November 20, 2012
It’s that time of the year again: the holiday season is approaching. This season centers around shopping and spending, right? Maybe not. Consider the following.
In 2011 the average holiday shopper spent $398.62 over Black Friday weekend, according to the National Retail Federation. That amounted to a total haul of $52.4 billion over the most important weekend of the year for retail outlets and online consumer sites.
We can imagine that the results will be even bubblier in 2012: consumer confidence indicators are ticking up, unemployment is declining – albeit slowly – and, well, we’re Americans. Spending is what we do, especially when the holiday season is upon us. In fact more than 70% of our total annual economic output, as measured by Gross Domestic Product (GDP), is driven by personal consumption. We are world-class consumers, camped in front of the big box stores just minutes after we’ve eaten our Thanksgiving meal.
Holiday shopping is a fine tradition. But think for a moment about your own spending habits in relation to that $398 per person average. Do you remember how much you spent last Black Friday? Do you remember what you bought? (There’s no shame in saying “no, I have no recollection” – we’ve all been there). Then ask yourself: could you re-direct some of the money you spend on consumption towards your investment accounts?
Many people compartmentalize the activities that involve money. Have you ever invited a friend see a movie and heard her reply “I’d love to, but I’m saving money and it’s not in my budget”. Yet you know she buys a $4 latte every morning before work. Two days of missed lattes equals one movie, but she doesn’t recognize that trade-off.
And that’s just comparing alternative ways to spend money. The compartmentalization becomes more extreme when we tradeoff spending versus savings. Many of us don’t think about saving and investing often, and when we do, it seems intimidating. Am I contributing enough to my 401(k)? Should I open an online investment account? Should I make an investment plan? These hardly seem as fun as hitting the outlet stores on a crisp Friday in late November.
But here’s a little thought experiment. Imagine that last year your Black Friday weekend expenditures met that national average. Let’s say you spent $400, just to round up. Now, imagine that this year, you reduce that amount by half - $200 – which you invest, so that you can start to build wealth for the future. You spend the other $200 buying gifts and items for yourself and your loved ones.
Assume that you commit to this plan every year, and that you will increase the amount you contribute each year by the rate of inflation. If the rate of inflation is 2.5 percent, for example, then next year your “Black Friday Investment Fund” contribution will be $205. Let’s assume you earn an annual return of 5 percent on your invested funds. (Remember, these are hypothetical figures for the sake of illustration).
How much will you accumulate if you follow this formula for 20 years? Well, from that initial $200 contribution, your nest egg will grow to $8,117.45.
How could you amass so much? It’s largely thanks to a concept called “compound interest.” This refers to the interest that your interest earns. The more you re-invest your earnings, the more your gains accrue. You’ll earn eight thousand dollars just by modifying your annual holiday spending habits.
Of course, Black Friday doesn’t have to be the catalyst. You can trim fat from many areas in your household budget and divert it to building wealth for the future. As the numbers above show, this exercise pays off. Plus, you can sleep in on Black Friday and wander to the stores after a nice, leisurely brunch.
Jemstep.com is a free online financial advisor that helps individual investors make better investment decisions and achieve their financial goals faster. A privately owned company with headquarters in the heart of Silicon Valley, Jemstep is a registered investment advisor under the rules and regulations of the U.S. Securities and Exchange Commission. To learn more, please visit www.jemstep.com.