Right now I am reading the biography of Warren Buffett, and there was one point alone that would have made me consider the book money and time well spent. Warren Buffett’s frugality has become the stuff of legend. It is a popular story that in his first house he made his newborn daughter sleep in a drawer (this was because of space and not money as many have mistakenly reported). This cheapness can be pointed back to one philosophy.
Buffett realized that if he invested his money wisely, that money would be worth much more someday. It becomes a lot harder to spend a dollar on a chocolate bar when you think that, if you invested that dollar, in 20 years it will be worth $10 dollars (it happens faster if you invest as well as Buffett). You wouldn’t pay $10 for that chocolate bar, so it doesn’t make sense to buy it.
This is the idea of investing. You give up a little bit of purchasing now with the intention of having more purchasing power later. Instead of buying one chocolate bar now you can buy five chocolate bars in 20 years. Now I understand that this example doesn’t make it sound that great, but you will be investing a lot more than one dollar.
If you invest $500 and earn a 3.5% annual return on it, not incredibly difficult to do, you will have $1000 in 20 years. Most students do not see far beyond the weekend, so this concept, while entirely simple, goes unheeded. But I think if you told anybody to give you a dollar and in return you would give them $2 the next day that they would do it.
I think one of the best ways for a student to overcome this period where it seems that everything is destined for you to have no money is to actually have less money. I don’t mean throwing it out the window or anything. I mean giving it to somebody else to use for a while until you want your money back, at which point if everything goes according to plan they will give you more money.
This is the idea behind banks. You put your money in savings and then the bank invests your money. Then they give you a little cut of the money they make with your money. So when you want to take it out you have more than you started. This is also the very basic idea of stocks. You give a company money, and then you own a little bit of that company. With your money the company tries to make more money. If they do then the stock goes up and you make money when you sell it. There are lots of other factors that affect stocks but this is the rudimentary explanation.
I know that when you are in school it can be tough to even scrape up enough money to pay the pizza man, but anything at all that you can put away will be working to get you more money. A student does not have time with school to be working to get money all the time, but any money that you already have can be “put to work” in your stead. While it may not be a lot, you always pick up a $5 bill when it is on the ground, so why would you give up the chance to make even just $5 a month. Investing your money can be like finding money in the couch cushions every month, except you are finding other people’s money.
And when you leave that money alone is when the real magic starts. Albert Einstein called compound interest the greatest force in the universe. When you have money in savings, the bank will pay you a certain percentage of that money every month. At the start of the next month you have more money. So if you keep it all there than the bank will pay you even more interest because you have more money in your account. This cycle continues until you are rich (best case scenario). Everybody likely knows this but not enough people take advantage of it.
The exact method of how you invest your money is a different, more complicated matter. There are many options, all having their advantages, and the variety can prevent some people from investing their money. But not knowing how to invest does not mean you should not put the money aside anyway. Even money in a bank makes more than money sitting in your wallet.
If you get a pay cheque, put however much you can live without right now into a savings account. Do this every time you get paid. This will add up over time, and you will be able to buy more chocolate bars than if you had bought one today.