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.