The word “investment” gets tossed around a lot. Just about anything can be called an investment these days. The definition of an investment is the purchase of something with the expectation of favourable future returns. We tend to think about financial returns when we talk about investments. But, even if there is not a reasonable expectation of a financial return, we often still describe a purchase as an “investment.” Here are three things that may not actually be investments — even though we talk about them as such:
1. Primary Residence By the time you pay the costs associated with interest, utilities, maintenance, repairs, property taxes, insurance and other related expenses, it is rare to see someone break even on a home, even if it has appreciated in value. Unless you keep your home for decades, and unless the market grew a great deal over those decades, chances are that you will lose money on a primary residence, even after your tax deductions. Homes are expensive. You put a lot of time and money into them, and rarely do you get everything back when it comes time to sell. Yes, you may walk away with a large chunk of cash due to the equity you have in the home, but it doesn’t mean you have a net gain.
2. Home Improvements This goes with #1. You almost never recoup the cost of a home improvement project when it comes time to sell. The increase in the value of your home rarely equals what you paid. If you are lucky, you might recoup about 80% of the cost. If you financed the project, your return will be even less, since you will be paying interest charges (although you might get a tax deduction to offset that). You might talk about a big home improvement project as an “investment”, but you probably won’t get a financial return that justifies that as a description.
3. Car This one is a little more obvious, but many people still refer to a car as an investment, in spite of the fact that it depreciates in value each year. If it is a brand new car, it depreciates rather dramatically once you drive it off the dealer’s lot. Plus, you have all the costs associated with interest on the loan, license, registration, upkeep, repairs and gas. And, unlike the costs associated with a home, the expenses associated with your car are rarely tax deductible.
Emotional Investment Many people take issue with the idea that a home is not an investment. This is because there are more investments than the merely financial. We can make emotional investments that offer an emotional return rather than a financial return. I accept that my home is really more of a large purchase than an investment. The return on the emotional investment, in terms of memories, sentiment and providing a stable and secure environment for my children, is quite high.
The same can be said of a car. While, in financial terms, you lose out when you purchase a car, it can enhance the quality of life, helping you get to work or go on family vacations. The emotional value of having a car, and the way it can help you enjoy life more, might make it worth spending that extra money.
In the end, it’s about priorities, and what you are willing to pay for. Whether you view a home, improvements to that home, and a car as an investment or not, it is important to look at the real costs associated with making these purchases, and determine whether or not they are worth the sacrifice, and whether there are enough positive emotional gains to outweigh your financial losses.