Saving is hard.
No matter what personal finance blogs say, arguing about the future, and just how much money one will have in the future, the fact remains that you do not have that money now. That $300 that could be used for clothes, movies, video games, or my personal weakness, computer parts, is now tied up in a savings account.
Well that’s boring.
It’s hard to convince people that saving money is more appealing than spending that money on goods that benefit you immediately. As a random finance blogger, however, I am going to attempt to convince you that saving is awesome, and that spending has less benefits than you may imagine.
My first challenge is trying to convince you that spending is icky. I want you to try and remember your last big purchase of a physical item. Do you remember how you felt before the purchase, and immediately afterwards? Great, right? Well, I want you to now think of where that item is now, and how you feel about it now. (Note, I just tried this experiment out with my girlfriend, and she lauded how much she is enjoying her new laptop. Of course, that laptop was picked out by me, so, her example doesn’t count).
Do you feel the same? Odds are you probably don’t. The emotions you had to buy that item at whatever price you paid for it are no longer there. You have less enjoyment from it than you did then. This is a concept I would like to dub “relative value”.
Let’s say that you spent $100 on that item. If you enjoy it half as much today, that item is now effectively “worth” $50 to you. Now, there can be purchases that are worth more than the purchase price for you. As an example, I bought a $30 pair of headphones to listen to on the bus, and not have to hear the people on the bus. To me, that is “worth” more than the $30 I paid for it.
It is true that spending can yield a greater return than the money you spent on it. However, when you start to look at all of your purchases as a whole, aka, how diverse your spending is, you will see a trend that the sum of what you have bought is less valuable now than it was when you purchased it.
Here is where I want to draw a parallel to something: the stock market. The S&P/TSX composite index (Just, for our purposes, pretend this is basically the stock market as a whole) during the worst financial crisis of our lifetime in 2008 dropped somewhere around 30% in value in about a month. This means that a $1000 investment would be worth $700.
Sounds awful, doesn’t it? Damn stock market, you can lose all of your money in about a month! Why on Earth would you want to spend if this could happen? Well, remember how I talked earlier about “relative value”? Well, if all of the items that you own are worth less than when you bought them, and provide less value to you, the same thing is happening that happened in 2008. The money that you spent (Let’s say $1000 for an easy comparison) on personal items is worth half the amount now than when you bought it. That 30% drop in the market amounted to you only having $700, but spending the same $1000 has amounted in you having a relative value of only $500.
And that’s the worst case scenario for the market.
On average, stock markets trend in different directions. Without getting too much into stock trends, whenever a market is doing poorly (let’s use the S&P/TSX Composite Index as an example), it tends to average losses of about 28% in a 9 month period. However, when markets do well, they tend to average gains of 124% in a 50 month period.
Although there is a mindset that stock markets can lose value rapidly they tend to gain value more often, and for longer. The markets right now have been in decline for approximately 8 months, and have lost somewhere in the range of 25%. If you haven’t put the pieces together, the right time to start funnelling money into the market may be soon.
All that money you may want to spend now will be worth significantly more investing in the market than it is spending on anything personal.
So, you know, go do that.
Guess you’ll have to read upcoming articles!