July 1st, 2011
Consumption vs. Saving
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Living the Single Life ~
Consumption (spending) vs.
Investment (saving)
Two important factors need to be understood about the simple concepts of Consumption and Investment.
The first factor is that spending on Consumption items results in reducing the total value of your assets (net worth). Spending on Investment items aims to increase your assets(net worth).
Of course, the best spending patterns are those that aim to attain a balance between spending on consumption and spending on investment items.
Choosing Consumption or Investment
You now know the difference between Consumption and Investment spending and that you can choose between the two and or have BOTH!
All you need to do is to think before you spend. Consumption spending can contribute to your lifestyle (driving a new car is fun, even if it was bought on credit and has created a liability of three to five years of payments). Investment spending provides income and wealth.
Shades of Grey
There is, of course, some spending that is not clearly defined as consumption or investment.
Buying your own home is considered by many to be an investment. It isn’t! This purchase is actually an expense, think about it, you have to pay the mortgage, the gas/electric/upkeep/etc. it’s an expense. The purchase usually is financed/mortgage/taxes and all repayments are a liability. You do not get any revenue from it. If you plan to sell it in a few years to make a profit on its increased value, then it may be an investment. Or if it is a two family dwelling or higher, then you have rental property with income and now that house becomes an income generating property.
Investment spending necessary for Building Wealth
In order to build wealth, some investment spending is necessary. The more that goes into investment spending, the bigger and quicker your wealth will grow. However, if too much goes into investment spending, and not enough into consumption, then lifestyle can become a challenge, but you always have choices.
Accumulation of Wealth – over Time [when time is on your side]
Most people are not born rich. Certainly, some inherit wealth, but consequently may not appreciate it. A few win wealth in lotteries, but ironically, perhaps because they have not worked for it, are not used to it, or are not educated in financial matters, could end up squandering the temporary riches and some in fact fall further back than when they won the monies. 
Everyone, however, has one thing in common. Each of us everyone of us have the same 24/7/365 – this time passes the same for each of us, the difference is in how you employ that time, that is the ultimate difference.
Imagine that at the age of 21, you invested $1,000 at an average annual rate of return of 10%, and then by the time you reach 65, you would have accumulated over $70,000 without doing anything else.
If at the age of 21, you invested $1,000 at an average annual rate of return of 10%, and each month invested an additional $100, then by the time you reach 65, you would be a millionaire, without doing anything else.
If you did neither of these things, then the same time would pass, and you would not have accumulated any wealth.
These examples of investment, quite deliberately, use amounts of money that are affordable by most, and if spent on investment, rather than consumption, would probably not be missed.
In terms of investing, Time is on your side.
Of course, you may not be 21 any more and you may wish to accumulate wealth at a faster rate. This is possible by increasing the amount invested, and the annual rate of return. It is not possible to systematically accumulate significant wealth (millions) without looking at a time frame of several years (say 5 to 10). If you are trying to make more money in less time, then your objectives may not be realistic. Perhaps a lottery ticket, crossed fingers and large amount of luck could produce your desired result, possibilities are endless, but don’t wait while holding your breathe.
The POWER of Compounding
In the above examples there is an additional factor at work. The entire return was reinvested and participated in earning the same rate of return as the original investment. None of the investment return was withdrawn and spent on consumption items
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A blind boy sat on the steps of a building with a hat by his feet He held up a sign which said: “I am blind, please help.” There were only a few coins in the hat. 
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