Investing vs. Consuming: Paving the Pathway to Wealth

Yesterday, I talked about how much money you need to be wealthy. Today, I want to share some thoughts on investing vs. consuming and the role of your everyday financial decisions in paving your pathway to wealth.

As you may have heard, Apple released the newest version of their iconic iPad – dubbed the iPad 2 – this past Friday. As expected, customers lined up well in advance to pay anywhere from $499-$829 (depending on the model) for an iPad of their own. Assuming an average purchase price $650, our local store sold well over $50k worth of iPads on Friday night.

Full disclosure: I picked up an iPad 2 myself on Friday afternoon. I actually decided to buy one about three months ago, but held off knowing that the new model was just around the corner. I was fortunate in that I pretty much walked up and bought mine with minimal wait.

Given the amount of money that people plunked down on the iPad this past weekend, I thought it would be worth highlighting an analysis of buying Apple products vs. buying Apple stock. About a year ago, a guy named Kyle Conroy compiled a list of Apple’s major product releases from November 1997 through April 2010, and then calculated how much money you’d have if you had bought shares of Apple stock instead of their products.

All told, there were 317 products in his list with an average price of $1867. If you had bought all of them on their release day and paid the MSRP, you would have spent $591, 719. As impressive as that number sounds, let’s assume that you had bought shares of Apple stock (AAPL) at the prevailing price instead of buying each of those products. Care to guess how much you’d have if you had done this?

At the time he put the list together, your AAPL investments would be worth a whopping $11, 120, 691. Considering that Apple stock has risen another 35-40% since that time, your nest egg would be even larger today. Of course, this is a somewhat contrived example, but the larger point still stands – every dollar you spend is a dollar that’s not available for investing.

This is a classic example of opportunity cost. By spending your money on the latest and greatest gadget (or whatever else you buy) today, you’re foregoing potentially significant investment returns tomorrow. This isn’t to say that you should avoid spending at all costs, but you do need to seek a healthy balance.

If you focus too much on saving and investing right now, you run the risk of living an overly ascetic lifestyle early on, only to find yourself with a huge excess later in life. While this is arguably a good problem to have, it’s okay to spend money on both needs and wants as long as you don’t overdo it.

On the flip side, if you spend too much and invest too little, you’ll enjoy a high standard of living today only to be forced into significantly delaying retirement and/or dramatically reducing your standard of living in the future. Not good. Not good at all.

My advice is to run the numbers and figure out how much you’re likely to need in retirement. From there, build a budget that incorporates sufficient saving and investing to meet your goals. As long as your basic needs (both present and future) are being met, you’re free to use your excess as you desire.

If you’re interested in accelerating your retirement date, your “splurge” might be to add even more money to your investment portfolio. If, on the other hand, you have a weak spot for gadgets, travel, or whatever, that’s okay. Just be aware that any dollar that leaves your pocket today won’t be available tomorrow.

13 Responses to “Investing vs. Consuming: Paving the Pathway to Wealth”

  1. Anonymous

    Your point is good. The example may not be the best to illustrate your point though. What if we replace Apple by GM, would that make your point less valid?

  2. Anonymous

    Wow, that’s an eye opener. I guess hindsight is 20/20. It’s hard to determine opportunity cost in the moment, but being sensitive to the idea can at least make you more thoughtful in the moment concerning the future result of the dollars you use in the present. Thanks for a good read.

  3. Anonymous

    Amazingly enough, I decided a few months ago to get rid of my iPhone and bought a refurbished laptop for $99 instead of buying a new iPad.

    There has been a few times I reached into my pocket to pull out my iPhone, but what I realized I like the most is the $100 I am saving each month by no longer having a large cell phone bill.

    Getting a cell phone plan, or a data plan with a iPad is like getting locked into a never ending credit card debt. I want to control my costs, not have them dictated to me by Apple, AT&T or Verizon.

  4. BG: All good points, but the utility of gadget purchases only gets you so far – and I say this as a borderline gadget addict. Yes, you’re entertained, and perhaps you’ve experienced a marginal increase in efficiency which could help you (indirectly) pay the bills, but you can’t eat the utility of an iPod, and it won’t put a roof over your head or keep you warm and dry.

    As with all things, balance is the key. Like I said above, once you’ve taken care of your present AND FUTURE needs (in the form of sufficient investments to meet your income needs in retirement), then have at it. But a huge number of people barely cover (if that) their current needs out of currently available funds, much less taking care of their future needs.

    In all likelihood, this article doesn’t resonate with you because you’re already following the advice.

  5. Anonymous

    Nickel said: “…If you buy something instead of investing, you are giving up the opportunity to invest and the expected returns….”

    and vice-versa. If you decide to invest instead of making the purchases, you are giving up the utility of the purchases.

    “…you’ll still beat the ROI of buying a typical gadget (with the exception of oddball things like the Apple-1 that you mentioned).”

    Not necessarily: purchases provide value that isn’t just a dollar amount. Computers can save you time, and provide an extremely cheap form of entertainment. If you look at the price of a computer relative to the cost of an encyclopedia set (for example), the computer wins 100-times over — because it is capable of providing information like an encyclopedia set, plus do that function in any language on the planet, and has millions of other uses too. Sure in a few years the computer is “worth-less” (can’t sell it for jack): but it provided enormous value while you used it.

    So, the example of foregoing purchases of Apple products (in favor of Apple stock) seems to be a straw-man argument. Even if you shunned Apple products: you still will be spending money on entertainment, information, music, and other utility that those machines would’ve provided, but just from a different company (like Dell, HP, etc).

    In the end though, if you think the going price for a share of Apple is more “Valuable” than the utility of a retail purchase, then buy the stock — otherwise make the retail purchase. That’s the way I think about things anyhow. I will not make a retail purchase unless I believe I am getting a good value of my dollars.

    As an example, last weekend I purchased the computer game “SpaceChem” on Steam — I think it was $15. I will not be able to get more hours of entertainment from anything else out there (including slow-reading books) for that amount.

    Could I have spent the $15 buying more retirement stock: yes, but (in my mind) I am getting much more value out of the $15 purchase, than I would ever get out of putting the $15 into a retirement account.

    However, if the choice were to put the money into a retirement account or use it (plus more) to go out to dinner at a restaurant: I’d buy the stock instead, because I don’t value going out to a restaurant as much (but God my wife does — heh).

  6. BG: Regarding opportunity cost, the concept applies regardless of when you apply it, but the outcome is only known after the fact. If you buy something instead of investing, you are giving up the opportunity to invest and the expected returns. Whether or not those returns pan out is another issue, but even if your investments are flat or decline, you’ll still beat the ROI of buying a typical gadget (with the exception of oddball things like the Apple-1 that you mentioned).

  7. Anonymous

    BTW: if you bought the Apple-1, know that one of these machines recently sold for $210,000 a few months ago…

    It originally cost $666.66 — so there was a 31,500% gain on just that one purchase (heh).

  8. Anonymous

    I didn’t do this but looking at the numbers one should have invested in vanguard energy fund (vgenx) in 84 and bailed out when the price of oil was at the peak. But that is hindsight. I believed the hype at the top of the market and bought in then. I have recovered my investment but remain invested for the long haul. Years ago Blockbuster was hyped as the stock to buy and some rode the wave up, didn’t realize market conditions change and hold nothing now. Investing is cyclical with all products having their peaks.

  9. Anonymous

    I’m not too sure what to make of this. Especially the ‘opportunity’ cost comments. Opportunity costs only apply in hindsight.

    I could’ve dumped a ton of money into GM stocks too (instead of buying their cars) — would’ve turned out completely differently.

    I agree with Nickel’s statement: “As long as your basic needs (both present and future) are being met, you’re free to use your excess as you desire.”

  10. TFB: I absolutely agree that there is hindsight bias here, which is why I pointed out that this is a somewhat contrived example. You’d be insane to pile your money into any one specific tech stock like this.

    I also agree that it would be interesting to see the numbers for a broad based index – or better yet, something like a regularly rebalanced 60/40 portfolio. The numbers would almost certainly be lower, but the point about the importance of investing first and satisfying your gadget-buying desires second would still stand.

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