I’m about to tell you some stuff that a lot of people don’t want you to know. You see, youth marketers are growing filthy rich off your hard-earned cash, and what I’m going to tell you will foil their schemes. That’s because the three investment tricks you’re about to learn will show you how to invest more of your money into your future, not theirs. If you follow my advice, you won’t be putting any of them out of business. But if a bunch of readers like you try these tricks, a few of them might have to drive BMWs instead of Lambourghinis. What a shame.
Here’s another shame. These tricks are so simple, you’d think that more people would try them. But most people don’t. Instead, they squander all their cash on stupid purchases, then complain that the rich keep getting richer, while they just keep getting poorer. It doesn’t take an economics degree to figure out that those marketers keep getting richer off their money— money that they practically throw at them.
Well, some people are just going to be stupid with their money, and there’s really nothing we can do to stop them.
But I’m figuring that you’re not like that. If you’ve made it this far in the book, you’re smart enough to see that you can pull off these investment tricks.
1. INVEST TN THINGS THAT GO UP TN VALUE
Think of it this way; every dollar you spend is an investment. What you buy with that buck can do one of two things: it can go up in value, or it can go down in value. The moment you buy a stereo, music album, pair of shoes, or sunglasses, you start losing money because you can never sell that used item for the price you paid when it was new That’s called depreciation. That’s bad.
Wait. It gets worse. When an item depreciates, you not only lose money in the value of the thing, you also lose the money you would have gained had you invested instead in something that goes up in value. That’s called opportunity cost. Let me show you what these things look like.
Let’s say you and your friend Sigfried each had $500 in cash and went shopping for new stereos. He decided to buy a turbo-charged model that’s so powerful the lights dim when you switch it on. He blew his entire $500 savings on this thing. A year later, he decided to go on a ski trip, raising the cash by selling his used stereo to someone’s kid brother for $300. Sigfried’s cost of very loud music for the year comes to $200.
But you decided you could survive on your clock radio—and listening to Sigfried’s stereo from a block away. So instead of spending $500 on a new stereo, you invested your $500 at the bank in a one-year certificate of deposit (CD) account that yields about 5% interest. At the end of the year you had $500 in principal and about $25 in interest. Now pay attention, because this next part is tricky. Sigfried lost out on this $25 opportunity—he couldn’t earn that interest on his $500 because he spent the money on the stereo. That’s his opportunity cost. The $25 opportunity cost plus the $200 depreciation actually made him $240 poorer than you at the end of the year. Bummer for him. And it gets worse.
Let’s say he decided against that ski trip and kept the stereo for five years. (Now his neighbors are bummed.) In five years his $500 stereo investment is worthless—noone wants to buy an old, broken-down stereo. But you,wise one, kept reinvesting in one-year CDs yielding 5%.Your investment is now worth about $638.
I admit it. There’s nothing wrong with buying a stereo. I have one myself. But before you purchase a stereo, car, shoes, or just about any consumer item, take a moment to consider the true price. If you sell it, you can’t get as much as you paid for it. When it goes down in value, you lose money. That’s depreciation.
What’s more, each time you invest in something that depreciates, you also lose the opportunity to earn interest on that money. That’s opportunity cost. The dozens of little things you spend money for each month may not seem to make much of a difference in your future. But they add up to lots of cash—cash that could be earning money instead. Right now, when you don’t have to pay for rent, home insurance, grocery bills, and medical expenses, you can be saving a larger percentage of your income. If you really want to save money, avoid spending it on things that go down in value.
In other words, invest in things that go up. Let’s move on.
2. NEVER BORROW MONEY TO BUY THINGS THAT Go DOWN IN VALUE
Let’s welcome your friend Winona to the story. When Winona saw Sigfried’s stereo, she fell in love . . . with the stereo, not Sigfried, sadly. She rushed out the next day and bought the same screaming model. But Winona had only $50 to spend, so she used it as a down payment. The store eagerly arranged to lend her $450 at 18% interest, which she could pay back in 12 monthly payments of $41.25. Now brace yourself, because Winona is losing money in three exciting ways:
Depreciation: Her stereo is losing value. Duh. Opportunity cost: Her money could be earning interest instead.
Finance charge: She’s paying interest on the loan.
Because of the finance charge, Winona wastes more money that could have been earning interest, so her opportunity cost is even higher than Sigfried’s. At the end of five years Winona’s stereo is worthless. When you figure in the depreciation, opportunity cost, and finance charges, she “paid” $721 for that cool stereo sound. Right about now she’s wishing she had fallen in love with Sigfried instead of his stereo. Remember, you made $138—and you’ve still got the original $500.
If you’re trying to save money for a car, an education—anything—then don’t borrow money for something that depreciates in value. While the bank is paying you 4% to 6% or more in interest in your savings account, you’re paying the bank—or some other lender-15% to 20% interest for the right to borrow it back. Does this sound ridiculous to you? It should! It’s like trying to go up the down escalator.
But as I said before, most people don’t follow this advice. They buy on credit and lose in interest charges.
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