Are you spending or investing? It’s not always black and white

18 June 2021

reading time:  minutes

It’s easy to think that you’re either spending money, or you’re saving it.

You draw up a budget. You work out what you spend, and you save the rest. (Alternatively: you pay yourself first, and then spend the remainder.)

In reality, however, financial decisions often don’t fall neatly into one category or the other.

The idea that “you’re investing, or your consuming” can be a false dichotomy.

Businesses spend money…

Companies are in business to make money. They aren’t in business to spend.

Yet companies spend a lot of money. Not all of this money goes towards buying assets that will eventually generate an income of their own. In fact, for most businesses, cash goes towards items that will show up as expenses on their profit and loss statement rather than capex that will show up on their balance sheet.

Spending money on items that are one-off, or recurring expenses, don’t constitute “investing” in any normal, household sense. When a business pays an employee his or her wages, they don’t get that time back from the employee. That money, and that time, is gone.

Businesses spend money on these items because they help the business to generate profit. This expenditure is a form of investment, intended to help the business generate financial returns, even if it doesn’t look like an investment in any traditional sense.

What’s true for business can be true within households as well.

Investing in yourself

It’s quite possible that you are your own most valuable asset. Your ability to be productive, create value for others, and generate an income over the course of your working life may not show up in your balance sheet, but it’s enormously valuable, even in objective terms.

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Spending money on yourself can be an investment, because it can increase your productive capacity. For example:

  • Being in good health is valuable, even from a very narrow financial perspective. If you have more energy, and can be productive for longer, it’s likely to increase your long-term income. Spending time and resources on your health is a productive pursuit.
  • I spend quite a bit of money on books and non-credentialed courses. I don’t think twice about buying a book on Kindle. I’m subscribed to services like Masterclass and Skillshare. Even other subscription services, like Youtube Premium, don’t just improve the quality of my life but improve my ability to vacuum knowledge.
  • I’m a gadget fiend. But as I reflected when I wrote about stuff I love, almost all of the gadgets I buy are tools. These tools, accompanied by proper software, level up my capabilities, and help me function at a higher level.

If I enjoy being in better health, being an infovore, and buying and using gadgets, then all the better!

The Matthew effect

This is a tangential aside, but I’m reminded of the Matthew Effect, aka the phenomena of accumulated advantage, aka the idea that “the rich get richer”.

When you’re scratching to make ends meet, it’s hard to invest in the traditional sense, of investing in financial assets or other asset classes (eg property).

But it’s also hard to invest in the less tangible sense: of accumulating tools and building capabilities, opening the door to opportunities, and incorporating slack in your life.

Take cars as an even further removed example, since it’s hard to think of buying a car as an “investment”. In our household, our cars don’t break down because we can afford cars that don’t have a huge amount of kilometres on the clock, and we can afford to get them serviced regularly. We’re also in the fortunate position where if one of our cars broke down, it would represent a minor disruption to our lives.

We take this (and many other things) for granted most of the time. And that is the point: the ability to not think about it is a privilege that not every household has. It provides us with a lot more slack than many other households, and enables us to focus on other, more rewarding and productive things in life.

I think about this sometimes when I chat with clients when they talk about how they value travel, and spend a lot of money on it. It’s easy to infer a causal link: they travel a lot because they can afford to travel a lot.

However, I think it’s actually more complex than that, and can work in reverse. I suspect that one reason that people have means is because they travel. In the book Diffusion of Innovations, Everett Rogers explains that more cosmopolitan people tend to be earlier adaptors, and these people tend to reap the benefits of innovative products and services. The exposure to new cultures and ideas also enables people to think of doing things differently, and ultimately be more productive.

Investing in “wealth” more broadly

This is a more philosophical view of what it means to “invest”.

At the end of the day, what is money for?

Is your aim to die with as much money as possible?

Or is money a tool, to help you live a life you want, that’s in line with your values and priorities?

Personally, my definition of “wealth” isn’t just financial, but includes many components that can’t easily be quantified. I spend money on these things which may not increase my net worth (at least not directly), but contribute to my general sense of wealth and well-being.

Examples include:

  • Being in good health. I’ve explained above from a very narrow financial perspective. But it’s wider than that: for many people, your health is your wealth. I can’t guarantee a long life span or healthspan, but I can take steps to move the needle, and in many cases this involves spending time and resources. I personally engage a health coach to provide insight, motivation, and accountability. My wife and I periodically engage a nutritionist. We buy equipment that makes it easier and more enjoyable to have an active lifestyle. We accept that if we want to eat well, we have to buy more expensive ingredients and equipment that reduces the friction to cook well (or at least that’s how my wife convinced me to give the thumbs up to buying a Thermomix).
  • Freeing up time to be productive or spend time doing the things I most value. Before my children went to school, this involved paying for child care. Now, we employ a cleaner and a gardener. When you say “no” to some things (chores), you say “yes” to other things (work, friends, family).
  • Being generous with friends. I’d like to think that my wife and I meet many of our loved ones at more than halfway. We reach out to people more than they reach out to us. We host at our house more than others invite us to their house. We often shout meals and drinks. (When people are concerned about this, I joke that it’s an “a-hole tax” – it’s the price we pay for being a-holes.) Maybe this reflects us being unpopular and having to buy friendship, but I’d like to think that we are simply contributing in a way that others would if they could. We might also be more conscious of prioritising this area of our life than others and/or have the privilege of being more able to.

As I’ve already mentioned: a lot of these types of spending don’t just contribute to my inner sense of well-being. They allow me to be more capable, and add more value to the lives of others.

It’s not black and white

Ultimately, this reflects a broader theme in most of the articles on this blog. Spending versus investing is not black and white. There are shades of grey.

Even for different people and households, the shades of grey are different. What is an investment for you might be spending for me, and an investment for me might be spending for you. At different points in life, the balance may be different. (There are times in my own life where I’d have read an article like this and thought “what is this guy on?”.)

It depends on your circumstances, goals, and objectives. It also depends on the perspective we take: whether we’re looking at a short timeframe or a long one, and whether we’re looking for financial returns, or other kinds of reward.


Tags

black and white, complex rationalisation, dichotomy, investing, Matthew Effect, shades of grey, spending, you've got to spend money to save money


About the author 

Sonnie Bailey

Sonnie provides financial planning services via his business, Fairhaven Wealth (www.fairhavenwealth.co.nz). Fairhaven Wealth provides independent, advice-only, fixed-fee financial planning services. Sonnie is also a “recovering lawyer”: he has specialised in financial services, trusts, and estate planning.

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