Back when I was a kid, there was this toy called a Beanie Baby. It was basically a little stuffed animal, and there were many different ones. There was a brief but intense craze where huge numbers of people were absolutely convinced that these things would be a massive collector’s item someday, and so people were buying them in enormous quantities. Naturally, they’re not worth anything special today – one of the things that makes something a collectible in the future is scarcity, so if everyone thinks something is going to be a collectible someday and hoards it, that pretty much guarantees that it won’t be.
Anyway, buying Beanie Babies as an investment was dumb – not just in hindsight, but even at the time. However, buying Beanie Babies because you liked them is just fine! Why? What’s the difference?
The point of all your work, all your toil and struggle, is to ultimately reap the rewards and find joy. Along the way, you make various investments – you buy tools, you educate yourself, etc. – to potentially magnify future rewards by amplifying the value of your efforts. But the end goal is consumption; spending the fruits of your labor on things you enjoy.
The difference can be subtle, but it’s vital. For instance, you can buy a pickup truck that you hate driving because it enables you to more efficiently run your side hustle and make money. But someone else could buy that exact same pickup truck because they love it and want to drive it around. For you, it’s an investment, but for the other person it’s a consumption good.
Why does this matter? Because consumption is the end of the road for our wealth. Whatever you buy with this mindset, you’re planning to consume; you don’t plan to resell it or make money off it. If you did, it would be an investment. And you have to think about these things diffeently.
If you buy something as an investment, you have to consider whether or not it will actually yield a positive return. If you buy something as a consumption good, then you only have to worry about whether you can afford it and whether it’s better than whatever other consumption goods you could afford.
So, back to the truck. As an investment: Will you make more money with this truck than without it? How much more? Over what time period? How long will the truck last? Will the truck make you more money than it cost in the time that it runs, and is there a different investment that would do better along these metrics? These are the sorts of questions you need to ask when you’re spending money with the express goal of getting a return.
But as a consumption good: Do I have enough disposable wealth to buy this truck? Will I like this truck more than the other things that cost similar money – a vacation, a hot tub, etc.? That’s pretty much it.
There’s no upper cap on investments as long as they’re yielding positive return, but they do need to do that. There’s absolutely an upper cap on how much consumption you can do, but you don’t need to burden yourself with silly notions about whether it’ll “pay off” in the future. It doesn’t have to; the payoff is joy, now.
The most critical thing is just understanding which things you buy are which, and being honest with yourself. If you want to get drunk, party with your friends, and talk about Hemingway for four years, that’s dope – but it’s absolutely a consumption good. Don’t pay $100,000 for a label on all that called “Bachelor’s in Literature” and lie to yourself that it’s an investment.
The people who understand and are honest about the distinction are the people who end up being able to afford a lot more consumption goods in the long run.