It Takes Money

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When I got out of college lots of people I knew got good jobs and then they started spending their money. They bought or leased new cars. They bought nice skis or nicer clothes. They got married and spent tens of thousands on one big day. Some bought houses. The screwed up part is that plenty of them went to business school and understand the concept of compounding interest, depreciation, and cash is king. Don’t buy expensive assets that depreciate, like luxury cars. Stockpile cash. It takes money to make money. Once you have cash, you can invest it and get paid for simply having money. If you start when young and in a recession, you’ll be that much better off that much earlier.

We got out of school in 2010 right at the bottom of a recession. Ten grand in the 2010 market could have been worth 12k in 2011, or more. Save and invest another 10k in 2011 and get a 20% return and you now have 26.4k to your name. So it goes, on and on. That’s the magic of compounding. It works the other way too though. When you get a loan the same equation works against you for the next thirty years.

It is important to live and not get obsessed with saving. I would urge those graduating in the next month to find a happy medium. Recognize that financial freedom is a very real freedom. It’s the ability to disengage from work to travel, to invest in your own ideas, and to invest in other’s ideas. Don’t forfeit the present to save for the future. Spend to gain an experience or memory but avoid the fancy materials and invest instead. Thanks to compounding, good decisions can become great decisions and bad decisions can become terrible ones.

Daniel Goldstein: The battle between your present and future self

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