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The 'Investment' Test

October 24, 2017

[Image credit: Max Pixel]

 

Around three years ago I was speaking with a salesperson about having artificial lawn installed in my rear yard. The price caught me off guard at first and I remember saying offhand I needed to decide with the hubby if we wanted to spend that much.
 
The salesperson quickly jumped in saying “It’s not an expense, it’s an investment”.
 
Do you hear this bandied around as well?

 

  • “A car isn’t an expense, it’s an investment.”

  • “Your schooling isn’t an expense, it’s an investment.”

  • “A new lounge suite isn’t an expense, it’s an investment.”

  • “Solar panels aren’t an expense, they’re an investment.”

 
I hear it time and time again. I’m sure I’m not the only one.
 
So is ‘investment’ just a sales word to get you to buy a product?
 
Yes and no.

 
According to Investopedia, an ‘investment’ is “the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment in a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit”.
 
The next time you are considering buying something and you’re told it’s an investment, there is a really cool test you can use to help you decide.
 
Ask yourself “will this item pay for itself in the future?”
 
For me, I did go ahead with the artificial lawn for around $2,500 (two men for a whole day plus ground levellers, adhesives, sand… it was a much bigger job than I realised!)
 
Now the salesperson told me it was an investment… right?

 
Was it? What do you think?
 
Since installation, I have saved on garden maintenance for the rear yard. No mowing or weeding required. Great!
 
That’s probably a saving of about $40pm. For the three years that’s $1440.
… not an investment yet…
 
The other way to get my money back is if I have added value to the house, and therefore will attract a higher sale price.
 
Now I’m not in real estate (perhaps you are?) but I am not aware that people are willing to pay more for a property that has artificial lawn. I think the sale price would be the same either way.
… not an investment …
 
Overall, what do you think? Investment or expense?
 
Here is another really common one: a new car.
 
“It’s an investment in your future” I’ve been told, and about how cheap a new car’s maintenance is. But does it pass the Investment Test?
 
Say you spend $50k on a new car. Your old car was costing you around $1,000 per year in maintenance and repairs. Given that you won’t get the sale price back when it’s second hand, the question is, how long do you have to wait to get your money back? In this case, it’s around 50 years. Will you actually keep that new car for 50 years to get your money back? Probably not. And by that time, I doubt you’re still saving the $1,000 per year on repair costs.
 
Answer: it’s an expense.
 
Is it the same for a car costing $20k?
 
I’ll finish today by saying that just because something is an expense, it does not mean you should stay away. It’s your money, and you can spend it on what is important to you.
 
The Investment Test helps make sure you are buying something for the right reasons, and not because a salesperson makes something look more attractive than it is. You need to buy it for you.

 

Have a wonderful week,

 

Erika Gilbert

The Income Organisers

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