Understanding The Difference Between Spending And Investing

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While the U.S. economy showed signs of sustainable growth during the first three financial quarters of 2012, recent figures suggest that this expansion may have been checked. In fact, the economy shrank at an annual rate of 0.1% between October and December, as defense spending cuts, diminished exports and sluggish growth in company stockpiles took their considerable toll.

Economists fear that this could be the prelude to another recession, especially with a number of job losses expected once further spending cuts are implemented in March. The Bipartisan Policy Center estimates that about 1 million jobs will be lost to the so-called fiscal cliff deal, while the Congressional Budget Office suggests that the figure may be closer to 1.4 million.

The Issue Facing U.S. Households
This is potentially bad news for U.S. citizens, who have become accustomed to financial crisis and austerity during the last five years. According to a new report conducted by the Corporation for Enterprise Development, approximately 132 million individuals lack the necessary savings to survive another period of recession, while many are also ill-equipped to fund long-term financial goals such as college tuition, healthcare and permanent housing.

This issue is especially prevalent among U.S. credit card holders in their late twenties and early thirties, who carry more debt than older consumers and make repayments at a far slower rate. According to researchers, individuals born between 1980 and 1984 carry on average $5,689 more debt than their parents had at their age, and a staggering $8,156 more than their grandparents. Not only does this offer an insight into the reckless spending habits that distinguish the current generation of young adults, but it also suggests that a fundamental lack of financial education may have taken its toll throughout recent generations.

The Difference Between Spending and Investment
In many ways, the current Presidential incumbent Barack Obama offers a great example to those burdened by debt. After graduating from Harvard Law in 1991, Obama and his wife Michelle held a combined total of $125,000 in student loan debt, but the President himself is now worth an estimated $11 million. Originating from a middle class background, he has achieved this success through hard work, patience and the cultivation of a responsible attitude toward spending and investing.

When the President talks about personal finance, there is always an emphasis on the importance of retaining as much of your paycheck as possible. Back in 2011, when attending an inaugural White House conference for web-based finance journalists, Obama spoke eloquently about the need for fiscal discipline and a willingness to prioritize savings. More specifically, he touched on the relevance of understanding the fundamental differences between spending and investment and how this can have a positive impact in modern society.

How Can Citizens Implement this Lesson?
While there was some suggestion that the President was aiming a veiled barb at his Republican rivals, understanding the difference between spending and investment is an important step towards accumulating wealth. Although both require an initial outlay of money, an investment is something that delivers a tangible reward in the future, whether it is in the form of capital, equity or qualifications that can boost your earning potential. When you spend, however, you are purchasing goods and services that will not improve your quality of life or offer any type of long-term gain.

Purchases such as holidays, expensive dining experiences and evenings out belong to the latter category, as while they may be enjoyable, they offer no form of tangible asset return. There are also less fanciful examples of expenditure that come under the same classification, however, with big ticket items such as cars and personal computers being among the most prominent. Known as depreciating assets, these often functional and necessary products lose considerable value through extended use.

With this in mind, it is important to consider every purchase that you make as a consumer and determine its potential to deliver a return. This way, it is possible to reduce the amount that you spend on luxury items and depreciating assets, before investing more of your capital into viable concerns. So the next time that you need to buy a car, for example, it is important to focus on high-quality, used vehicles that can be purchased affordably and have a less pronounced rate of depreciation.

The Bottom Line
The line between spending and investment is a fine one, especially when you consider how certain assets are likely to depreciate in value over time. As a consumer, it is important to fully understand the difference between spending and investment, and apply this to every single purchase that you make. This will enable you to make the most of your disposable income, and commit as much money as possible towards improving your quality of life and accumulating long-term wealth.



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