We all want to save money on purchases. We scour for deals and subscribe to services like Groupon to help us find them. We go to great lengths to bid the right price on eBay, or search a local classifieds section for a price break.
But these deals and decreased sticker prices are just the beginning. They are front end cost savings, which are typically one time savings, but sometimes you can save even more on the back end of the transaction, and sometimes save over and over again.
Let me demonstrate the most significant way to save first, because it is the most important and most effective. Following it will make much of what you buy become free. "Ah", you say, "there is no such thing as a free lunch, so what kind of gimmick is this going to be?" I assure you it is not a gimmick. What we are going to do is use the relationship that time and money have mathematically. Think of it like the relationship mass and energy have to each other in physics, or like the relationship frequency and time have to one another in a Fourier transform. Even Albert Einstein said this principle "is the greatest mathematical discovery of all time". Using this principle, we can calculate a way that instead of things costing you money, they will only cost you time. I call this method "Dimes to Time". Dimes to Time takes advantage of a few things: what I call a Value Reclaim, and also what is called
compounding and
the time value of money, but in a way you may not have thought of it before.
First Way To Save: Reclaim Some Value out of a Used Product
So you bought some clothes at a discount sale at your local department store that offered you 30% off. Great! You saved good money up front - money that never left your hand which you can now use elsewhere in your personal economy. The rest of the money you spent was transferred into the value of what you purchased, and most of the things we purchase depreciate - declining in value as we use them. Once you use your clothing though, it still has some value that you can reclaim to save even more. There are two ways to do this. The first way is to sell the clothing, the second way is to donate it and receive a tax deduction. Say you sell your clothing for a price that was 5% of the original cost to you. Great again! You just saved another 5% for a total savings so far of 35%. Or say the Feds kicked you back $5 of the value of your donation by reducing your tax liability. Great, that's $5 off your total cost of the product.
But wait! You're not done saving! Take that value, that capital you reclaimed from your sale or the money you got back for your tax deduction, and put it to work. If you invest the capital in an equity fund or something similar, you can literally grow your savings year after year. And it gets better. Leave it in the fund long enough, and that item of clothing you bought will have cost you nothing but time. Let's calculate this and turn our dimes into time!
Say the 10% savings we previously mentioned was $20, meaning that the original cost to us was $200. If we invest the capital we reclaimed in a stock fund that returns 8% per year, it will take just under 30 years' time to return that value to us. Which isn't bad at all.
This equation was used to calculate the above figure. n is the number of periods (in this case years) that it will take to make a Final Value (FV) out of a Present Value (PV) with a given Interest rate (i).
Use the same formula, and calculate the time it takes to reclaim the total cost if we receive 20% back instead of 10%. We get: (log(200)-log(40)) / log(1+0.08) = Just under 21 years.
So, what we're basically saying, the dimes-to-time cost of clothing purchased for $200 with a reclaim value of $20 is 21 years.
Here's where it gets really cool. Say over 10-15 years you've spent $50,000 on stuff, and you are just now selling things off to reclaim some value for them. Perhaps your average is 25% being reclaimed ($12500). How long will it take to get your $50,000 back? (log(50000)-log(12500)) / log(1+0.08) = Just over 18 years. You've quadrupled the money returned to you from the sale, and nearly made it like you never spent it. Now, you may say that 18 years is a long time to wait. And that is somewhat true. However, after 18 years you'll have $50,000 you otherwise wouldn't have if you didn't try to reclaim some value (such as just throwing things away, which is a $0 return) or if you'd have spent the $12,500 on something else that depreciates, such as that sweet new jet ski, which in even 10 years time is an old jet ski worth maybe $2,000. You also didn't have to do anything. Your money, time, and returns did all the work.
Another great thing is that at an 8% rate of return it will only take about 9 years for that money to double again, meaning you will have $100,000 after a total of 27 years. To me, that's like having your cake and eating it too. It's like the typical way we think of saving, but in reverse - almost like deferring the savings until after the purchase. I think this can be a great way to save in a supplemental way to a normal savings plan (i.e., doing both at the same time), because there are things we need now such as clothing, a car, school books, etc., and you can't save 100% of everything you earn because of that. But reclaiming value from used goods and making sure to invest the returned capital in a way it can be compounded can obviously do wonders to your overall savings rates.
The great thing is that since this capital can be considered "trash money" (money you got from "useless" things - useless to you, at least), you can "set it and forget it" in a fund with good returns and not worry about it. If things go badly and you only earn 3% returns over 20 years instead of 8%, you didn't really lose anything because your reclaim would have been $0 if you would have thrown it away or given it away. You'll just be a bit behind your original dimes-to-time calculation.
Our example above detailed what happens if you sold some things that cost you $50,000 all around the same time and invested the $12,500 reclaimed capital at once. But what if all along those 10-15 years, you were selling off a few things as you bought new ones, and invested the reclaimed capital as you went? Well, no surprise, but you would return your money quicker. The calculations for this become complicated, and I won't delve into them here, but you can use calculators like
this one to see how fast your money would return to you.
I'll be writing a follow-up post to this one doing over what happens when you continually reclaim value and invest it, so come back to see it here in a few weeks.
Let's move to the next great way to save: Savings Stacking....
For Part 2 on "Savings Stacking" in the 3 Part Series,
click here.
