By Eric
One of my favorite financial mindsets to apply to various situations is that of “Don’t Buy Stuff – Buy Stock”. The concept is simple, as is the application of the concept: instead of using your money to consume things, use that money to purchase stock in the company you would have otherwise given business to.
While it may seem small or like an odd way to think about putting your money to work, the thought behind it is based in the fact that many times we spend our money on things that we believe will bring us happiness – and sometimes that is true – but many times, the “new” fades from the thing we bought, we don’t get the level of satisfaction we anticipated from the transaction, or we made the purchase on some sort of impulse and may even regret it later.
When you compare that low level of post-purchase satisfaction with the high rate of satisfaction that comes from setting yourself up for financial success or improving your financial well-being, the equation begins to make sense.
Let me give a few illustrations:
Let’s say that you’re having a rough start to your Monday morning and decide to swing through your favorite Starbucks’ drive through on the way to work for a little wake up call. I know coffee gets a lot of grief from people at the standard “$5 per cup” assumption – but I am a huge coffee fan, so I’ll allow it for purposes of example.
Half an hour into your work day, you’re hitting the office coffee pot with the same vigor you normally do despite having purchased a better coffee on the way in to work. That $5 that you spent at the drive through didn’t deliver anything different, and the joy of better coffee probably faded quickly making this purchase quickly fail to deliver any level of real satisfaction. What if, instead of spending your $5 at the coffee shop, you had purchased $5 worth of Starbucks stock. Assuming you find yourself in this “Monday Funk” twice per month, you’ll be spending $120 per year in the drive through. That same $120 could have purchased 2 shares of SBUX which we hope will appreciate in value rather than fade in value as the actual cup of coffee did.
Over 25 years, assuming a 7% return plus dividends, you could have your choice of the following:
1 2 “better” coffees per month
or
2 A little more than $10,000
How would $10,000 improve your financial well-being? Probably more than sporadically purchasing coffee with a brand name on the cup. (Related, check out our thoughts on what you could do with $10,000).
The same could be said for your regular trips to the grocery store. Let’s say you find yourself buying $10 of impulse purchases each week at the grocery store. Not food, not things you need, but legitimate impulse buys such as candy, single-serve sodas to drink immediately, random kitchen ware you don’t need, etc. The satisfaction will quickly fade but the money will be gone.
What if you took that $520 per year in impulse purchases and invested in the grocery store’s stock instead? I’ll use Walmart as the example here with the same assumptions from before. 25 years from when you implement this change in mindset, you could have more than $44,000 in place of a few candy bars or kitchen gadgets collecting dust in a drawer somewhere long forgotten.
If you rely on the 4% safe withdrawal rule of thumb (which we will discuss in a future post), that investment will generate nearly $1,800 in annual income for you – enough to cover a month of mortgage payments or a full year of internet!
While these examples may seem a little over the top, the math and assumptions aren’t that bold. And, if you took an honest look at your spending, I’m sure you could find areas where you spend more than you should on things to deliver satisfaction, but find that those things consistently deliver below expectation.
It may not be Starbucks and Walmart for you, but there’s probably things you buy weekly or monthly that could be skipped without real impact to your overall level of satisfaction. Putting that money to work for you instead would likely give you better financial peace of mind and improve your financial well-being.
Perhaps you’re already great at knowing what will bring you joy and what won’t. The things that do improve your quality of life are absolutely worth spending your money on. But if you’re spending money on things that don’t, consider implementing this strategy and see how it shifts your level of satisfaction with where you are directing your cash.
Patrick’s Thoughts:
I think Eric makes some great points about removing needless spending and instead putting that money to work for you. That’s a concept that I think is valuable for anyone to consider. While I may disagree with the idea that you should fully route that money towards a particular company’s stock, the overall concept is a good one.
Where I get lost when reading both examples is the generalizations that are made about them. Eric eventually gets to this point at the end of his post, but for me, I was reacting to the examples as I read them. The reiterative point I’m about to make is important.
For some, there are certain luxuries that add a significant amount of value to your life. For example, that “$5 cup of coffee” could mean a lot more than just a “better cup”. It could be the people we develop relationships with at the store. It could be that extra boost of confidence we get walking in to work knowing we’re set for success. It could be that we enjoy 15 minutes to ourselves in-between dropping off the kids and heading to work.
What I’m trying to say is if we start removing the little things that bring us joy, we start to lead lives that are less fulfilling. Emotional well-being is just as important as physical well-being, and if there are things you’re doing that contribute positively to that, don’t fully cut them out just to save a few bucks. We need to understand what’s truly important and what isn’t.
Now back to the concept at hand. In prior posts, we have discussed the incredible impact you can have on your financial future just by focusing on the little things. The other part of that story is that you must take those financial savings and do something with them. I think investing those savings into stocks of companies that you buy products from is a very interesting concept. The more difficult part is managing it. How do you know how much to spend? Where do you spend it? What are those little things that you’re cutting out on a monthly basis?
In order to be successful at this, you’ll have to make some estimates and create some infrastructure to regularly use. Maybe you download the Robinhood app, and transfer money every week that you would have otherwise spent elsewhere. Then, maybe you do the math on a bi-monthly basis and make a point to buy stocks on a reoccurring basis that makes sense. Using the Starbucks example above, you would save about $40/month by cutting out two trips a week. That means you could buy approximately 1 share every two months.
It sounds a bit complicated, so maybe you make it simple. Do the math over the course of the year, and design an allocation strategy for two or three different stocks. While I somewhat disagree with not being more diversified than that, you are investing money you otherwise would have spent. The idea isn’t to get an exact model, but something that closely replicates it. Then, on some regular occurrence, you invest a predetermined amount into those stocks at that allocation.
Maybe there is an easier way: someone invents an app that can do this for us automatically. Now, that’s a great idea.
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