In theory, the definitions of an investment or an expense are quite clear-cut. An expense, or cost, is simply the dispensing of time, money, or resources. An investment, while an expenditure, comes with the expectation of a return.[1][2] While the two ultimately have the same goal –to acquire a good or service—their intentions and outcomes differ. So, let’s discuss the main differences between an expense and an investment and why sometimes, the reasoning to back up each cost can make a difference.
Defining Each Concept
For starters, the period of usefulness of the asset acquired differs between an expense and an investment. The item, service, or experience obtained could be considered an investment if it is durable and promotes continual benefit for some time.[3] An expense, however, is when any potential gain is immediately received and finished shortly—its useful life is typically less than one year.[4]
What Does This Mean for You?
So, what are some examples of an expense vs. an investment? As we know, technically speaking, an expense is money that you spend on a simple exchange that doesn’t provide financial returns. People often spend their money on expenses. They pay rent and buy clothes, decor, and groceries – things used for personal, non-financial, non-speculative reasons. But expenses need to be differentiated from other kinds of monetary transactions if you want to grow your wealth. That’s where investments can help!
There are many ways to invest, like buying stocks, bonds, or even paying for tuition and enrolling in college. By owning these items, or earning a degree, you are basically ensuring that you will have access to more financial freedom in the future.
However, there is a gray area to this distinction as well. Some investments aren’t as obvious. For example, we tend to view materialistic items as expenses rather than investments. But, if you purchase something like a vintage car, you could potentially sell it for a higher price down the line, thus turning this into an investment. Similarly, college tuition is considered an investment. However, there is no monetary gain directly associated with it. There is an indirect monetary value, given a degree often sets one up for a prosperous career, but there are both monetary and non-monetary values to completing college.
Conclusion
Balancing expenses and investments are a vital part of maintaining financial and personal well-being. Whether you are an entrepreneur launching your business or considering helping pay for your family’s college expenses, knowing the difference between expenses and investments is one of the best ways to increase your financial literacy. Overall, implementing a financial plan that accounts for both investments and expenses will ensure your money works for you, helping you enjoy your life and gain financial freedom. If you’d like to discuss your financial plan further, contact us for a complimentary meeting.
