Apple iPod – Consuming, Saving or Iinvesting

In an attempt to explain the differences in consumption, saving and investing, I thought it would be a good idea to use a real world comparison. I have therefore chosen a comparison between purchasing Apple’s first IPOD when it came out in 2001, saving this money and leaving it in the bank and finally, using the same money to buy Apple Inc (AAPL) stock. I hope you find the comparison illuminating.

Consumption

On 23rd October 2001, Apple launched it’s first iPod with a sale price of $399. What that $399 purchased was a 5GB hard drive, with the most unique feature being it’s now famous scroll wheel method of navigating through your song collection. As a result of the scroll wheel it was much easier to navigate through the iPod’s playlist than competitors and laid the foundations for the Apple iPod to become the most sought after MP3 player.

From a financial perspective however, in 2014 that $399 would now have disappeared long ago and you would have been left with an iPod that is outdated and more than likely doesn’t even work anymore.

Saving

Instead of consuming that $399, it could have been set aside for a rainy day and placed into a bank account.

Since 2001, that $399 would have received interest, however the amount you would have received has been minimal due to the reduction in the prevailing federal reserve rate. Assuming a reasonable 3% per annum over the entire period since 2001, your savings would now be worth approximately $588.

Whilst those savings would have barely kept pace with overall inflation over that period, due to the combined forces of entrepreneurial innovation and competition which is particularly applicable to the technology sector, these funds could now purchase a far better product than the original iPod you could have purchased in 2001.

It could in fact purchase an iPhone, a product which according to Robert Bryce in his excellent book smaller faster lighter denser cheaper ‘it has 250,000 times the data-storage capacity of the computer onboard the Apollo 11 spaceship that went to the moon in 1969.

The decision to delay consumption has rewarded the careful saver with the ability to consume a superior product in 2014.

Investment

A purchase of Apple Inc (AAPL) stock on 23rd October 2001 using your $399 would have purchased 22 shares at a price of $18.14 per share.

Since your purchase of shares in 2001, the stock price of Apple has increased dramatically in reflection of it’s incredible growth in sales of not just iPods, but Macbooks, iPhones, iPads, not to mention it’s huge sales volume generated through it’s iTunes platform.

It has increased to such an extent that there have been stock splits since your original purchase meaning that your 22 shares would now be converted into 308 shares (a 2/1 split in 2005 plus a further 7/1 in 2014).

Now 308 shares at today’s share price of $112.98 would be worth $34,797, a truly incredible increase in wealth.

Over that period you would also have received dividends amounting to $1,320.88, with the dividends alone trebling your original investment of $399.

(Disclaimer: I have not taken account of taxes in my figures however I have also not taken account the benefits of dividend reinvestment which would have further magnified returns. Of course if you make the incorrect investment that $399 could also disappear).

Conclusion

Whilst this is a particularly extreme example, I hope it will help you decide that with at least some of your earnings, you should become an investor in an attempt to increase your future prosperity.