Do you choose to be rich or poor? Everyone would choose to be rich however their behavior shows that they in reality want to be poor! If you choose to be poor enjoy ramen noodles twelve packs and living in a slummy place. But I don’t want that! Good! Then we need to make the right choices in life.
Let me give you an example. If I give you $70,000 USD to spend what do you do with it?
- You can buy a fancy SUV now. Cost $70K. You enjoy now. Forget about tomorrow. Just like the one in the picture.
- You invest that money in the stock market in say a growth stock and drive a $10K beater car instead like a used Honda CRV or Toyota Camry. That gives you $60K to invest.
Let’s see what happens five years down the road.
Option 1: The truck/SUV depreciates rapidly. At the end of five years your vehicle is now worth $30,000. So you are -$40,000 in the hole! Doh!
Plus you have paid interest assuming you financed the vehicle. Average car loan rate 5%. So over five years that makes a car payment of $1320.99/month. Over five years $79,259 for total interest paid of $9259 USD.
Adding together your interest plus the depreciation you have lost $49,259 of your investment! You are a Money Fool! Put on that dunce cap and go sit in the corner!
Option 2: You buy Google stock. Looking at the prices chart below.
At $750/share you buy 80 shares of Googl. After five years those shares are worth $126,480 USD. You gained $66,480 in five years. You more than doubled your money. There is no dividend on Google stock so we don’t need to account for that. However your beater car is now worth $3000 only so you have lost $7000 in depreciation. Still you are up $59,480 USD. Nice going!
Option 3: You bought Microsoft stock instead. Yeah you secretly want to be like Bill Gates and live on Mercer Island. Hey I do too! OK then.. moving on.
For $60,000 you get 571 shares at $105/share.
Those shares are now worth $214.25/share so you are worth $122,336.
Plus 2% dividend per year so around $6000.
Total gain $68,236 extra
Less beater car depreciation $7000 so $61,236 in pure gain. Great job.
Option 4: Invest in Nike. Just do it! like the ad campaign says. Investing in the sneaker king you would have turned your $60,000 into $112,290.
There is also a dividend here but smaller so you get say $5000. Total gain $57,290. Not too shabby for sneaker company! You can treat yourself to some new Air Jordans as a reward.
Less beater car depreciation $7000 = $50,290 extra in your pocket
Option 5: You get very lucky and invest in Zoom. Zoom Zoom indeed!
You buy at $50/share for 1200 shares.
Those shares are now worth $350,724! No dividend but who cares!
You are up $290,724. You can buy yourself a house or apartment in many parts of thre country. Imagine life with no rent or mortgage. That’s nice!
The thing to keep in mind is that money can now be reinvested again and again, meaning snowballed into real money. Before you know it that $60K can go from $60K to $120K to $240K and on and on. Warren Buffett didn’t start with billions after all. However there is no guarantee you will get these returns all the time. Some years will be good and some wil be medicore. The one thing that is absolutely guaranteed is that vehicle is going to depreciate like a rock!