PRACTICES AND PERFORMANCES FOR EDUCATION INSTITUTIONS

Choosing consumption or investment

You now know the difference between consumption and investment spending and that you can choose between the two.

All you need to do is to think before you spend. Consumption spending can contribute to your lifestyle (driving a new car is fun, even if it was bought on credit and has created a liability of three to five years of payments). Investment spending provides income and wealth.

Shades of Grey

There is, of course, some spending that is not clearly defined as consumption or investment. Buying your own home is considered by many to be an investment. It isn’t! The purchase usually is financed and the repayments are a liability. The upkeep of a house costs money. There are rates and taxes payable on it. You do not get any revenue from it. If you plan to sell it in a few years to make a profit on its increased value, then it may be an investment. However if you have to buy another house to live in are you really any better off?

Investment spending is necessary for building wealth.

• In order to build wealth, some investment spending is necessary. The more that goes into investment spending, the bigger and quicker your wealth will grow. However, if too much goes into investment spending, and not enough into consumption, then lifestyle can become meagre. But you can choose.
• Accumulation over time
• Most people are not born rich. Certainly, some inherit wealth, but consequently may not appreciate it. A few win wealth in lotteries, but ironically, perhaps because they have not worked for it, or are not used to it, could end up squandering the temporary riches.
• Everyone, however, has one thing in common. The same amount of time goes past for each of us, and at the same rate. How you employ that time is significant.

Imagine that at the age of 21, you invested $1,000 at an average annual rate of return of 10%, and then by the time you reach 65, you would have accumulated over $70,000 without doing anything else.

• If at the age of 21, you invested $1,000 at an average annual rate of return of 10%, and each month invested an additional $100, then by the time you reach 65, you would be a millionaire, without doing anything else.

If you did neither of these things, then the same time would pass, and you would not have accumulated any wealth.