Simple steps that help you benefit from the economic machine
Make your daily decisions work for you in the macro movement of wealth
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” — Albert Einstein
I’ve heard this quote a million times, but I’m not sure I fully internalized it until I took greater ownership of my finances and became more conscious of my cash inflows and outflows. It’s a bold statement that goes well beyond the egregious interest rates on car loans that nobody should pay, or the fact that earnings in the market can multiply over time to reach staggering levels. It is much more intricate than that and it is impacted by even some of the most minute daily decisions that we make.
The concept applies to both the accumulation of debt and the purchasing of stuff
Debt compounds, and investors in that debt are on the other side getting rich. However, the same idea applies to most consumer spending. Wealthy business owners and executives market and sell products, the middle class buys those products, and investors of those businesses get wealthier and effectively have their own purchases paid for by everyday consumers. I’m not implying that it’s harsh, or even that it’s right or wrong, but just that it’s the way that wealth moves. It’s important to recognize this idea so that you can benefit from it with your daily financial habits.
Don’t just buy the thing — buy shares in the company that makes the thing
Buying material things you truly want is fine. Buying material things aimlessly is destructive. Buying material things aimlessly in large quantities takes your financial freedom and gives it to other people. Think through a few real world examples where this takes shape…
Smartphones or other heavily marketed consumer electronics
When you witness a mob of people camping out to get the latest iPhone, you may have one of two schools of thought as to what you see:
- “Lucky” consumers able to get their hands on the latest gadget, OR
- Apple boosting its earnings at the expense of hyper-consumers, gaining a steady stream of users consuming Apple content and driving ad revenue for them, and investors of Apple reaping the actual benefits.
As of this writing, Apple makes up the largest weighting of the Vanguard Total Stock Index fund (VTI) at about 4.5%, so those camping out for the latest iPhone are effectively paying investors, even if those investors simply own a broad index instead of owning Apple shares directly.
Be the millionaire with a $400 phone instead of following society’s recommendation to buy a $1200 phone and funding your boss’ retirement (because he or she probably owns more Apple stock than you do).
Gambling or other forms of “gamified” risk
I’m a huge fan of fantasy football. In small quantities I like to play for money with close circles of friends. A recent trend in fantasy football is “daily fantasy”. This is effectively spawning an entire industry of a football themed casino where the majority of players feel like they are among the most knowledgeable fans on earth and take bets disproportionate to their wealth, unsurprisingly losing a lot more than they win.
When people ask me if I play daily fantasy, my response is always the same. If I ever wanted to be involved in that space, I’d rather invest in the enabling platforms (i.e. DraftKings or FanDuel) than actually place bets on athletes I’ve never met doing things I can’t control. I’m far more confident that people will spend their money with those platforms than in my own ability to place football bets. You’re on the right side of the wealth equation when you profit from other people placing those bets, rather than on Tom Brady throwing for 300 yards and 4 touchdowns.
Index fund investing ALWAYS puts you on the right side of wealth movement
To take the concept of ownership further and make the money flow in your direction, own every public company through index funds. When these companies succeed, it can happen in any sector of the economy and you can ensure you are positioned well by casting the largest possible net. If you want to devote some portion of your portfolio to individual companies, do your research and keep it to a percentage of your assets that you are comfortable incurring higher risk on.
Know when you’re being marketed to, officially and unofficially
I’ve worked in the digital ad tech space for about 13 years, and am especially cognizant of knowing just how good it is at identifying when you’re in market to consider spending money on just about anything. This probably isn’t terribly surprising, but the average consumer is probably more influenced by advertising than they realize.
Advertising effects are exponential by way of consumers influencing other consumers. This goes back to the iPhone example. Even my own mother has often expressed her need for an iPhone because that’s “what she sees”. After detailing the capabilities of much cheaper phones, it was easy convincing to talk her down several notches on the smartphone menu.
Be on the right side of hyper-consumerism (and bring others with you).
Those who are working to be financially free tend to avoid hyper-consumerism and invest wisely and regularly, but still DEPEND on the masses to maintain a lower level of financial literacy and to buy things they can’t afford. If they didn’t, their investments would stagnate. This, however, doesn’t mean wealthy people should keep these effects a secret.
There is a massive gap in financial literacy among people of all ages, and sometimes even among high earners. The best thing that the financially literate can do is to pass the knowledge onto others so that they can take action in their lives as early as possible. More financially literate people is a good thing in the bigger picture even if it poses a temporary threat of reduced consumer spending. Wealth begets wealth, and people can accomplish more when they have their financial house in order earlier in life.
Happy investing. No better day than today to start taking your life back.