Consumption versus Investment
by Richard
So, why is it so much easier for some families to save and invest?
Experience has taught me that it is not a function of intelligence or education.
If anything, it is the simple acceptance of delayed gratification as a life skill…and this take a great deal of focus and persistence in a culture geared towards instant gratification.
Failure to master this impulse has catastrophic consequences in later life. For this simple reason: Investment can be converted into consumption…but consumption cannot be converted to investment.
The Consumer Mindset
Take a quick survey of those you know best. Those who favor consumption tend to wear, drive or eat their wealth, with very little trickle down for long term investment. Life is good, for now, lived from moment to moment.
Their mantra is “why worry….tomorrow always takes care of itself” and they pride themselves on their spontaneous behavior. Planning is mostly about where to go out for dinner or entertainment.
Spenders tend to view shopping as an all encompassing social and entertainment venue, and they are in thrall to all the latest fads and fashions. They see money as a renewable resource, harvested from steady employment income, and cannot fathom a future where they might be forced to live off of investment earnings.
The Investor Mindset
Those in investment mode are not necessarily drudges. But they see the world in an entirely different light. Investors divide all expenditures into two big piles:
- Those that immediately go down in value after purchase
- Those with the opportunity for significant long term growth and compounding
The savers will max out 401k and Roth IRA accounts, and save diligently for home ownership. They tend to pre-fund their children’s educational accounts. They look at discretionary spending as the residual after the serious money is invested for long term goals like retirement, health care, and education.
The Millionaire Next Door
When Stanley and Danko wrote “The Millionaire Next Door”, they profiled two physicians who epitomized this stark dichotomy. The investment-oriented doctor bought high quality cars used, paying cash. This allowed him to convert his practice income into prudent investments.
The consumption-focused doctor bought expensive cars new, at full dealer markup, always financed to the hilt. Because his income was so high, he never saw the necessity or virtue of investing.
It’s no mystery who wins the ultimate race to financial security.
Financial planners and wealth managers like to take credit for their client’s success, but the reality is that each client is the author of their ultimate achievements, based on personal character and productive habits.
Becoming Investor-Focused
If you are serious about wanting to join the rank of investment focused families, there is a simple screen through which you can pass all your intended purchases.
You must ask yourself before you hand over the plastic or write the check…is what I am about to purchase designed to grow and compound over time…or is it guaranteed to go down in price at the moment of purchase.
All cars are used cars. All clothing is used clothing. The newness and novelty evaporates at the exact moment of purchase.
The McMansion you live in may be twice as large as your needs dictate.
All vacations and restaurant meals are fleeting pleasures of the moment.
It’s not a question of whether or not you will eventually receive this common wisdom.
But sooner would be much better than later.
October 13th, 2008 at 1:29 pm
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