Thursday, June 11, 2009

Money = Sweeet

Last time we discussed how diversifying what you actively do with your cash is similar to how a young girl or boy would pimp up their car. While this is all nice and good, a lot of you out there are thinking why would I want to put my money into shares, property, online savers etc etc.???

The short answer: Making money while you sleep.

A medium length answer: To provide options for you, instead of involuntarily working for your money. Making cash flow positive decisions now will lead to you having choice in what you want to do later. By investing now, you are "building options" for later.

A lengthy answer: Investing in all it's forms, whether it's buying property, trading shares, buying art, collectible cars etc. etc., all lead to the same consequence. The real question that is being asked by many young people is "Why should I save now, I can party hard, drink till I drop, live it up and worry about all that later!" Unfortunately, as young people often do, they haven't thought this scenario through fully.
Lets look at this example. Let's say I'm one of those millions of people who like to travel (as I do and you can see my travels on http://travelhurrah.blogspot.com/). An average trip to Europe etc. will cost anywhere from $4000 to $10,000 depending on how cheap you want to go and live. I know how much fun it is, I understand that it's awesome and that after finishing high school, it's pretty much all you want to do. Been there done that. But consider this. Let's say you put that $4000 away and let's say you buy shares. In a certain amount of time, between 4-10 years, this money will double (for arguments sake). When this happens, you have $8000. Imagine if you did this with all of the money you went to spend on holidays. Over a 10 year period, if you do this once a year (put 4000 away instead of holidaying), you will have....$72,000, and that's a conservative number. After ten years, you have these two scenarios:

1. 10 trips overseas and no cash.
2. No trips and $72,000.

So here you are, ten years down the track. Yes having made those 10 trips has been awesome, life skills learned, friends made have seen glorious places. No money in the bank, you are now 29, it's time to start doing stuff with your life. It's time to get a job, find a partner, have some kids perhaps, settle down and set yourself up for retirement.

OR....

Here you are ten years later. $72,000 in the bank, which modestly, earns you $5000+ every year in interest and FOR THE REST OF YOUR LIFE, you can go on one of those trips EVERY YEAR.

It's hard to fathom, but those early financial decision that we make, whether it's putting money away, going travelling, buying fancy overpriced new cars, getting personal loans for items, really has impact in the long run. Setting yourself up in that first 10 years after high school is vital to how you approach REAL adulthood in your 30s, when things get serious.

I am not suggesting you should not go on holidays, but I do want you to think about what you are doing now to set yourself up for bigger and better things for later in life.

Me personally? I think I have put certain steps in place already that have allowed me to basically approach financial freedom before I'm 40. I am always thinking about what I am doing with my cash, but at the same time, I do not have to hunt every dollar. I can still have some fun and enjoy the fruits of my labour. I can still spend some of my money now, with the knowledge that I am on my way. BUT, this has come from a hard slog of forced savings, and living on the edge of what I deem reasonable. It's worth it now though....