Time For Your Holiday (com)Pounding
Every year in December, you can count on an avalanche of “holiday spending tips” listicles, all nagging you about the same ol’ shit: Start with a budget, don’t go over budget, hunt for those electric deals!! Trample a granny if you have to!! COUPONS!!!!!! Hand-make this, hand-make that, save all year, don’t impulse shop, serve Everclear + Kool-Aid in martini glasses at your holiday party blah blah blah.
These are all excellent tactics that you should 100% utilize, but we all know these things by now, right?? And really, how much money are you going to save by using newspaper instead of wrapping paper? I mean, I’m all for conservation, and we all need constant reminders of this stuff—I just don’t want to be the one to give you a pounding on it. Or at least, not that specific pounding.
I’m more interested in giving you the ol’ Christmas/Hanukkah/Kwanzaa COM-POUNDING.
Let’s use a new perspective to think about the money we spend during the holidays. I want you to see what it looks like if some of this money is invested, instead of shoved deep into the pockets of Hallmark/Apple/Target/the mall/the internet. Specifically, I want to show you how this money would look in the stock market, earning compound returns.
I will discuss the math behind the compound returns at the end of the post. For now, just think of it this way: any money invested earns more and more over time, at an increasing rate. The earlier you stash money away, and the more time you wait, the bigger and faster it will grow—like a snowball rolling downhill. That’s the pure magic behind compound returns, which I’d argue is a more impressive form of magic than whatever’s happening at Santa’s factories in China—errr, workshop in the North Pole!! The numbers are shocking.
Hey, we all spend money on dumb shit during the holidays. And by holidays, I mean Christmas. Us Christmas-mongers spend the stupidest amounts of $, and we like to get defensive about it too. NO ONE SHALL SPEAK ILL OF ALMIGHTY CHRISTMAS AND THE FINANCIAL DECISIONS I MAKE AT CHRISTMASTIME!! I WILL TORCH YOUR GINGERBREAD HOUSE TO THE GROUND AND YOU CAN KISS MY GIFTWRAPPED ASS IF YOU DON’T LIKE IT!! LOL, okay Santa’s honorary elf, but stop. Scrooge McDumpster Dawg ain’t tryin’ to suck all the joy out of Xmas—it’s just that the average American family is $15,000 in credit card debt, has saved next to nothing for retirement, is terrified for their financial future, AND HAS THIS IN THEIR FRONT YARD:
While this is not a call for you to eliminate every dime of spending (although, if you have credit card debt, you need to consider it), it would be life-changing if we allocated even 1/10th of the energy and resources we give to the holidays as we do to long-term financial planning. Check out the trade-offs below, and you might feel inspired to agree.
These numbers are assuming an 8% rate of return over a forty-year period.* Think: I’m 25 now and know I will need retirement money when I’m 65. If I invest this teeny amount of money here or this small amount there, what will that look like when I’m retired? Will it even make a difference? Is it worth forgoing these sick-ass Hanukkah nail decals? You decide:
You could easily spend $5 100 different times in December: Stocking stuffers, a card at The Paper Source, holiday scratch-its (odds of winning, .0000000000008), 1/3rd of one fancy cocktail, a Maccabean Manicure for all your press-on latke needs (keeps the Torah at your fingertips!), the list goes on. If you put that $5 in the market—just once!—you could have over $100 in your 401k by the time you retire.
I searched the internet, but it appears there is no statistic available on how much the American people spend on generic fuzzy purchases around the holidays. Fuzzy slippers, fuzzy socks, fuzzy PJs, fuzzy fleece, fuzzy-fuckin’-anything. If it is fuzzy, we will buy it.
$30 seems like such an innocent amount. It’s how much you spend for a couple boxes of ornaments, an on-the-go meal while you’re running errands, a white elephant gift, or a festive holiday “topper” (see photos above). And while the Randy-Cane the Menorah Fedora are both totally worth it, having $650 would be pretty cool too.
There is no shortage of terrible holiday sweaters you can buy during the holidays. Some are great—terrible in a good way, if not totally overpriced—but some of this rubbish renders me physically unable to feel any emotion whatsoever, let alone holiday joy. If you see someone wearing a sweater that says “If you jingle my bells, you’ll have a white Christmas” (yes that’s a splooge reference), “Welcome to the North Swole,” or features a stripper pole-dancing aloft a dreidel, you have my permission to steal from his wallet exactly $1,086.23.
I get it, we all need something sexy to wear to Santacon. $65 might seem like a great deal if you’re getting free drinks bought for you all day, but it’s actually not if you consider that 1. you’d have 1,400 freaking doll hairs if you just invested the damn money in your 401k/Roth IRA/IRA and 2. That cape is so tiny. It’s the tiniest cape ever! I want my Mrs. Claus cape to at least cover up my weird back moles for $65.
I love to receive personalized cards from my friends, especially when they have new families. It’s just that between printing and postage for your 400 friends, shit gets expensive! Speaking of postage, how much have you spent on expedited shipping this year? $50? $80? More? Ouch! If you invested the money you spent on shipping (or personalized cards), you’d have (at least) two flights to Hawaii.
A tree and the tree stand alone could cost you $100, and that’s not even taking into consideration the emotional cost of picking pine needles out of your rug for the next three months. Is $2,175 worth skipping the Christmas tree/Hanukkah bush this year?
You’re going to need a fab skirt (and blouse, blow-out, and manicure) for your company holiday party. But wait! Your new friend, the Xmas tree, needs a skirt too! For both you and your tree to get matchy-matchy holiday skirts you’re looking at at least $150. Or, you could not and have $3,000.
THE $50 PRESENT. THE OL’ I-HAVE-NO-FRIGGIN-CLUE-WHAT-TO-GET-YOU $50 PRESENT.
Personally, I have purchased that exact scarf and tie for my mom and dad for at least 14 of the Christmases I have been alive. Then, you’re buying candles for your third cousin, candles for your coworker, and candles for a hostess gift. When times get really desperate, you break down and spend $50 on a vintage-seeming tin of Peppermint Bark from the Williams Sonoma catalog. Or really, anything from the “tartan wonderland” that is William Sonoma (for a holiday laugh, you must read this now). What if you eliminated just 4 of these $50 gifts? ($200 total.) Periwinkle scarves…………….or $4,300!!!!!!!!!!!
Spend 10 minutes in Target during the holidays, and you’re walking out with a $300 receipt, I guarantee it. When I decided to quit my corporate job, I gave up Target altogether. Seriously. Target has crafted itself into a veritable cathedral of seduction. I would suggest not going and instead, investing that $300, but I fear that I jeopardize my credibility as someone who understands the human condition. Women love to love Target, so, I won’t go there. But…….one trip to Target to buy crap you won’t remember buying in two years…..or $6,500…..
The average person will spend almost $1,000 on Christmas gifts this year. That’s JUST gifts. That doesn’t include the decorations, the feast(s), the outfits, the social engagements, and so on. Again, I’m not suggesting that you should not buy gifts for loved ones, but it is pretty wild to see what just one cash dump into the stock market can do with time. For most of us, $1000 is a lot of extra money to scrounge up and put towards a long-term plan. But when we think about just how much we spend during the holidays, it really doesn’t seem like that much.
What if, starting this year, you found an extra $1000 during the holidays to put into the stock market, in a retirement account? (Just buy an S&P 500 fund in your 401k, IRA, or Roth IRA.) And did this every year? This is no substitute for regimented monthly saving—and you have to pay off your credit cards first—but this is truly the ultimate gift you can give yourself and your family. Stop buying them Yankee Candles now, and take them on a tour of Europe when you retire. Say no to the 11th pair of Old Navy pajamas, and pay for your grandkids’ college. If you were to invest the extra $1000 each year for 40 years, you would have:
That’s some holiday magic. (Compare this to only saving—not investing—$1000 a year for 40 years: you’d have $20,000.)
Anyways, that’s it. That’s all I really wanted to show you. I hope it makes you think.
For those of you that want to understand the math behind compound returns, read on.
As mentioned, compound returns are returns on your investment that are growing at an increasing rate. How does this happen? First, you earn a return on the money you invested, called the principal. Say for example, you invest $1000 and earn a 10% rate of return.
$1000 x (.10) = $100
You made $100 in profit. If this was a stock, the value of your stock went from $1000 to $1100. That whole new amount—the $1100— is reinvested. In the following year, let’s say you earn the exact same rate of return, 10%:
$1100 x (.10) = $110
You made a larger profit even though you had the same rate of return! That’s because the original principal ($1000) was invested, AND so was the previous year’s profit ($100.) What does the next year look like? Remember, you’re reinvesting all available money ($1100 + $110).
$1210 x (.10) = $121
See? Each year you not only make more money, but at an increasing rate. And you’re not doing anything different! You’re not adding more money in!! You’re just sitting back and lettin’ that shit ride.
These amounts are small so its hard to wrap your head around the true magic of compound returns, but play around with a compound interest calculator to see how impressive these numbers can get—especially when you explore time frames longer than 30 and 40 years. That’s when the slope of a compound return graph starts to get steep, and it’s also why people are always screaming at us and telling us that our young years are the most important for investing. I think we should listen.
*It’s important to point out that all of this is purely hypothetical. You’re not going to “land” on any of the exact numbers I provided, I guarantee it. While the stock market has averaged about 11% a year over time, we should expect less—that’s why I used an 8% return in my calculations—but even this might be generous. 8% is an average, but real stock market returns are variable, so timing is a factor.
Also, if you make one wrong move—selling out during a crash (do not fucking do this)—then you’re not earning 8%. But if you add money to the stock market consistently over time, are never phased by a downturn (they will happen), and are PATIENT, you will not be disappointed.
Enjoy that holiday compounding and have a great week!!