Thursday, July 12, 2012

Money 101: Spot the "investment"

Sometimes people want to believe a purchase is an investment for one simple reason, they wanted to buy Item X, so they called Item X an investment as a justification for the purchase.  My point is, if you like something and want to buy it and you can afford it... then buy it.  But don't fool yourself into believing that an item is an investment just by calling it such.  If a purchase is truly an investment however, you still need to do your research to determine whether it is a winner or loser!  Lets look at some things people buy and see if you can spot the "investment":

A house: Trick question!! There are two kinds of houses.  The house you live in and the house you rent to other people.  1) The house you live in is not an investment. You aren't making any money on it now. And generally you will pay more in mortgage payments than you will make when you sell the house, even if you sell it for more than you bought it. 2) The house you buy as a rental is an investment. But it could be good or bad, there are no guarantees.  You could lose money if you misjudged the rental market and, for instance, there aren't people renting in the area, or houses are renting for less than your monthly mortgage payment.  Your investment may not make or lose money at all if, for instance, a year of rental income only covers a years worth of mortgage payments + property taxes + any repairs. You could make money however if a year of rental income exceeds a years worth of mortgage payments + property taxes + any repairs.  There are a variety of other factors that come into play, but my point is: buying a house isn't necessarily an investment, and even if it is, it may not make you rich.

Expensive luxury items: A friend of mine, who shall remain nameless, was telling me about an acquaintance who buys an expensive $2,000 + purse each year. The acquaintance sees the purses as investments. I see the acquaintance as delusional. If she wants an expensive purse and can afford it then by all means, buy it. But don't delude yourself into believing it's an investment. It is a luxury item, not a mutual fund.
Jewelry: Even an expensive brand new diamond ring loses value once you take it off the lot. Don't believe me? Ask any divorcee you know who has sold her ring. The price you pay at the shop takes into account the stores rent, employees, insurance, wholesale price of the stone, the crafting of the ring, advertising etc. That is why a new ring that costs a store $1000 ends up on the shelf for about $4,000 - $5,000. Buy new jewelry because you like it and can afford it. You aren't making money on that shiny new solitaire.  If you see a Chanel brooch at a yard sale for $1 however...

Trendy toys:  Beanie babies... nuff said.

Art:  Tread lightly in this area!  Art can be an investment but research is necessary.  If you see a painting for $5,000 and you think it is a good investment, STOP!  Are you buying it because you think it is beautiful and you would love to see it above the dining table every day? Or are you buying it because you think you can sell it in the future for boat-loads of cash?  If your answer is "boat-loads of cash" you better have done your research on the artist, how much his/her stuff is worth, and whether it is in demand.  Additionally, what is popular now may not be in the future.  So a painting may actually lose value.  Real world example: I was at the antiques road show recently and a man brought two paintings for appraisal.  They were appraised for $30,000 each!  He wasn't happy.  It turns out that he had paid $30,000 each for them.  He, for whatever reason, thought he was getting a deal when he purchased the paintings.  But it turned out that he just got a fair price.  I couldn't help but think that maybe consulting a professional or doing more research may have revealed the true state of affairs.

To wrap this up:  Don't pull the wool over your own eyes, i.e. it's a purse not your retirement account.  Do your homework if you are buying something that is an investment.  Buy things you like, because in the future you may not be able to sell them, let alone make money on them! Don't be greedy.

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