The conflict between buying and investing

Every time you write a check or whip out your plastic, what do you really get for your money? What’s the true value of the money you spend on items as diverse as stocks and air conditioners? Here’s how to spot and appreciate the difference in value.

My wife and I were shopping a few weeks ago when she used a line that pretty much everyone uses at least once: “We need to invest in a new … ”

We all occasionally try to equate a big item with an investment. We all know that in reality that we just buy something. The big question: Do you make an investment or do you make a smart or discretionary purchase?

First, let’s define investment and distinguish between smart and discretionary buying. With an investment, your acquisition – a stock, bond, commodity or sometimes real estate – provide you a return on your capital, more wealth or a benefit for society.

I don’t mean contributions to your retirement or brokerage accounts or an increase in your accumulated savings, but buying a business, investing in a rental property, acquiring a piece of art that might appreciate or similar outlay. You buy this variety of asset expecting to see a return over time.

A smart or favorable purchase, though not an investment, adds a clear value to your life. Maybe you replace an old, unreliable car with a newer one. The value here is that maintenance costs on your old car may now exceed the entire vehicle’s worth; replacing it drops your maintenance expenses.

Your quality of life improves because you no longer need to deal with car issues.

Another example might be a beach vacation. When you return refreshed from vacation, you are a better spouse, parent or employee. Unplugging from work reduced your risk of burnout. This constitutes a positive as long as you did not exceed your budget for the time away.

A planning client recently mentioned upgrading his air conditioner. He had room in his budget and stood to save big on his electric bill. This was a smart acquisition: Instead of significant return you see substantial savings and, in the case of my client, elimination of a future headache when his old air conditioner does eventually break down.

Discretionary buying involves some item that you want rather than need. In my case, this category comprises almost every tech device I ever bought. I am sure when the new iPhone hits shelves this fall, I will want one and will try to justify to myself that the shiny gadget will offer me some return on my time.

I know it won’t. This spending is called “discretionary” for a reason.

You can feel free to build wiggle room in your budget for items you splurge on every now and again. If you allocate some extra money for items like this, fine. Do not dig into your rainy day or emergency fund to pay for your fun items.

I hope this helps clarify your true value the next time you shell out for something big. In the meantime, to my wife, “Honey, I think I need to invest in an Apple Watch.”

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