Sunday, 27 December 2015

Personal finance: If you only spend money on consumer goods, in the long run you're broke

"I will invest my savings in a new car/ new hand bag/ new bike/ new television."

- So what's wrong with this saying?

There is a fundamental difference between an investment and consumption. Generally, an investment starts with spending money followed by receiving money (cash outflow followed by cash inflow). A consumption starts with spending money (cash outflow) with no future cash inflows expected.

So let's take a closer look and make it simple. If you buy a car for your personal enjoyment and do not plan to make any money with your car, then it should be regarded as an consumer good (cash outflow). Otherwise, if you plan to drive people around and maybe start your own transportation or taxi company, then it would be an investment (in case your guests pay you with money ;) ).

Same principle applies to everything that you can buy. So each time you are going to buy something, try to differentiate between an investment and consumption. If you buy something that is probably going to generate cash, then you would call it an asset, otherwise it is just a consumer good.
If you want to make money, you should invest money.

But in what kind of assets should you invest or what the hell should I buy that generates cash?

Always remember: There are only two things you can do with money. Either 1) invest or 2) consume.
Consume or invest? Choose wisely.

Feel free to discuss guys,


PS: Of course you can say things like: "I invest money on vacation and increase my health status or happiness." It's nothing wrong with it. But this is not what we call an investment in financial terms. Financial terms are purely cash related. Happiness is difficult to measure, whereas cash amount is not. 

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