The question we have to ask ourselves with every penny we have is whether it’s best to spend it now or in the future. If we spend money now we can instantly enjoy its value. But if we wait we give ourselves the possibility of having more money in the future (if invested wisely of course).
The issue gets more complicated, however, when it comes to knowing how much we should ‘invest in ourselves’ today compared with putting money away for our future.
For some this may seem like a question coming from a position of wealth –many have no excess money to invest in themselves or the markets. But I challenge this view – if you follow the steps of sound financial management for a few months you will start finding yourself with a little bit of extra money beyond your standard living expenses. And that’s when the real questions about life and money begin cropping up:
J.D Roth, writer of Get Rich Slowly, calls this the ‘Third Stage’ of financial maturity:
- The first stage of personal finance involves learning the basics: understanding compound interest, reducing debt, beginning to save.
- The second stage is putting the basics into practice: choosing to live frugally, saving in earnest, and pursuing financial goals.
- The third stage — the “what next?” stage — comes after we’ve mastered the fundamentals. It’s at this point that we begin to ask “why?” Why are we continuing to save? All of our debts are paid, so what’s the point? (There certainly is a point, but what is it?)
If you get to this stage early enough, the world is an exciting place filled with possibilities. And you may start wondering if it’s the right thing to be pumping your money into savings accounts and investments or whether it would be better spent today on the things you’re passionate about. It’s certainly something I’ve been thinking about recently and the question has compelled me to admit a dirty little secret about my own spending (keep reading).
Money as a Resource
As I started my own financial journey I was hesitant to spend too much money in the present.
After learning about the amazing power of compound interest in my very early 20s I’ve spent the first few years out of university saving and investing as much as I could, being sure that if I channelled my money into the stock market, the returns over time would be huge. I believe in this strategy so strongly that I started writing a blog about it (hint: you’re reading it right now!).
However, in recent months I’ve been giving this some additional thought:
“Is it in my best interests to be investing all my extra money every month in the stock market?”
Companies in the stock market are always hungry for money from investors because it helps them grow and make even bigger profits. It’s investing 101 and I know this, but…
If money is so important to them to be able to grow, why I am I giving my own money to them? – the very thing that makes them powerful. Would the money be better spent on myself? On helping me grow in the same way that my money was helping the big companies grow?
Rather than investing in the stock market, should I be investing in my passions?
Investing in our passions
To give an example, I’m a singer and have many friends who are also singers. One particular singing friend made my head spin the other week when she told me she was currently spending £300 A MONTH on a singing course.
You could tell that I was a personal finance blogger because as she told me I instantly started thinking about how much £300 a month could grow if she invested it in the stock market….assuming a 10% annual return she would have close to £2 million pounds if she kept it up until she was 65!
But for her, the singing course was giving her immense value and honing her already incredible voice so she could do more of what she loved: singing and performing in operas. From an outside perspective it may have seemed like a huge investment, but for her, she was investing in herself in something she truly believes in and the return on that investment is clear to her.
To give another example, investing in experiences like travel is popular form of ‘investing in yourself’. When you travel you have the whole rest of your life to remember your experiences; it helps shape you as a person. And like stock market investments, your memories appreciate over time!
My Dirty Secret
I’ve been thinking about writing this post for a number of weeks now because I’ve got a confession to make. Whilst I’ve been writing this blog several times a week about saving and investing money for almost a year, I’ve not actually been saving as much as I was before I started blogging.
Let me explain.
2010 has been an amazing year in a lot of ways, but in perhaps one of the biggest mental shifts I’ve made since graduating in 2007, 2010 has been a year in which I’ve really begun ‘investing in myself’ more than ever. For example:
- I’ve ‘invested’ in a considerable amount of travel to build relationships and broaden my experiences of the world.
- I’ve ‘invested’ in an extensive number of driving lessons, as well as e-courses and books to grow my skills.
- I’ve ‘invested’ in software and tools (and even, very recently an assistant) to grow my online projects, including this blog, and have already seen the most incredible results, financially and personally.
This is in contrast to 2008 and 2009 when my focus was on keeping my costs low and both establishing and meeting aggressive savings account balance and investment goals.
That said, I’ve still been investing some money in the stock market consistently, every month of this year, and feel you should be too.
Time Diversification and Why You Should Still Be Investing In the Stock Market
Whilst the idea of investing in yourself is certainly appealing to many of us and I’ve become increasingly warm to the idea in recent months, it shouldn’t be used as an excuse not to be saving for the future.
In investing, the concept of diversification is incredibly important –it means not putting all your eggs in one basket but rather, spreading your money around in different places so that if one investment goes wrong, then you don’t lose all your money.
I’d therefore like to propose that we all practice diversification – not just with our investments, but with our spending over time: We should not be spending all of our spare money on ourselves today (no matter what the return we predict) and likewise we should not be squirreling all our money away for the future (despite the potentially huge investment gains due to compound interest). This might seem obvious advice but it’s really easy to move from extremes of saving and spending.
Investing in yourselves in the present can be incredibly rewarding but concentrating too much on our present passions could lead to us getting into trouble in the future. Not only do situations change quickly, but we as human beings change as we age, and our passions at age 25 are likely to be different in some way by age 45. Therefore by practising ‘time diversification’ we protect ourselves from losing out on our ‘life and experience investments’ should our interests change.
(You also cannot live entirely on your memories so it helps to have some money saved for when you can’t work any more!)
You can increase your chances of helping out your future self through investing in yourself AND investing in the stock market. Fail to do one or the other and you risk not helping your future self at all –your investment in yourself might not be of interest to your future self and therefore not be valuable, whilst investing solely in the stock market will have robbed your future self of experiences and skills, regardless of how much money you accumulated for their supposed benefit.
Ultimately it comes down to a single question. A question we have to ask ourselves with every penny we have: Is it best to spend it now or in the future? Should we ‘invest in ourselves’ today or put money away for our future.
Practice ‘time diversification’ and you stack the odds in your favour that some of your investments, monetary or personal, will offer a good return over time.
Am I right? What are you investing in? More in yourself or more in the markets? Is there a right balance?
In other news
Magical Penny (in the form of yours truly @adampiplica) is featured on the home-page of Love-Drop, which has gone live this week (massive props to J$ @budgetsaresexy). As a financial and community contributor to this amazing movement I’m excited to see it grow and develop and can’t wait until 1st January for it’s official launch.
Spend a Dollar. Change a Life.