I want a new kitchen sink, and I've recently realized that it might cost me $35,217. Or maybe even $234,782. Yikes!
Let me back up and explain. You see, my current sink is a bit wider than normal, so if I want to pop a new sink into its spot, I'll have to special-order one that will cost at least $300. In an attempt to be a sensible steward of my limited finances, I'm evaluating my options. If I skip the new sink and learn to love my old one, embracing its stains and dents, I'll save $300. I can spend that on something else. If I buy $300 of new games from Funagain.com, I'll be able to enjoy many evenings of game-playing with friends and family. That might actually offer more enjoyment than a new sink. But I already have plenty of games, so some new ones won't really add much to the enjoyment potential.
Another alternative is that I could invest the $300. I'm always saving up sums of money to plunk into stocks or top-notch mutual funds, and the $300 will help me get to a new investable sum more quickly. If I invest it and it earns an annual return of 10% for the next 25 years, it will amount to $3,250. Not bad, eh? But if I leave it invested for longer, perhaps so that I can leave a gift to my nieces in 50 years, it will grow to $35,217. Now that's compelling. I know that it sounds like just another skip-that-daily-$3-latte-and-get-rich exhortation, but these examples offer real truths, real alternatives.
Bigger sums, bigger gains
Here's another thought. An alternative to getting a new sink is redoing my kitchen. A typical kitchen remodeling can cost upwards of $25,000. As I evaluate that option, I should remind myself of what $25,000 can do for me in other areas of my life. It could pay for a new car one of these years. It could make up a respectable emergency fund, waiting in case I have costly medical expenses or a job loss or some other need. It could fund several terrific vacations. Or if I invest it and earn 10% per year, it can turn into $271,000 in 25 years. If I do better than average, perhaps earning 13% per year, it can turn into $531,000! Suddenly, my Formica counter is looking better than it did yesterday.
It's not so crazy to imagine earning 13% per year, on average, though it's far from a sure thing. You don't have to have invested in Microsoft
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Enjoy denial
This kind of thinking is a good habit to develop, and it needn't reflect you punishing yourself, depriving yourself of everything you crave. By all means, buy whatever you really need, if you can afford it. But when it comes to things you don't need but simply want, think each purchase through a few times from different angles. Think of how else that sum might be spent. If you end up denying yourself the purchase, enjoy the denial by noting how you'll spend it instead -- paying down debt, buying something else, investing it, etc.
Flip the order
Another way to go about saving and investing, if you'd rather not deliberate over most purchases, is to set up a budget and stick with it. Many people receive their paycheck, spend much of it on all kinds of things they need (rent or mortgage, electricity, gas, food, medications, insurance, etc.) and things they want (movie tickets, a 27th pair of shoes, a detailing of their car, etc.), and then save or invest what's left. In many cases, there's nothing left to save. A shocking number of Americans are spending more than they have to spend, as is evident by the rise in credit card debt.
Flip the order here. Keep track of your cash inflows and outflows and see how much you can save and invest. Aim for at least 10% of your income, if not 15%. When your paycheck arrives, take out your saving/investing money first -- if it hasn't already been transferred automatically into something like a 401(k) account. Then pay for everything you need to pay for. Then, with what's left, have fun. If you have enough for a new sink, go for it.
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Microsoft is a Motley Fool Inside Value pick.
Selena Maranjian's favorite discussion boards include Book Club, Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Microsoft. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
