Financial misnomers

While on vacation recently, I visited with a person about Finance Matters! Exploring Your Assets and Securing Your Future. The subject of investments came up, and the discussion turned to housing. I was amazed the tone of the conversation changed dramatically when I mentioned personal housing is an expense, not an investment.


The point of this particular blog, then, is to state there is a difference between an asset and an investment. Expenses occur when we spend money, whether for an asset or an investment.

Investments occur when we spend money on an item, real or hypothetical, that has a decent chance of increasing in value, thus, increasing our net worth. Investing involves risk, belief and other emotional considerations.

Assets may be articles purchased as expenses, such as the house we live in or a frying pan. We may purchase, rather than rent, a dwelling. We list the value of our house on our financial statement.

We list the liability, if any, regarding the item, along with our other assets, investments and liabilities, do the math and hopefully end up with a positive balance (net worth) that grows each quarter of the year.

(I want to state here clearly- I am not against owning a home. I do know how quickly property values go up ( and down). I understand real estate appraisals and loan values. Just so you know, I am trying to make sure we all mean the same thing when we use the same words. Financial education is my passion! If we miss the finer points of what investing means, we can easily be misled.)

My point today is, when I buy a frying pan, it is not an investment. It is an asset I use in order to lower other expenses (eating out each evening, perhaps). While the fry pan may lower my expenses and thus, raise my net worth, it does not earn money on its own.

In the same way, a mortgage may 'lower' my cost of living (less than rent) if the insurance and taxes are not too extraordinary. The house may increase in value on paper. But if I do have that mortgage and if I live in it, while I may benefit from the sale of that house, I must subtract what I have paid in interest, taxes, upkeep and insurance before I find out if I made the right call and benefited financially from owning the home. In other words, I may realize a profit from selling an asset I own.

Please do not confuse the term asset with the term investment. They are not interchangeable.

Think about it and let me know what you think-

Thanks!

Thanks to all the organizers for the lovely OWFI meeting I attended in Oklahoma City last weekend. I had a blast visiting with folks and sharing ideas and concepts. I also need to give a special thanks to the volunteers. I had so many questions and they graciously answered them all and gave encouragement to me along the way. I thoroughly enjoyed each session I attended and I learned a lot, not only from the speakers but also from fellow attendees.