Wealth Accumulation? How – But Not the Way You Expect?

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(June 2012)

Most people dream of accumulating wealth but have little understanding of the process or are unwilling to do the necessary saving and investing. Further, most people live "paycheck to paycheck" either by habit or presumed necessity. How can a young family, with a small income and huge expenses, save enough to accumulate wealth? The simple answer is it is difficult, but you must save more, earn more, spend less, and invest well. You start with excess capital from earning more and spending less. The Deviant Investor will help educate you on What and When so you can invest well.

Let’s discuss decreased spending. We usually ignore this point as "not worth the sacrifice," or "it can’t make any real difference." Perhaps that is NOT TRUE! Consider:

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Suppose that instead of buying cigarettes and smoking you invest in silver (or many other choices) over a period of say, 40 years. Assume that you don’t buy one pack of cigarettes each day, which works out to about 14,600 packs total. Now we shouldn’t define 14,600 packs of cigarettes as a number of dollars because the price of cigarettes has steadily increased over the past 40 years and probably will increase over the next 40 years. But we can relate the value of those 14,600 packs of cigarettes to other commodities that have or will increase similarly.

Assume that every pack of cigarettes is one unit. On average, an ounce of silver has cost approximately the same as 5 units (of cigarettes) over the past 8 or more decades. The same will probably hold true, on average, for the next several decades. At times silver has been more expensive, such as 1980, and at times it has been less expensive, such as in 2000, but on average one ounce of silver has cost about the same as five packs of cigarettes. Take the 14,600 units and divide by five, and you get approximately 2,900 ounces of silver that you could have saved if you hadn’t been buying cigarettes over the past 40 years. At today’s prices (June 2012) silver is approximately $30 per ounce, and at $30 per ounce your “not buying cigarettes” savings from the past 40 years would be over $80,000! Imagine having another $80,000 today. Spending less can make a difference. This all started from the capital accumulated by not buying a pack of cigarettes each day.

You can extend this analysis to other activities, such as drinking, gambling, drugs, compulsive shopping, skipping your daily designer coffee beverage, owning a smaller house, or whatever. Convert the cost of those activities to "cigarette units" and then divide by five to get ounces of silver. For example, suppose you drink a six pack of beer every day, and a six pack of beer costs about the same as a pack of cigarettes. Then suppose that instead of drinking every day, you only drank on Friday and Saturday night. Over the past 40 years you could have accumulated another $60,000 in silver investments if you had reduced your drinking to just one six pack each on Friday and Saturday nights.

We all could be much wealthier than we are currently. We could have been slowly investing in silver (or gold), we could have bought Microsoft stock in the 1980s, we could have bought Apple stock in 1995, we could have avoided the NASDAQ crash of 2000, or simply made different choices during the course of our adult lifetime. The possibilities are nearly endless, but if a simple decision such as not buying cigarettes and investing the cash over 40 years can create investment savings of over $80,000, then it should be easy to see that wealth accumulation is within reach of almost everyone.

The logic is the same whether you slowly invest in gold, rather than silver, or good mutual funds, or select real estate, or whatever will, over time, maintain its purchasing power in an economic world where the local currency units (dollars, pounds, euros, etc.) gradually become less valuable and purchase less of the things we need for daily living. The key is making good investment choices (What and When) so that you preserve your purchasing power.

GE Christenson
aka Deviant Investor

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