Once your housing expense is under control, the next thing to tame is your consumption habits. The most common waste of money today is buying an automobile. New cars are simply too expensive for the median household income. But because car manufacturers have created ways for consumers to stretch with financing and leasing deals, consumers succumb to marketing persuasion and buy cars they cannot comfortably afford.
If consumers follow my 1/10th rule for car buying, almost all of one's financial problems, as it pertains to a car, will go away. If you spend only 10% of your gross income on the current value of a car, you won't sweat paying insurance, paying tickets, or paying for maintenance or damages. At the same time, if you want a $30,000 car, find a way to make $300,000.
If you want a luxury automobile that costs a whopping $100,000, then you best make more than $1 million gross a year!
Now that we have a viable solution for automobile buying, the next bad consumption habit to slay is everything else you don't need i.e. wants. From buying $3,000 Louis Vuitton handbags to spending $9,000 on a Panerai watch, there are a lot of wants that will prevent us from achieving financial freedom sooner, rather than later.
Therefore, to solve this problem of mindless consumption, I've come up with The 10X Investment Consumption Rule.
The 10X Investment Consumption Rule
Before I explain to you the rule, let me share a comment from a reader in my post, Here's When You Know You're Not Yet Rich Yet. The post talks about wasting 2.5 hours of my life because I was unwilling to spend an extra $100 to fix my cracked iPhone due to sunk cost fallacy. Nate's comment inspired me to come up with this consumption solution.
Apple continues to be really, really good at social-engineering sheeple to buy their products and services. It has perfected marketing and social engineering. Its users are willing to buy overpriced phones that require overpriced dongles and overpriced support. And even when the users get kicked in the gut, they’ll continue buying Apple over and over again. It’s irrational; it’s also great social engineering that you fell for.
So yes, I am a sheeple for using Apple products. I fell for their marketing and social engineering because I realize their products are so much more expensive than generic PC products. But because their iPhone was so revolutionary when I first got one in 2008 and because Apple built an ecosystem of apps that made their software and hardware easy to use and integrate between a laptop and a mobile phone, I stuck with it.
Unfortunately over this time period, their products seem to be worsening in quality, and their customer support has declined as well. Going to an Apple Store is almost like going to the DMV, a nightmare place.
But after the comment, I realized one of the reasons why I keep buying Apple products is because I've owned Apple stock since 2008 and I love supporting companies I invest in.
Invest In Companies You Use
The first iPhone came out on June 29, 2007 and I was a skeptic. I had been a heavy Blackberry user since 1999 and couldn't fathom a buttonless device being good enough for work correspondence. Some of the e-mails I had to write on my Blackberry were extremely lengthy due to the amount of research analysis I had to provide to my clients.
But after a year passed, I decided to give it a shot. And after a couple months of giving it a shot, I bought $10,000 worth of Apple stock. Over the years I've ended up buying about $100,000 worth of Apple stock that has since provided a healthy return as the stock is near an all-time high. During this time period, my overall net worth increased as well.
I can basically frame my family's Apple product consumption of iPhones, Macbooks, and iPads as free since 2009 + a profit thanks to my returns in Apple stock.
The 10X Investment Consumption Rule simply states that before you buy any product or service you don't need, you must first make an investment return equal to at least 10X the cost of such product or service.
Consumption Example #1: Overpriced Mobile Phone
You want to own the absurdly priced iPhone X for $1,000. To do so, you must first make a $10,000 return on Apple stock. You could also make an investment in Apple's downstream component suppliers as an alternative.
If you follow my rule, you'll need to review your existing liquidity in order to determine how much you can afford to invest. You'll have to do a deep dive net worth allocation overview to see where you are currently exposed. You might even run a cash flow analysis to see how long you need to save before you will come up with the investment capital.
If you can't afford to invest, how can you afford to buy a $1,000 phone? If you've only got $10,000 to invest, you realize that you'll need to return 100% to be able to afford a $1,000 phone. Such a time delay will make you think thrice before buying something you don't need.
But if you have $100,000 to invest, it might be easier for you to make a 10% return to afford a $1,000 phone. And since you have $100,000 to invest in one stock, that must mean you have much more behind, which means you absolutely can afford to splurge.
The goal is to transform from a consumer mindset to an investor mindset.
Consumption Example #2: Basketball Sneakers For Show
You want to own the latest colorways of the Jordan 3, Jordan 4, Jordan 5, and Jordan 6 shoes. The total cost for this box set is $900. Before you waste money on basketball shoes you'll use to just walk around in, you've got to return at least $9,000 in Nike stock.
I swear to goodness, every time I go to a Footlocker or Nike Store when a new Air Jordan retro drops, there are lines out the door filled with teenagers and 20-somethings, the poorest demographic in our country.
By spending hours researching the company that's taking all their money, Air Jordan consumers will understand more about how a business is run. Sometimes, they'll discover some products have a 90% gross profit margin, which makes them stop consuming for not wanting to feel stupid. Other times, they might be inspired to start their own business to capture such profit margin.
Consumption Example #3: European Vacation
Instead of driving an hour to the beach for just $10 of gas, you just have to fly to Santorini for $1,000. The trip will be fabulous for your Instagram and Facebook profile.
The 10X Investment Consumption rule means that you'll have to make $10,000 in an airline stock like United Airlines (UAL). That's no easy task, especially with oil prices moving higher, but that's the whole point.
By the time you finish researching and investing in your favorite airline stock, you'll understand how to measure available seat miles (ASM), revenue per available seat mile (RASM), cost per available seat mile (CASM), break-even load factor, and earnings sensitivity to a dollar in oil price change.
Or maybe you might want to do research on TripAdvisor (TRIP) to figure out when the slow season is to find the best Santorini deals. After all, you'll also have to spend money on lodging, food, and entertainment.
Adopt The Investor Mindset If You Want To Spend
If you can’t get excited about investing in a particular stock after doing your research, the simple solution is to either buy an index fund, a sector index fund, or don’t buy that particular good at all. It’s only logical that if you don’t like the fundamentals of the company, then you shouldn’t be supporting the product.
Having a savings + investing mindset will always ensure that you make enough money before spending. If you can do this, you will never go broke. You will learn patience. You will better appreciate the value of a dollar.
Instead of living paycheck to paycheck, you'll likely grow rich beyond your wildest dreams. Treat your investments like expenses to feel good about spending a lot!
Build More Wealth Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile. Real estate provides utility and generates income. If you like to spend money, not only should you follow my 10X investment consumption rule, you should also develop passive real estate income as well.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $944,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Invest In Private Growth Companies
If you want to consume, invest!
Consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Stay On Top Of Your Money
Finally, sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms.