Is That Really An Investment?

by Miranda Marquit · 15 comments

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 favorable future returns. We tend to think about financial returns when we talk about investments. But, even if there isn’t 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.

The main exception is the purchase of a junky vintage car that you can fix up and then sell for more than you paid in order to realize a net gain.

Losing Investments

Of course, there is another way of looking at the above as investments. The argument is that, as when you buy stocks, homes and cars are investments that carry the risk of losing value. Many point out that a stock or a commodity is still an investment, even though you might end up with negative returns. From that standpoint, then, perhaps a home (or even a car) is a financial investment — one that is likely to result in a financial loss.

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 I will see a financial gain from. But I enjoy my home (and can make changes to it in order to increase that enjoyment). The return on the emotional investment, in terms of memories, sentiment and providing a stable and secure environment for my son, 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.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

Money Saving Tip: An incredibly effective way to save more is to reduce your monthly Internet and TV costs. Click here for the current Verizon FiOS promotion codes and promos to see if you can save more money every month from now on.

{ read the comments below or add one }

  • Mitsuko G. says:

    hmm, I was always taught to believe (whether through family, friends, media, etc.) that owning a home was a good thing, especially with today’s mortgage and therefore foreclosure crisis. I own mine free and clear for about 10 yrs now…3,200 sq ft on 1 acre in Florida in a decent neighborhood. Granted, the expense of maintaining it is something I wish I didn’t have to deal with, but I love my house/property and will hold onto it for as long as I can 🙂

  • Heres a good tip for deciding if something is an investment asset or a liability.

    If it is putting money in your pocket then it is an investment. If it is taking money out of your pocket then it is a liability.

  • julie says:

    That’s why I’m 36 yrs old and have not bought a home. I’m on the fence.

  • Squirrelers says:

    The word “investment” is used creatively, it seems, by people wanting to justify the purchase of various things. I do agree, however, that some things are good purchases regardless of the purely financial ramifications. Health, Wealth, and Relationships are all interrelated, in my view.

    That said, I agree with the points on a home, home improvements, and car not being true “investments”. The home as an investment might have been true as the bubble was expanding, but not during “normal” times (is there a normal?), and not now in my opinion. I have heard of people buying cars and reselling for a profit, but typically not the one you drive daily. Those are cost centers.

  • Cd Phi says:

    Speaking of emotional investment, my uncle purchased a house a couple of years back and it is now facing foreclosure. He put in tons of work to fix up the house and even installed a very nice swimming pool. Now that he’s losing it, it’s very tough for him because he is losing out on everything he’s done which is unfortunate.

  • Kevin@OutOfYourRut says:

    Brilliant analysis Miranda. And I completely agree with Edwin that “investment” is a word used as an excuse for buying things.

    Houses and cars are really consumer goods, not investments. They’re end use products, but the investment connotation comes from the fact that houses have an end value at time of sale which has historically been higher than the purchase price. I really believe that the view of houses as investments has been largely responsible for the housing collapse, causing people to buy more house than they can afford because they were confident they’d make it back (and more) on the eventual sale.

    Stocks that pay no dividends are probably another loose use of the term. Are they investment or a speculation? I say they’re a speculation.

    • JoeTaxpayer says:

      Kevin – I think that’s drawing too fine a line. Actually maybe too broad.
      Berkshire Hathaway not an investment? One can make a case that companies that have a use for the cash and use it to expand are sending a more positive message than those who distribute some of their profits.
      As you get into actual financial products, even derivatives, you’d have to look at the details of the big picture to deem the transactions investments vs speculation.

  • Edwin | Finantage says:

    “Investment” seems to get tossed around a lot as an excuse to buy something. People seem to think that if they can spin it into being an investment, the purchase is justified. The one on your list that bothers me the most is people seeing a car as an investment. A car is an expense and should be treated as such.

  • JoeTaxpayer says:

    My wife once said she was going to invest in a new pocketbook. I told her that she was using the word improperly. The pocketbook may bring her pleasure, it may last a long time, it may carry her stuff really well, but by no means was a product not likely to increase in value and provide a decent return to be called an investment. (Disclosure – my wife makes more than I do, on average. By the strict definition, marrying her was a good investment, her taste in pocketbooks and shoes aside.)

    • Miranda Marquit says:

      Hahahaha. Great example. Love it. And, hopefully, she is a good emotional investment as well 😉

    • MoneyNing says:

      Great example. Though I am itching to tell you that it’s only a good “investment” if your wife saves more than you (as opposed to makes more than you) 🙂

  • ryan says:

    agreed – the final part re: emotional investment is a good pt. I have a friend who recently purchased a boat which can be like throwing money into a black hole with all the repairs, gas etc. but he loves the boat & sharing it with his friends. I think it’s about having the right expectations when making a purchase.

    • Miranda Marquit says:

      I like your point about having realistic expectations. You need to know why you are buying something, and whether it is likely to actually fulfill your needs/wants.

  • Peter says:

    Most investments are definitely emotional ones. Just don’t go too far because an investment for your desires is a VERY deep hole.

  • Stephan says:

    love the final part about the emotional investment that isnt considered when only looking at financials. i recently bought my first car, and even though i know its a money losing purchase and my expenses have gone up significantly, gas, insurance, etc., i am now much happier as i feel that i have taken my first step to becoming fully independent and creating my own life.

Leave a Comment