By Loren Jersey
Copyright 2008, Stupidopolis Chronicle
Sound impossible? Keep an open mind and read on; you may change your opinion yet. Everyone has heard the old adage spouted by retail advertisements “The more you spend the more you save!” But most of us are skeptical of the motivation behind such sayings. Sure there may be some truth behind it, but are large retail chains really that interested in our financial well-being? Harvard Economics Professor Jeffery Abdelal is certain of it. “Retail corporations need our money, and the only way they are going to continue to get it is if we continue to prosper. Therefore this symbiosis requires nurturing from both sides.” Well, just how does it work?
Save Save Save
Professor Abdelal explains it this way:“Suppose you need to buy 2 blankets, and Retailer A has them for $30. A week later they are on sale advertised as “buy 1 get one free”. You now are able to purchase 2 blankets at a $30 savings. Most people would purchase the two blankets and leave it at that, or even worse would then spend the $30 they had saved on something else. But what most people don’t realize is that the key to saving money is NOT found in not spending it, but rather in spending it on things that save them money! Had you purchased the blankets at the original price, you would have accumulated $60 in debt, but purchasing the blankets at $30 not only produces only half the debt, but actually generates $30 in savings which you can take directly to the bank!”Confused? Your old-world “earn a penny save a penny” financial paradigm is beginning to feel the stress of this new financial strategy. It all boils down to how you spend your money. Buying where you can save money gives you the things you want and cash savings. Keep a tally of that saved money, and you might be surprised how fast it can grow.But saving money is only the tip of the iceberg. Once you have learned to save, and the savings begin to add up, you are ready to step up to the next level and ask “how do I make this savings WORK for me?”
Another important fact about economics is that “Poor people pay interest, rich people earn interest.” Debt is the number one reason why people cannot reach their financial goals. The average American carries over $5000 in credit card debt, and pays an incredible 20% in finance charges on that debt. That’s $1000 in finance charges each year. Eliminating your credit card debt produces an additional $1000 in savings annually! Professor Abdelal further explains how spending money on the right things and at the right times can actually eliminate debt! “Now, not only did you only put $30 on your credit card, but the $30 you saved can be used to pay off your credit card debt!” And if you consider the 20% interest you would have paid, that $30 becomes $36 in savings! Now that you are earning interest, you are ready to move on to accumulating wealth.
It has been said many different ways, but never better than this: It takes money to make money. Once you have spent your way out of debt, whole new opportunities for actually producing wealth will become available to you. But how should you invest your money to produce wealth quickly and with as little risk as possible? Municipal Bonds are paying a paltry 4.5%. A Certificate of Deposit is only slightly better at 5.3%. Mutual funds are much riskier, but in the long term earn an average of 11%. What can you invest in that earns more than 11% but is not nearly as risky? Credit Cards! The average interest rate on credit cards is currently at 20%, and if you remember the example above, even very small investments are possible, with no loss in returns. As we saw, a savings of only $30 can turn into a savings of $36 in just one year. And if you continue to save, interest compounding will cause your savings to grow exponentially. Imagine if you could save $100 each month in credit card debt. That’s $1200 each year, and (trust me on this figure) with interest, it is over $1300. In just ten years, your savings of $12000 will actually be worth over $38000! And the higher interest your credit card, the quicker your savings add up!