Written by: Corey Janoff
This post was originally published on our previous blog website on August 8, 2017, and has since been revised and updated.
What a year 2020 has been. For some of you, this post may be an inspiration to drink away the memory that is 2020 and start fresh in 2021. I know I could go for a stiff drink this holiday season. Many of you probably saw this title and thought to yourselves, "Wow, Corey must be an alcoholic." Or, "Wow, Corey must have a lot of money if he can afford to blow $5,000 on booze." Or both.
I have to confess, I didn't actually spend $5,000 on liquor, but I sort of did. Let me explain.
How It Went Down
I live in Oregon, which has the second-highest state excise tax on liquor in the country at $21.98 per gallon. The state of Washington is the highest. In Oregon, the distribution of liquor is controlled by the state, and the state sets all the prices. There is some convenience in this, knowing that you will pay the same price for a bottle of your favorite liquor in one store as you will pay in another store within the state. No need to ask around to see who has the best price, because the price is the same no matter where you go.
California, which borders Oregon to the south, has one of the lowest excise taxes on alcohol in the country at $3.30 per gallon. And the price for a bottle can differ from one store to the next, based on a number of factors.
Some savvy business people are well aware of this discrepancy and found a way to capitalize on it. In northern California – not the Bay Area, but way north, near the Oregon/California border – there are a number of liquor warehouses. Literally giant stores in no man's land that sell booze. If you're used to your typical 600 square foot liquor store, this will feel like going to a Costco that only sells alcohol. These stores sit right along Interstate 5 for people's convenience in southern Oregon and those making a road trip home from more exciting parts of California.
A handful of years ago, when I was in my late 20's, one of my friends was doing a road trip to southern California with his wife and was planning to stop at one of these liquor stores on the way home. He kindly asked me if I would like him to pick up anything for me. What a good friend. He gave me the name of the store he was going to stop at so I could peruse their inventory online.
I was like a kid in a candy store. They had bottles of all my favorites, and some I was eager to try for the first time. Also, some of the prices were literally half of what I could expect to pay in Oregon. I saw a bottle of scotch for $25 that would cost $50 in OR. A bottle of bourbon for $30 that generally sells for $50 here. A tequila bottle for $26 would sell for over $40 at a liquor store near my house.
I made a list of all the bottles that I wanted and realized my wife would kill me if I spent that much on alcohol, so I trimmed the list down to about $315 worth of stuff. My friend delivered me a whole box to stock my liquor cabinet, and I Venmo'd him the money. My wife still wasn't pleased, but she was less displeased than she could have been. Besides, she drinks the cocktails I make, too, and it took several years before I needed to buy anymore bourbon.
How I Got $5,000 from $315
In the title of this post, I claimed to have spent $5,000 on liquor. In reality, I only spent $315. But what if I did something else with that $315 instead of buy booze? What if I invested it for the future?
Let's pretend I took that $315 and put it into an IRA and invested it in a diversified equity portfolio and let it grow tax-free. Now, it would be hard to diversify $315 with fund minimums perfectly, and there are no guarantees of growth, but we're pretending here. While we're pretending, let's also assume I am able to realize an average rate of return of 8% per year on this investment. Historically, some will point out that equities have probably fared better than an 8% per year average over time. Forward-looking pessimists will point out that 8% per year average might be overly optimistic. This is a hypothetical scenario, so we're going to run with it. In reality, every year will yield a different return. Some years will show double-digit growth. Other years the investment will decline in value. For ease of the illustration, we will assume 8%/year every year.
Now, drumroll, please. If I invested $315 at the age of 29 and let it ride at an 8%/year compound growth rate, I would have just over $5,000 at age 65. Holy interest, Batman! That's pretty spectacular!
What if, instead of tapping into that money at age 65, I let it continue to run until I turn 90 years old? At that point, I'm close to kicking the bucket (if I haven't already) and decide to donate the money to charity. How much would that charity be receiving? About $34,500. Now I really feel like a jerk by spending that money on liquor. Some charity is very disappointed in me right now.
Albert Einstein once said compound interest is the eighth wonder of the world. I have to agree with him. If you are on the right side of it, compound interest can do wondrous things for you. If you're on the wrong side of it, it can vehemently work against you.
I'm not advocating that you stop indulging in your vices. I would be a pot calling a kettle black if I was. But think about how you spend your money. Next time you are out shopping and spend $300 at the Nordstrom's anniversary sale, think about how that $300 could have been an extra $5,000 in your retirement years. Or how it could have been an extra $35,000 for an orphanage when you pass away.
Next time you spend $300 to go to dinner and a concert, in the future when those activities are a thing again, think about all the shows you will have to pass on in retirement. Or all the homeless children that will go hungry one day as a result of your desire for a single fun evening.
Sorry, I didn't mean to make you feel bad about yourself. That was not my intention. We need to have some fun in our lives. We never know when the lights will go out for good. But we also need to plan for the scenario where the lights stay on a long time. Find a balance. For every dollar you spend on the fun today, invest a dollar so you can continue having fun tomorrow.
So let's all raise a glass and drink to compound interest and investing for tomorrow!
Examples are hypothetical and for illustrative purposes only. If fees are factored in, results could be less. All investments involve risk of loss, including total loss of principal. Consult with your financial advisor before making investment decisions.