Our culture is focused on making and spending money. Advertisements play on your emotions by implying that their product will make you happier, prettier or more successful. It is like a virus being planted into our heads.
It floods our kids with the notion that to be popular you need to have the latest iPhone, an expensive car or nice clothes. Ads tell you that you deserve their products even though you cannot afford it. The ‘solution’ many people turn to is debt.
The debt problem of many Americans
And even so, we wonder why the debt level of Americans is at about $4 trillion in 2018? According to LendingTree, the total credit outstanding as a percentage of disposable personal income is about to reach 27%. This level has exploded over time.
Do not get me wrong, debt can be a wonderful tool if used wisely. Using debt to finance your home or to buy real estate that produces cash flows can be a smart decision to build wealth. But this is not how the average American seems to use debt.
The average American baby-boomer or Gen Xer has $7,175 or $8,291 in credit card debt, respectively. Credit card debt, often with interest rates of 12%+, is not the kind of debt you want to have.
When you compare this with the average savings account balance of an American, you see a troubling picture:
• Under 35: $1,580
• 35-44: $5,000
• 45-54: $6,500
• 55-64: $8,500
• 65-74: $10,000
• 75+: $11,000
For the average baby-boomer or Gen Xer, their credit card debt is likely to surpass their savings account balance. If this was me, I would be very worried!
But if spending money on material things gives you happiness, then go for it! Though this is often not the case. Buying X will give you a happy feeling at first after which buyer’s remorse kicks in. The same with buying Y, etc.
Even if you buy something that makes you happy, you see a friend who bought something that seems to make him even happier than you are! Suddenly, you don’t feel that happy anymore about your purchase. This cycle just keeps going on and on.
I was part of this same vicious cycle. Working hard while figuring out on what things I could spend my money to make my life ‘so much’ better! But after being part of this vicious circle for some time and being disappointed by the outcome many times, I wanted something different.
After collecting stuff I did not really need, I decided to collect things that would give me the freedom to enjoy experiences that give me a deeper sense of happiness. For me, this turned out to be collecting pieces of companies in the form of shares.
I have listed a few reasons for my mindset change below:
You collect a piece of a business providing growth and dividends
Buying a fancy watch, car or iPhone may seem that you are buying something much more tangible compared to some abstract number of shares with a dollar amount in your portfolio. At first glance, this is the case.
However, a share is nothing more and nothing less than a piece of a business. In case of index investing, buying a piece of many different businesses. You are purchasing assets and future earnings power of a business.
Let me illustrate this with an example. You could buy the latest iPhone X for $1,000. If you buy the iPhone X its features and unparalleled ease of use will amaze you. You will enjoy it a lot over the next few weeks after which you will get used to its features. You will no longer be amazed and the phone seems nothing more than just a phone. After about 3 years the iPhone will probably be worth about $300 as a trade in. Your iPhone has lost about 70% of its value.
For the same $1,000 you could buy about 6 shares of Apple (ticker symbol: AAPL) at today’s prices. You are now a shareholder of a company that sells several of the most innovative products around. With earnings-per-share of $11.91, your shares represent about $71 of total earnings. Part of these earnings are kept by Apple and are reinvested to create even more innovative products.
About $2.92 per share will be paid to you for each share you hold as a dividend. So you will receive about $17 in dividends for this year alone. If things keep going well, this dividend may very well increase in the coming years.
If Apple keeps reinvesting earnings and keeps selling innovative products in the marketplace, and even manages to increase sales and earnings over time, your shares may even increase in value. If you held these shares for the past 10 years, you would have almost tripled your investment.
Of course, shares can also decrease in value, dividends can be cut, you could lose your entire investment in case of bankruptcy. But what would you prefer? An almost guaranteed depreciation of 70% on your iPhone X or quarterly dividends and the potential of appreciation of your shares?
Stocks, over time, provide financial freedom and flexibility
There will be a time when you do not want to work anymore, or that you cannot work anymore because of a health-related issue. To continue to do the things you enjoy and make you happy, you need financial freedom and flexibility. You need the ability to quit or work part-time by having a financial nest egg to cover any living expenses.
Living expenses will differ for everyone depending on your lifestyle. If you want to retire in a log cabin in the forest, waking up to whistling birds, you need a lot less money than if you want to travel the world and stay in fancy hotels during your retirement. Regardless of the size of the nest egg that you need, investing is the surest way to get there.
Index investing via exchange-traded-funds (ETFs) is a very useful tool you can use to reach financial freedom. You can start with as little as $50 a month. For example, if you want to invest in corporate America, you can buy shares of an S&P 500 ETF such as the one from Vanguard (ticker symbol: VOO).
Every invested dollar in this ETF is spread out over 500 of the largest and most profitable companies of America. Such as Coca-Cola, Google, Apple, Johnson & Johnson and many more. The expense ratio of 0.04% is almost impossible to beat.
Historically the S&P 500 averaged 7% after inflation. If you start investing with $15,000 and add an additional $300 every month and reinvest dividends, after 40 years you will have a nest egg of almost $1 million dollars after inflation. A nest egg with this size will surely give you flexibility and possibly even financial freedom!
You will become a better person
Investing requires discipline. If you want to reach financial freedom and flexibility, you need patience. You need to delay immediate gratification for an even better gratification over a longer period of time.
This is very difficult to do. Especially for younger people who are more easily influenced by their friends and by our society which promotes spending your money on instant satisfaction.
But being patient and managing your impulses is way more rewarding. You feel better about yourself that you are able to resist the urge to spend money. You will also feel better about the fact that you are building something that will give you deeper happiness and freedom.
What can be better than freedom? Freedom to do the things that you really want to do. Spend time with your spouse and kids. Travel the world. Helping others who are less fortunate than you are.
So what do you collect? Any thoughts on how you combine instant and longer term gratification?