To Consume, Save, Invest, or Speculate? That Is The Question.
I believe it was Shakespeare who once mused:
Many Americans know not where their money goes
To consume, save, invest, or speculate?
That is the question to be posed
Before thy money is gone
To question early in life is to see thy freedom grow
Save a nickel, a penny more
To consume, save, invest, or speculate?
That is the question to explore
Before thy breath is gone
To question later in life is to depart ‘mid the poor
Okay, perhaps Shakespeare never penned such awful poetry, but the message is sound. To consume, save, invest, or speculate? It is an excellent question. Before you answer, consider your options.
You CONSUME when you choose to exchange your money for something of little lasting value.
We are all consumers. We must buy products and services just to get by. However, consuming destroys our wealth. When we buy a product or service, we shift a bit of our wealth into the pocket of the seller by handing him more dollars than he spent on the product or service he hands over to us. The difference in dollars is the seller’s profit. In exchange, we end up with a product or service worth less than what we just paid the seller for it. Worse, its value falls rather quickly – even down to zero if we consume the product or service in full.
Profit is not a bad thing. Sellers deserve a profit for providing value to consumers. A bad thing is consumers consuming excessively. Too many Americans today give too many dollars – even dollars borrowed from banks – over to sellers in exchange for products and services of little lasting value. Across billions of transactions each year, sellers collect mounting slices of our wealth. Consumers, in turn, collect mounting piles of worthless objects and wistful memories.
You SAVE when you choose to avoid, reduce, or delay exchanging your money for products and services.
Many of us are savers. We save money when we keep a little – or a lot – of our cash income in our bank accounts by taking control of our exchanges with sellers. Just because sellers offer us cool, fun, or interesting things doesn’t mean we must possess or experience these things to live a fulfilling life. How many times have you rushed out to see the latest Hollywood movie only to leave the theater thinking, “Well, that was a waste of time and money”? Yet, the time is lost forever and your money is in the pocket of the ticket seller.
Time and money are essential ingredients to building wealth. While many Americans seek to “get rich quick” with “no money down,” financial freedom begins with our own cash savings and a large dose of patience. Compounding interest, dividends, earnings, and gains from wise investments will, over time, offer us a greater chance at financial freedom than years of playing the lottery ever will.
You INVEST when you choose to exchange your savings for an asset you know is worth far more than its price.
Some of us are investors. We invest when we exchange our savings for assets worth significantly more than the price we pay for them. Why would someone want to exchange his valuable assets for our smaller cash savings? Time and money. The assets may be valuable because, over time, they are expected to put significant cash flows – dividends, interest payments, royalties, net rental fees, etc. – into the pockets of their owner. However, the owner may not want to wait for time to pass before he can pocket the cash flows himself. Instead, he prefers to pocket our smaller cash savings right now.
Think of it as paying $10 for a $20 bill. No doubt the $20 bill is worth $20, but the seller’s price is only $10. We pay the seller’s $10 asking price and instantly own an asset worth $20. Such an exchange is how we wisely invest our savings in assets like stocks, royalty trusts, small businesses, and rental properties. If we repeat these exchanges over and over again, we become wealthy. This is how the world’s wealthiest investor, Warren Buffett, invests his billions. How does he find such great deals? Speculators hand them to him.
You SPECULATE when you choose to exchange your savings for an asset you have not reasoned its worth.
Many of us are speculators. We speculate when we willingly exchange our cash savings for assets the worth of which we do not know. Speculators do not take the time to study an asset and determine its worth. Instead, they just pay the seller’s price and hope that the price will be higher later. Some speculators speculate and make millions. Many, however, lose their shirts by hoping that luck – the gambler’s unreliable friend – will save them from total loss.
Ironically, speculators make America a great place to invest. The speculator soon forgets the valuable assets he owns when he jealously watches an asset he does not own increase dramatically in price. To quickly raise the cash he needs to buy the increasingly expensive asset he covets, the speculator willingly sells his valuable assets at discounted prices. Always on the lookout for a bargain, the investor stands ready to scoop up the speculator’s valuable assets at prices well below their worth. This is how speculators transfer their wealth to investors like Warren Buffett, who patiently grows wealthier every year.
If you consume in moderation, you create cash savings, which you can invest in assets sold to you at bargain prices by those who speculate. To consume, save, invest, or speculate? How you answer the question is up to you. May I suggest you leave the poetry to Shakespeare?
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NOTE: This article first appeared in the Winter 2007 issue (Volume 5 Issue 1) of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation (www.lfhoa.com).
Copyright 2007 PowerWealth.com. All rights reserved.
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