF’s or mutual funds and you’ll be ahead of about 3/4 of your peers.
Oh, and one last observation. Today I’m closing in on 60 so I really don’t feel like I have another 30 years to compound my money. So, it gets easier to talk myself into spending it on that shotgun! Not nearly as expensive.
See what I did there? 😉