Imagine that you command a battalion of soldiers. These soldiers will carry out your exact orders, precisely, every time. Some orders can get them killed while other orders will allow them to bring prisoners home. The prisoners that they bring back get recruited and become your soldiers too, adding to the number of soldiers you have under your command. The more soldiers you have, the more potential you have of capturing more prisoners to grow your army even more. The only variables in this hypothetical war are your orders. So what kind of orders would you give? Wouldn’t you send your soldiers on winning missions every time? Would you EVER send your soldiers on suicide missions where they’ll get killed?
No, you say?
Then why are you killing them every day???
Think of Your Money as Green Soldiers
Here’s how I think of my money—as soldiers—I send them out to war everyday. I want them to take prisoners and come home, so there’s more of them.
~ Kevin O’Leary, Shark Tank
I don’t agree with Kevin O’Leary on everything, but I think this is a helpful illustration of how money works. Money is a curious thing in that it has latent potential, meaning it can be put to work to actually DO stuff. So every time we waste money, it dies and loses any ability to do anything for us anymore.
- Eating out instead of packing a lunch? $10 DEAD!
- Unused gym membership? $50 KILLED EVERY MONTH!
- Buying a brand new car when your old one works fine? $20,000+ SLAUGHTERED!
So what’s the big deal? Well, besides the fact that it’s not nice to kill things, we need to remember not to disrespect even the small bills. If a soldier is able to be repeatedly dispatched to bring back more prisoners to grow the army, we need to preserve as many soldiers as possible! That’s how it is with money. We can send them out to die or we can send them out to grow.
How Money Grows…and Withers
Money may not grow on trees, but it does grow. The process of making it grow is called investing. How does this work? Let me illustrate.
You have $1000 and suppose the following are the ways that you can deploy those 1000 green soldiers:
- Spend it on a new big screen TV – You have exchanged the $1000 for an object that doesn’t produce any income for you and its value (i.e. what you can sell it for) will continuously decrease forever. Your $1000 is effectively dead.
- Hide it in your mattress – You’ve “saved” the $1000 to protect it from loss. However, if the annual average inflation rate is approximately 4%, your money actually loses 4% of its value every year. Your $1000 isn’t dead yet, but is slowly withering.
- Start a business – Suppose you start a business with your $1000 and you earn a $100 net profit in the first year. Your 1000 soldiers have effectively brought home 100 prisoners. In financial terms, your $1000 had a 10% rate of return on your investment. The next year, you can deploy the additional $100 for a total of $1100. Assuming you have the same rate of success, your soldiers would have earned you another $110, bringing your total worth up to $1210 at the end of two years.
If you chose option one, your initial $1000 is now an out-dated TV that’s worth maybe $700 (or less!) after two years. If you chose option 2, in two years your initial $1000 will have the same purchasing power as $922 when you started. If you chose option 3, your initial $1000 is now $1210!
Put Your Green Soldiers to Work
The Crumb Saver looks at each purchase as an investment. Sure, not every dollar we spend will result in a financial return, but the point is that as many of them as possible should be! Instead of spending so much on groceries, maybe invest that money in growing your own garden. Instead of buying another expensive birthday gift for you kids, invest the money for their college tuition. Instead of buying that huge mansion, buy a smaller house to live in plus a rental for income.
The principle is that as many of your dollars as possible should be invested to bring back more dollars, rather than being sent out to die. Think about how much your money can grow with time, rather simply what it can get you right now.
The End Goal
Now the goal can’t be just to amass an ever-growing pile of money. There’s got to be a point where enough is enough, right?
Well, imagine that you’ve put your money to work so consistently and effectively over time that the amount of money your money is bringing home (commonly referred to as “passive income”) is equivalent to your living expenses. When that happens, congratulations! You are ready to retire. Just think how you no longer will have to work in order to pay your bills. Your green soldiers are paying your bills for you, so you are free to do other things, to give more, and to serve more. Moreover, who said that you have to wait until you’re 65 before this can happen?* If your lifestyle is such that your living expenses are very low, you don’t need a huge passive income to live on each year.
Sound too good to be true? It is as long as you’re killing your green soldiers! Take good care of them, put them to work, and soon they’ll be taking care of you.
*Check out Mr. Money Mustache’s blog for proof that I’m not making this up. He retired by the time he was 30! (Pardon the swearing, though.)