Shopping gets a bad rap. And rightly so. When most people go shopping, they buy things that go down in value over time. This includes cars, clothes, big screen TVs, couches, and (sigh) bikes. If you want to be poor the rest of your life, then keep buying this stuff.
On the other hand, if you want to improve your financial situation, then you need to shift from buying depreciating assets to buying assets that go up in value or produce income.
Things that Make Money
There are a variety of fun things to buy that make money. Yes, if at all possible, you need to start thinking of these things as “fun”. Listed roughly in order of their percent return, these include:
CDs (Certificates of Deposit): These produce income but it’s negligible. It’s better than just buying space in a savings account, but not much. Current rates on a 12 month CD are around 1.3%, which means that if you buy $10,000 worth of a 12 month CD, you will make $130 per year.
Bonds: Bonds are basically loans to the government or private companies. They pay you money (dividends) every month. It’s pretty nice. Again, you don’t get a lot of money, but it might pay for a few trips to the grocery store per year. The dividend payouts for bonds vary, but as an example, the Vanguard Total Bond Market Index Fund pays out dividends just over 2.5%, so for every $10,000 invested, you’ll get around $250 per year.
Stocks: Stocks are basically shares of ownership in a company. They pay out dividends like bonds (around 1-3% per year), and over time will appreciate in value. The long-term return of the S&P 500 index (a measure of overall stock market performance) is around 7% per year, adjusted for inflation. This means that an initial $10,000 investment could be worth $700 more after one year. There’s no guarantee that future returns will equal past returns, and not all years generate positive returns, but stocks generally increase in value over time.
Rental Properties: Real Estate takes work and may feel like a second job, but for those that have the motivation and expertise, your rental property will pay you every month in the form of rent from your tenents. Of course, you have to factor in mortgage payments, repairs, property taxes, and other expenses when determining your net return, but in general, you might expect (hope) to make around 10% returns from residential real estate.
Real Estate Investment Trusts (REITs): If you want some exposure to Real Estate, but don’t want any hassle, you might consider just buying a REIT. Vanguard offers a low-cost REIT index fund with an expense ratio of only 0.12% It has averaged 11% return over the last 5 years. Who knows what it will return in the next 5 years. With potential higher return comes higher risk (you knew that, right?).
Learning a Trade or Skill: If you want to have a successful financial life, you will most likely need some type of education. But not just any type of education. I’m talking about an education with a high return on investment (ROI), where you learn a defined trade or skill that is in demand and will make you money.
An excellent example is a 2-year dental hygienist Associates degree program that might cost $20,000 total with an expected 70K per year salary after completion. After 30 years, your total earned income might $2.1 million (70K/year x 30 years), which would be a return of 10,000% ($2.1 million / $20,000).
Other examples might include a computer programming certification, a business degree in accounting, or an engineering degree. If you already have a good career (such as those of us in medicine), you might consider looking for continuing education courses that give you a new skill to expand the services you are able to offer.
A specific example of what NOT to do would be to get an English degree from a high cost school, where you might find yourself $200,000 in debt without a job.
Starting a Business: This is where the magic really starts to happen. If you have a great idea and can learn how to market it, then buying (putting time or money towards) your own business has the potential to develop limitless returns.
Those of us in medicine might consider starting our own practice or buying into a surgery center or an imaging center. However, your business doesn’t have to be a high cost brick-and-mortar endeavor. Rather, you could write a simple pdf book (like If you Can by William Bernstein), develop an online course (like the Affiliate Marketing course from Michelle Schroeder), or create an app (like Strava). You could also create an income-generating website (like Physician on Fire).
If you think you don’t have any good ideas, you are probably wrong. However, it may take you some time to come up with a good idea. Make sure to brainstorm daily.
Go on a Shopping Spree!
When most people get their paycheck, they go shopping. You should do the same thing, but instead of grabbing that latest iPhone, you should set aside your budgeted expenses (say $4000 per month, if you’re trying to live on $48,000 per year), and take the rest of the money and buy things that MAKE money. If you don’t have anything left over after you set aside your budgeted expenses, then you need to reduce your expenses or increase your income (see Learning a Trade or Skill, above), or both. There’s no free lunch in life.
How I Do My Shopping
In case you’re wondering, here’s how I do my shopping. I am paid once monthly towards the end of the month. A portion of my pre-tax income is already going towards my 401k (enough to fill it up before the end of the year), so I never see that money as part of my paycheck.
Anyways, once that paycheck hits my checking account, I go on my shopping spree. I mentally subtract $4000 from the amount deposited in my account (my wife and I are trying to live on approximately $50,000 per year) and then take ALL the rest, go to my favorite store (Vanguard.com) and buy all sorts of fun stuff.
First, I fill up my Roth with some low-maintenance reliable Vanguard Lifestyle Growth Fund. Any money left over goes into my taxable account. I buy some top-of-the-line Vanguard Total Stock market Index Fund, some flashy new Intermediate Term Tax Exempt Bond Fund, and some sale-priced Total International Index Fund. It’s super fun, I get to avoid the crowds and there’s no buyer’s remorse.
Bottom Line
Stop buying things that go down in value. If you want to get ahead, you need to learn how to have fun buying things that make money. If you can get more excited about stocks, bonds, real estate, or new business ideas than the latest iPhone, then you know you’re headed in the right direction.
Great ideas! This doesn’t quite fit into this line of thinking, but I also think quality possessions also make you money over time. It costs money upfront, but buying better-quality items will save you money and sanity in the long term.
Great point. I received a pair of Ecco dress shoes in 9th grade from my grandparents, and I am still wearing them 20 years later. There is no longer any tread on the bottom of the shoes and I’ve replaced the shoelaces three times. They may need to be retired soon, but that was an impressive run.
Great post! I’ve read some things by Robert Kiyosaki and James Altucher that say something similar – buy assets and not liabilities.
I try to adhere to this but the one thing I am willing to spend money on (that doesn’t make money) is experiences – travel, shows, nice dinner with the wife, etc…
I completely agree. Although experiences do not necessarily make money, they enrich your life and contribute to happiness, which is also essential.
This seems like an ad for Vanguard.
Other than the fact that I invest a portion of my money through their website, Vanguard and I have no financial relationship. In fact, Vanguard specifically does NOT offer an affiliate program. By the way, you don’t have to invest through Vanguard. Fidelity and Schwab also offer low cost index funds.