Back to the future

When Warren Buffett went shopping as a young man, he would always take out the dollar he was about to spend and look at it, knowing that he could turn that one dollar into two by the end of the year if he invested it. So by delaying the immediate gratification of a non-essential purchase, he could in reality get it for free. Now we know that there are very few Warren Buffetts around with such investment acumen, but the principle is one of the most important ones for young people to learn. Most of us cannot invest our money and expect to double it every year, and truth be told, we shouldn’t try because that will entail taking some serious risks, but understanding the fact that the power of compounding would make even a modest return turn into something significant if you give it enough time, is priceless.

The catch is that you have to start early in life to get the full benefit of compounding. The other difficulty is that when you are young, especially when you start earning your own money, not spending it on earthly pleasures is very difficult. How can you say no to your friends when they invite you to go to a pub for a few cocktails and then splurge some cash on a good steak dinner? One of the solutions to this problem might be to take the choice of saving versus spending away from the young adult, and to place it in the hands of the parents or grandparents. We all know that presents will be given and support provided by the elders during the year. Perhaps some of the money earmarked for those presents and support payments can be channeled into longer-term investments?

We have recently highlighted the type of returns certain asset classes can provide over time. If we take the past and project it into the future, there is no asset class that will not beat spending money on wasteful items. We don’t have to stop living a good life and treating ourselves to things we value, we only have to look at that rand we are about to spend and think about it for a while.

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