Use Future Value to Pave Your Way to Financial Independence.
The easiest way to make money is to not spend it. Have you ever asked yourself: What would the future value of the money I’ve spent be if I had invested it instead? If you knew the answer, would it cause you to re-evaluate your spending habits across the board?
This article deserves a shout out for its inspiration. I recently finished reading Grant Sabatier’s book: Financial Freedom. It is a fantastic read, cover to cover. If you’re looking for an in-depth take on how to build wealth and retire early, please check it out. Like many books I’ve read about Financial Independence and financial savviness, it left me with some new ideas to consider. One of my take-aways from his book was to look at the long-term impacts of my spending habits.
By examining our spending habits, we can start to think creatively about how to increase our retirement savings. What I appreciated about Grant’s approach is the numerous ways he does this. He recommends using a future value calculator to help guide purchasing decisions. He also suggests finding ways to increase your savings by 1% increments, along with quantifiable dollar amounts. Making this a fairly regular, almost daily process can lead to some strong habits to help increase our wealth.
I really like Grant’s strategies. An example he gives is the impact of a regular day’s cup ($3) of coffee, purchased every day over the course of a year. Such a purchase would amount to $1,095 in a year’s time. The comparable example that immediately comes to mind is the $60 new release video game. Combine this with the fact that software accounts for around 80% of the gaming industry’s sales. So, $60 seems like an amount we as gamers are comfortable paying on at least a semi-regular basis.
While working part-time jobs in high school, and later college, I often didn’t put much thought into this $60 before buying the newest games. For fear of missing out, playing with friends, or simply wanting to play it by myself. But what if, instead of buying one $60 game, I had invested that money? What could money I spend today be worth in ten, twenty, even thirty years from now? Let’s find out.
The math itself isn’t overly complicated. The power of compounding interest cannot be understated. To find future value, we can break down this equation:
FV = I x (1 + R)T
Where: I = Investment Amount, R = Interest Rate, and T = Number of Years Invested(Investopedia – Future Value)
This equation is used as a base reference, but for the sake of this post, I’ve created this awesome chart for you by using a future value calculator graciously provided by millennialmoney.com (Grant Sabatier’s blog). Here are some assumptions:
- The stock market has historically returned 10% on average, reduced to 7% after accounting for a 3% inflation rate.
- $60 is currently the MSRP standard for a newly released video game.
If I bought one game today, at $60, here’s what that same $60 would be worth in one, five, ten, twenty, and thirty years from now.
|Time||Value Over Time|
|1 Year From Now||$64.20|
|5 Years From Now||$84.15|
|10 Years From Now||$118.03|
|20 Years From Now||$232.18|
|30 Years From Now||$456.74|
That same $60 doubled its value in just ten years, and is worth over seven times that thirty years from now. $456.74 is nothing to scoff at, especially if my goal is to retire as early as possible. If I were paid $20 an hour, that amounts to almost 23 hours of work. That equates to valuable time I’m able to reclaim.
Here’s another scenario. What if instead of buying a game each month for an entire year ($720), I invested it instead, allowing that money to grow?
|Time||Value Over Time|
|1 Year From Now||$770.40|
|5 Years From Now||$1,009.84|
|10 Years From Now||$1,416.35|
|20 Years From Now||$2,786.17|
|30 Years From Now||$5,480.82|
Here’s where we can truly see the power of compounding. If instead of buying twelve $60 video games, I invested that $720 into a total stock market index fund, in thirty years I’d have $5,480.82. Truthfully, I’d much rather have that $5,480 years down the road when I could really use it, no matter how much enjoyment I gain from twelve video games.
Finally, say that I continue to buy video games, once a month at $60 each, over a thirty year period. This is of course assuming that a video game’s suggested retail price never exceeds $60. What would that same sum of money ($21,600, periodically invested monthly in $60 increments) be worth with the driving forces of the stock market behind it?
|Time||Value Over Time|
|1 Year From Now||$742.82|
|5 Years From Now||$4,271.71|
|10 Years From Now||$10,263.10|
|20 Years From Now||$30,452.18|
|30 Years From Now||$70,167.16|
Now, the idea of buying approximately 360 video games over a thirty year period may seem a bit exaggerated. But, let’s consider a different frame of reference. Ask yourself this question: Am I in a position to afford investing $60 more a month into my financial future? If you, you’re able to illustrate the meaning of the saying “pay yourself first.” Are there other areas where you can cut spending? If you’re able to invest $60 a month (or more) over a period of 30 years, say hello to an incredible boost to your wealth.
Personally, I recall two decades ago buying games for Gamecube, PS2, and Xbox at $50 each and not batting an eyelash. I’d say, on average, I added around six games to my collection a year. Using the formula above, say I continued those same spending habits. At present day, I could have $12,298 more to my name if I had invested it instead. By 2050, I would have $121,958. This is a prime example of letting your money work for you, and not the other way around. This $120,000 would be three years of an annual $40,000 salary. It might afford a sizable chunk of, if not cover, a child’s college education.
This article, of course, isn’t meant to be critical of video games. If they bring you joy, like they still do for me, that’s awesome! What I am trying to highlight is the real opportunity cost to purchases we make on a day-to-day, month-to-month, yearly basis. There’s real benefit to objectively evaluating (and periodically re-evaluating) what we value. What we value determines how we spend our money. After all, we trade our precious life energy (our time) for money.
Hindsight is 20:20. Coincidentally, it’s the year 2020, and I think I’d prefer that $12,000 in my possession today, not permanently gone. This number doesn’t even account for the money I’ve spent on consoles, controllers, online subscriptions, and more, which increases that amount considerably.
Perhaps instead of buying games once a month, it turns into once every other month, or once every three or four months. Our future selves will quite likely thank us. Perhaps we’ll stop feeling encumbered by having too many options, and instead enjoy what we already have.
Finally, I purposely didn’t include the time I spent playing those games I purchased. It goes without saying: I don’t regret the time I spent playing games with friends and family by any means. As they say, “time enjoyed is not time wasted.” But holistically, the time we have on this planet is finite. While I do enjoy gaming as a pastime, it’s not what I want to solely define me. At the end of my life, I’d much rather say: “In my life, I feel I made a difference.” This sounds so much more purposeful than: “In my life, I was really entertained.”
So buy video games, collect video games, play video games, whatever you fancy! But in addition to doing that, take some time to consider your financial future. The reality is, video games are not an investment tool. Leave that to the low-cost, total stock and total bond index funds in your portfolio. Contribute as much money as you can, as often as you can, and enjoy the ride.Whatever you take from this article, I hope I’ve illustrated the point that our money can and does buy us the ability to take our time back into our hands. I would like to thank Mr. Grant Sabatier for the inspiration I received from Financial Freedom, along with Mr. Money Mustache’s classic article The Shockingly Simple Math Behind Early Retirement, where this article’s title comes from.