Thursday, April 1, 2010

Every Purchase An Investment

Someone mentioned to me the other day that the Tri-plex I am buying is an investment, it's not the same as if it was a Single Family home. Though he is right in some ways, it made me think about what is and is not an investment. For example the Tri-plex I am buying is without question an investment. However, don't most people consider their homes an investment too? What I mean is that even if I was buying a Single Family home wouldn't it still be an investment. In fact it is my opinion that every purchase is an investment of one kind or another. Furthermore every person is an investor, good or bad. Let me explain.

Each dollar that we earn has the potential to create wealth. That is, every dollar has the potential to be invested and grow. If we didn't have any expenses and we invested every dollar we made into creating wealth, only then would we see our true wealth potential. Unfortunately we have expenses. For some crazy reason we are required by nature to do things like eat. And for some even crazier reason food costs money!

Of coarse most of us are going to spend the majority of our money. However, each dollar we do spend has an opportunity cost. An opportunity cost is the benefits you could have received by taking an alternative action in this case wealth creation instead of eating. defines investment as the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. If every dollar we earn has the potential to create wealth then I purpose that every time we use a dollar it is an investment. The question is it a good or bad investment.

"Every time we use a dollar it is an investment"

Now, I understand that we have expenses. I'm not suggesting that someone is a bad investor because they spend their money at the grocery store. However, we do have choices in how we meet our needs and how we spend our money. It is also important for us to distinguish our needs from wants. For example, I like to buy candy. I have one crazy sweet tooth. When I spend $1 on a candy bar it may not seem like much, but over a 30 year period that $1 can have an opportunity cost of as much as $300. The question is what do I want more? A candy bar or $300? Everyone of us faces questions like this on a daily basis. What makes us a good investor or a bad investor is how many choices we make like this.

Once we put our money aside in order to create wealth, that is an entirely different type of investing. Someone can be a good investor in the grocery store and a bad investor in their IRA. The trick is finding financial balance.


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