Many of us are guilty of equating status, success and ultimately happiness, with material possessions. Even if, like me, you make a conscious effort to avoid such associations, most of us tend to go through life accumulating a lot more stuff than we need.

 
Take clothes. I have no interest in clothing or shopping. And yet my wardrobe is full of clothes I’ve barely worn. The suits and shirts alone probably cost me £2,000.

Throw in the casual items that have hardly seen the light of day, and I’m probably looking at £3,000 of wasted expenditure. And I’m not a frivolous spender.

The opportunity cost of that £3,000 is enormous. I’d like to think (perhaps mistakenly!) I could earn about a 10% annualised return on that £3,000. Compound that over 30 years and what do you have? A whopping £52,000.

So the effective cost of my wasted spending – on clothing alone – is north of £50,000. And that’s just based on my current wardrobe, ignoring clothes I’ve bought in the past and discarded.

Once we consider all the other ways we waste money, like on daily Starbucks coffees, ‘stuff’ for the house, toys for children that go un-played with, funky gadgets (leaf blowers, bread makers etc), that wasted spending figure probably rises to at least £50,000. Which compounded over 30 years at 10% is £870,000!

This is ignoring the really big items of spending, like buying bigger houses than we need, the second car, the holiday home and so on; which would take that figure well into the millions, possibly even the tens of millions.

 

‘When you spend money on stuff you derive little value from, the true compounded cost is massive. This means a lower retirement income’

 

I’m making all these figures up. I could use a different time horizon and growth rate and I don’t account for inflation. It’s the principle that matters though.

When you spend money on stuff you derive little to no value from, the true compounded cost is massive. This means a lower retirement income and/or the need to work longer to provide for the things you actually want and value.

To be clear, I’m not advocating accumulating money for the sake of it, because then you’re just hoarding cash instead of possessions. However, a certain level of wealth does offer security and provides the freedom to spend your time in the way you want, with the people you want.

As a general rule, accumulating more stuff will not make you happy. We tend to significantly overestimate the happiness material possessions provide and soon revert to similar levels of satisfaction as before.

Experiences and time spent with friends and family tend to be far bigger drivers of happiness and life satisfaction. Both can be maximised by minimising unnecessary expenditure on material things.

The message is especially important for younger generations. Young people have time on their side, making compounding staggeringly powerful. An 18-year-old investing £20,000 (the current ISA allowance) would amass a pot of half a million pounds by age 65, assuming a 7% annual growth rate.

Enough to provide a basic retirement income even accounting for some inflation. A 45-year-old would have to invest around 7x more to achieve the same outcome.

I apologise to any youngsters reading this – I know most of you don’t have anywhere near £20,000, and many of you will have debts incurring horribly high interest rates.

But if you can pay off some of those debts or start investing a little sooner (prioritise the former before the latter), by not wasting money on things you don’t really need or want, you’ll be in a far, far better position in the future.

As Albert Einstein is reputed to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

 

This article was originally published by the Undercover Fund Manager.

 

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