You have to think of money as capital, not purchasing power, if you don't want to lose years of wealth accumulation

You have to think of money as capital, not purchasing power, if you don't want to lose years of wealth accumulation
Photo by Anne Nygård / Unsplash

From my student days and when money was always tight, I took a thinking fallacy with me into my early professional years that cost me years of wealth accumulation: I thought about income in terms of spending levels that I could afford.

For example, if I had a monthly €2000 income, subtracted €700 rent from it and €800 for variable expenses, then €500 remained for monthly subscriptions and loan repayments.

At the time, I was primarily thinking about how to structure and use that monthly €500 potential, for example, by allocating monthly €50 for a mobile phone contract, €75 monthly instalment for a notebook, €150 for a fancy rowing machine and so on.

In my head, these 500€ of free income already had a future value of 24 months x €500 = €12.000, which I could allocate today thanks to credits. So a salary increase of, let's say, €100 meant to buy something that I can pay through a monthly instalment of €100. So each additional salary increase would further increase the monthly subscription and credit repayment levels, thus wealth.

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This is nonsense and catastrophic for one's wealth accumulation.

With this thought pattern, I was the perfect consumer, as the capital market probably wanted me to be, but I would never become wealthy.

Being wealthy does not mean being able to afford something. Being wealthy means having capital assets to work for you.

People who understand this don't get blinded by a show-off's fancy car because they know he probably makes the expensive instalment from his monthly income, not from his capital.

And an extremely well-earning doctor couple, envied by everyone in the neighbourhood, can be impoverished if they only use their high income as purchasing power.

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Money must be viewed as capital, and the goal must be to use as much income as capital as possible.

At some point, I finally understood. It was when I started listening to financial podcasts and investing in shares - fortunately, at a time when the markets were only going up.

Seeing how capital can magically multiply and work for me was a game changer. Through price gains and dividends. Through returns.

In my error mentioned above in thinking, I was not that wrong. It's a good idea to think about the future value of money. With capital, however, you do that via the return and interest rate effect.

  • If I consider monthly 100€ only as purchasing power, after seven years, I have spent 7*12*€100 = €8.400. So this is more or less the purchase price of a used car.
  • If I consider monthly €100 as capital, after seven years of investing with a 10% interest rate, this results in €12.000!

So the €100 monthly capital has earned me 3600€, and these, in turn, can also be invested as capital. These compounding effects are what will make you wealthy, eventually.

Photo by Towfiqu barbhuiya / Unsplash

I now get great pleasure from putting every available euro into capital accumulation.

You might think spending money on consumption is more fun than wealth accumulation. But that is wrong. It is an absolute pleasure to invest every euro and watch how the capital stock grows monthly and yearly.

Even in bad times, like now, when the invested capital evaporates due to falling prices, this is not as bad emotionally as I would have thought. You have time, and at some point, things will start to look up again, and then you'll benefit all the more because you got in at such low prices.

What is also fun is calculating the monthly investment with interest effects on the future: what will I be able to get out of dividends in addition to my pension? I will soon show you how to do this in Excel in another blog article.

Model: @Austindistel
https://www.instagram.com/austindistel/

Photographer: @breeandstephen
https://www.instagram.com/breeandstephen/
Photo by Austin Distel / Unsplash

I hope this blog post helps you see if you have the same thinking error I had. Feel free to subscribe to this blog to hear more tips on living a productivity-driven life.