Please enjoy this guest post from our friend Pauline at Investmentzen.com.sacp
I recently read Alice Shroeder’s book The Snowball, a biography of Warren Buffet, and an anecdote caught my attention. Buffet paid $31,500 for a house in Omaha, Nebraska, in 1958. He was relocating back to his home town with his wife and two young children. A third baby was on the way. Buffet had to provide a roof to his growing family. However, he hated the idea of spending any more than needed, arguing that any money stuck in real estate wouldn’t increase his net worth the way he was able to grow it when investing in the stock market.
The same way, he was reluctant to give to charity in the 1980s, when he was already worth several billion dollars, because he trusted his investing abilities to snowball his net worth even more (hence the title of the book, ha!), and make a bigger impact after he’d pass. He is now worth over $66B, and while I don’t understand why he still works at age 86, or still looks for ways to make more, there is a valuable lesson here.
Money today turns into a lot more money tomorrow. And while it may not seem like much today, it can buy you a lot in the future.
Money Equals Time
What I want to buy in the future is time. We all know that time is money. The time you spend working is a sacrifice compensated by a salary. And if you have money, you can afford to buy time, which equates to buying your freedom.
I want freedom. And I am willing to sacrifice freedom today for freedom tomorrow. Why? Compounding.
Say you are too lazy to cook tonight. You feel like sushi. You go and get yourself and your boyfriend a $14.99 sushi meal to go. Plus tax, plus tips, you’ve spent $40. You don’t really care, because you make $40 an hour at your day job, and an hour worth of your time today feels like a good trade not to have to cook tonight.
It is also equivalent to having gone home an hour early, passed on earning that last hour’s salary, and made dinner. Would you have cooked if you had left early? Maybe you’d have been in a better mood and have had more energy.
But most importantly, if you had invested these $40 on the markets at 8% for the next 35 years, you would have $657. Or over $320 adjusted for inflation at 2% annually. How does a $320 dinner feel?
Now you can imagine how Buffet felt after spending $31,500 on a house.
5 Questions to Ask Before Purchasing
$320 can easily buy you a couple of days of freedom. So instead of choosing the instant gratification of one hour today, you could choose two days in the future. All your money decisions should be based on a few criteria:
- Can I afford it? Simple, straightforward. If you have to charge your card for it, you probably can’t.
- Do I need it? Another easy one, although sometimes it is hard to differentiate wants from needs.
- Am I getting a good deal? For cheap items, are they as cheap as it gets, for big purchases are you getting quality, value, and something you will use happily for a long time?
- How long did I have to work for it? You can use your hourly wage to get a rough estimate, but it is usually more than that because of taxes, commuting time, and other work-related costs. You can take at least a third off your hourly rate for a more accurate estimate. For example, you make $20/hr. and want to buy a $200 item, it probably is costing you closer to 15 hours of your time than 10 hours.
- What am I giving up in exchange? That’s when the future you comes in, and figures out how much today’s you is getting in the way of a comfortable and relatively early retirement… because we all want to make ends meet in retirement, and most of us claim to want retirement to come sooner rather than later.
Thinking in Terms of Time, Not Dollars
When you think in terms of time, the perspective changes. The two days you gave up for that sushi night are going to be queued at the end of your active life. That means two more days, at age 60, 65 or 70, depending on how often mindless spending happened, stuck at work. At 60, it’s probably not a big deal. When you’re reaching 70 and all your bones ache, but you still have to go mop the floors at McDonald’s, that’s another story.
Suddenly, you go back on that sushi night you don’t even remember, and you resent your 2016 self.
I am by no means advocating extreme frugality, nor suggesting you give up on life’s pleasures; but, ruthlessly cut the fat, yes. Ask yourself these questions every time you take out your card. Remember as a rule of thumb that $20 today is one day of freedom in the future. If you are really to give that up, go for it. Otherwise, put back that card in your wallet and save your money.
And Buffet? 58 years later, he still lives in that Omaha house.