Tuesday, May 22, 2012

Every Dollar Is An Investment

Before I start, credit where credit is due. Treating every dollar as an investment is the third step in the Motley Fool's 13 Steps to Investing Foolishly.

I read that article awhile ago, leaving the idea percolating in my head.  

In your life, you will only get so much money. That amount can be higher or lower based on a number of things in and out of your control.  But the amount is limited.  As your momma said, "Money doesn't go on trees."

While you might not think twice about buying $3.40 latte (for example), the implications of doing so loom large.  Especially when multiplied hundreds or thousands of time. That $3.40 can never again be spent on anything else.  Is it really worth it?

Another way of looking at it:  Each time you spend a dollar, you value the object purchased more than the dollar.  You also value the object purchased more than anything else you could potentially buy with that dollar.  And some things I'd rather spend money on other than lattes.  For example:
A whole other category of ways to spend that $3.40 exists.  Ways that make my money make more money (reread that part carefully), also known as investing.  For example:
  • Saving towards the down payment for a housem where I can build equity.  
  • Paying off credit card debt, instead of owing the bank 14% or more.
  • Funding my retirement account or otherwise investing in the stock market.
The first options are good and the second superior.  Investing wisely now means more money later to do the things I want. 

Back to the coffee.  Never buy a latte?  Not at all.  At times a latte has been the best money I've ever spent.  Do treat each dollar as an investment.  Consider and value each purchase.  In doing so, you will stretch your money much farther.  Some tips:
  1. Make a Budget and Track Your Expenses:
    Know where your money goes. I estimated $250 a month for food on my first budget.  The reality? $400-$500!  Those Subway stops, Starbucks run, and nights out added up, without me knowing.
  2. Find the Low Hanging Fruit: Once you know where your money goes, you can find ways to save.  Some are easy.  Pack a lunch to work instead of eating out.  Brew your own coffee instead of a daily latte.  The savings add up quick.  Consider the math:

    Home brewed coffee = $.25.  Latte = $3.40.  Weekly Savings = $16.75.

    Ask yourself what's really important to you and what's not.  Are you investing too much money in your car every month?  Sell it and buy a cheaper one.  Can you get by with just using Hulu?  Then cancel TV.
  3. With Your Extra Money Pay Off Debt, Save, and Invest!
    1. First of all, Debt is Dumb. If you have any that's not your home mortgage, pay it off! I've been debt free for about a year now, and the freedom feels great.    
    2. Once that's done, sock money away.  Choose an amount and save it every month.  Once you see your accounts grow, you'll get addicted.  Seriously, it's fun!
    3. Invest.  Make your money work for you.  Fully fund your retirement.  Open an IRA.  Check out a site like Prosper.  Build wealth!

      Read Dave Ramsey for the full scoop.  His baby step plan is great, and I did not do it justice here.
  4. Spend Your Money on What Really Matters To You (In Cash):  
    Use some of your savings to do what you love.  I love travel, but not on Visa's dime.  Gardening and bike riding are also hobbies of mine.  I pay for them in cash.

    Get those season tickets you want.  Go to the ballet.  Buy that motorcycle.  Spend your money on the things that matter to you.  Find a cause you're passionate about and give.  
You work hard for your money.  Use it to live the kind of life you want, without going into debt, while building wealth.  It might sound impossible, but when you think about where your money goes, you'll be amazed at how far your money goes.  

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