The other day a group of friends and I were discussing investing and my friend mentioned that he had purchased some stock in Apple Inc. (Ticker: AAPL) back in 2003 for $20 per share. He had invested $4,000 for 198 shares (Disclaimer: I also own stock in AAPL, but alas, I did not get in for $20 per share).
The investment performance has been…shall we say….lucrative.
One of the others in the group had an interesting response: “I would have invested in Apple too, but we weren’t lucky enough to have four grand lying around to bet on stocks.”
(As an aside, I discussed with this friend why he chose to invest in a single stock, when most financial advisers advise to diversify. His response was that this was “play” money that he could afford to lose, and that the vast majority of his investing was done in index funds.)
A while back an acquaintance asked if I knew about one of my good friends recently purchasing a very, very nice car (I don’t know how much they run, but somewhere north of $90,000). The acquaintance’s next comment was something to the effect of, “He’s lucky to be able to afford that car — still in his twenties!”
Yes, he’s lucky.
And yeah, my friend who invested in AAPL four years ago is lucky.
They’re both lucky enough to be smart enough to live within their means.
With my investor friend, he had discretionary money lying around that he could afford to lose. Why was it lying around? Because he hadn’t spent it. Why hadn’t he spent it? Because he lives within his means. He doesn’t spend every dime that comes in. So when an opportunity came along that he thought he should take, he could afford to take it.
There are two points of affordability really: the physical and the psychological. Physically, if you have $4000, and an item costs $4000, then you can afford to buy that item. Psychologically though, it’s a whole different ball game — especially with investing. The question you also must ask yourself is if you can afford to completely lose that $4000 and have little to nothing to show for it.
My friend ran the risk of losing virtually all of his investment. But he could afford not only the $4,000 but also the risk attached to the investment. He was comfortable with both sides of the coin. Had he been living on the financial edge, he would not have had the means necessary both physically or psychologically, to be able to make the investment. As a matter of fact, his mind would have been so wrapped up in trying to stay current with his payments I doubt he would have had room upstairs to even think about possible investments.
The second scenario is with a good friend of mine who, while in college, begin helping his friend build a business. While building this business he has stayed in school, married, and started a family. While building the business he (and his wife, who of course shared in all of the building, or demands thereof I should say) wore old clothes, got by with one extremely old car that most of you would be embarrassed to sit in, didn’t go out to eat, didn’t go to the movies, didn’t spend anything extra on anything.
So yeah, he was lucky to have the opportunity, but how good would that opportunity have been if he had been living above his means, loaded down with debilitating credit card debt, used to living the high life (or worse yet, completely dependent on his parents while in college)? I submit that the opportunity would have been passed by, not on its merit alone, but on his ability to take advantage of it.
And your ability to take advantage of opportunities that come your way is directly related to your flex-ability with your finances. The rich get richer not because they’re in some secret club or know some secret formula — it’s because they live within their means (easily). This allows to them afford opportunities when they present themselves.
Go find yourself some luck and manage your budget so you can live within your means.