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Saturday, April 21, 2012

Investment vs. Expense...Changing Your Mindset.

I watch a good amount of television. Not too much crazy reality shows (although I do have my guilty pleasures), but mostly lifestyle HGTV, and the Travel Channel, with a lot of Investigation Discovery (ID), CNBC,  and History Channel thrown in. Okay so unfortunately watching lifestyle channels, CNBC, and listening to Dave Ramsey is my only real glimpse into how wealthy people view things.

One thing I have picked up is that when wealthy people are interviewed for a particular show, whether it be buying a property or going on a vacation, then tend to describe it as either an  "investment" or an "expense".  As you would expect, they tend to "invest" more then just "expend", my assumption is because they want to stay wealthy...Maybe broke people "expend" more than "invest"... Is it that simple? defines the word invest (verb) as:"to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value". So in other words, people who do more of this tend to put their money into things that  will reap some sort of return (monetary or otherwise). also defines the word expend (verb) as: "to use up".  So in order words, people who do more of this tend to put their money into things that use it up. Basically "expending" your money is like driving down the highway with $1 bills in your hand throwing them out of the window, its gone, its not going to generate anymore, its been expended!

I suspect that when wealthy people decide to "expend" they first determine if they can really afford to take the "hit", given the amount of their other money is going toward investments.  

For example, you take a $3,000 vacation which (for the sake of argument) is an "expense"; can someone with your net worth and income level really afford that vacation? Even if you don't go into debt and save up for it; can you really afford to take a $3,000 "hit" to your total financial world (net worth, etc.)? In other words, can you afford to drive down the street and throw 3,000 $1 bills out the window without batting a eye?

I think if we are going to be financially successful, we need to pay attention to how much of our money are we "investing" vs. how much we are "expending".

I know that in order to survive expenses are a very necessary part of our world, however I think we should consider them under these terms.  I don't know the "magic" formula of how much of your income should be going to expenses vs. investments...but I am (personally) trying to get my living expenses down to 50% of my income, with 30% to invest, and the remaining 20% to spend and enjoy. So that would leave me 70/30 in terms of expending vs. investing. Now if (when) I become wealthy those ratios will change, just because you make $10M, doesn't mean I must now live on $5M and spend $2M on crap.  Likewise a person making $30k per year, may not be able to live on $15k, invest $9k and spend $6k a year!

I would challenge you today to make a list of things you often spend money on and categorize them as either an investment or an expense...

Let me help you...

*Some of these items can be considered both an expense and an investment depending on the circumstances.


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1 comment:

  1. Well there goes my 2013 Disney World vacation! I was planing on spending that much exactly.


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