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Aunt Toby explains investments

Fasten your seatbelts kids because Aunt Toby is going to tell you one of the most important ‘home truths’ you will ever hear. Commit this to memory. Write it down and embroider it for a wee bit of framed art over your desk. Never forget it and don’t allow anyone to ever tell you otherwise.

Here it is: Investments are things that you spend money on that bring in income.

Income. Real cash flow. Revenue streams (sort of like the Mississippi only with greenbacks). Dividends. Interest. Rents. Payments to YOU.

Why am I saying this? Because Aunt Toby reads, on a regular basis in the media, on the internet, etc. pieces where the writer associates the word ‘investment’ with something that does NOT bring in revenue streams. If nothing else, this debases the entire meaning of the word investment.

It also puts false ideas into people’s heads. Ideas such as “Owning your own home is a good investment.”

I beg your pardon? Even under the best of circumstances, unless the total cost of owning your home (mortgage, insurance, maintenance, taxes and fees) is less than what it would cost you to rent the same amount of space, under the same conditions, owning your own home is….expense, pure and simple. If you were to buy a house and rent it out and the amount you got in the rental was greater than the amount of money it cost you in all the other costs associated with that piece of property, then THAT is an investment. And Aunt Toby would like to remind her gentle readers that the value of homes in many parts of the United States today is LESS than it was even a couple of years ago, and of course, if you are trying to sell your home in a depressed market, you may find, for all practical purposes, it has no value whatsoever.

No value? How can I say that? Because, my friends, if you have something that no one else will pony up the shekels to buy, that means it has no value. Value is in the eye of the beholder.

But, let us return to the issue of investment. One of the reasons that people have been led to believe (and have deluded themselves into believing) that owning a home is an ‘investment’ is that in a world where real estate seemingly never stops increasing in value, then the money that one had put into the house (in terms of purchase price, maintenance, any additions or rehabilitations, etc. ) would be recouped in a sale…and then some. Ah…when that happens, indeed, one has truly made an investment because one received the ‘revenue stream’ at the after end, in the sale. If one does NOT recoup all that money, then it’s all been expense – and people are made to feel somehow cheated and stupid when that happens.

And they should not feel that way. The government set up everything to benefit the home builders – they set up tax laws which encouraged borrowing to purchase homes, borrowing to improve those homes. We won’t go into all the shenanigans that banks have gone through in terms of loans, mortgages, home equity loans, reverse mortgages, etc. Something to remember is this: In some parts of the country, the past 20 years have not been a boom time in terms of the prices of homes. Homes have kept their values for sure; homes have not seen the precipitous drops in sales prices. But they never went through the roof either. No one was making the big money in those areas in terms of selling their real estate.

Another piece of mythology about ‘investment’ comes in the form of encouraging people to buy certain types or pieces of clothing or accessories in terms of their being ‘investments’. Aunt Toby read a headline just today that made her smile: “Getting more out of your closet investment.” Now, they were not discussing the building of a closet and renting out the space therein – THAT would be an investment. What they were discussing was the various items of clothing that were in the closet.

Clothing and accessories (except for fine jewelry, which carries its own value, which Aunt Toby has found much to her disappointment is not as much as one would think) are NOT investments, unless you have been bequeathed vintage things that are of the quality and provenance as those in the picture at the top – those are one of a kind, couture created pieces of art. And in an auction situation (and even to the gimlet eye of an insurance company), these would have value and the longer you have them and keep them under museum quality environmental conditions, when you sell them, you will achieve a revenue stream from them and therefore…they are an investment.

But the clothing in your closet, no matter how fine or nice; no matter how well you maintain them, is just another expense of daily living. We don’t consider food to be an investment – and although we should not waste money buying clothing that will fall apart and need repairs or further expense, we should not try to delude ourselves that the clothing items themselves are some sort of investment. Buying well made clothing that with maintenance will last a long time and through many wearings is a good in itself. Ultimately, it will reduce one’s expenses, which will, in a roundabout way, increase one’s savings which if placed in a bank or into an investment grade item such as stock or a bank account, will throw off a revenue stream. But by itself, it is not an investment.

So, be extremely careful about using that word ‘investment’, and thinking about what you are actually doing when you spend money.

(photo courtesy of Maia C)

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