Investing doesn’t have to be about money. We all make some sort of investment every day. Perhaps we choose to eat oatmeal rather than that cinnamon roll, hoping that the healthy food we eat today will benefit us as we age. Maybe we put an extra hour in to studying for a French exam, knowing that good grades can help us get good jobs after college. All of us clearly make decisions that determine our daily actions based on how we believe those actions will affect us in the future. It’s usually a well-reasoned system of losses and gains meant to maximize our potential outcomes. When our investments are about money, however, we frequently forgo the logical thinking governing our everyday lives and try to go with our “gut,” making mistakes that can cost us lots more than our pride.
To make it easier on you, here are three things that you should almost always consider bad investments. No need to wonder or worry that your instinct is leading you astray!
You need a home, a place that affords you day-to-day shelter. But a home is a necessity, not an investment. You shouldn’t purchase your primary residence with the hope that it will provide you with a surplus in your retirement. If you want to invest in real estate, you need to focus your money on properties that you buy in addition to the one you regularly inhabit. Consider this: the house you buy today for $300,000 might well appreciate to $800,000 over the next thirty years. But that doesn’t mean you have a profitable investment. First, the value of your home is locked, meaning you will have to sell your home to get your money out of it. In addition, you will actually pay a lot more than the original $300,000 over the course of your mortgage due to loan interest, as well as annual upkeep costs. And even if you buy your house or condo with cash, you will still have yearly taxes and insurance. Add in the price of inflation, and you can guess that the $300,000 you think you are spending is more like $730,000+! Sure, when you sell, you might receive more than you initially paid, but it probably won’t be more than you will have ultimately spent over the lifetime of the property’s ownership. To make a good investment, you should buy a secondary property where your tenants can provide the money for your payments and maintenance instead of yourself.
“A new car just loses value once you drive it off the lot.” Your dad might have told you that when he plunked down the cash for a 2007 Toyota Corolla instead of the decked-out new model you really wanted. You might have thought he was just trying to save a buck. But take a look at any Kelley Blue Book, and you’ll notice he was right. A car loses a portion of its value each year, with new cars losing the most value in the first three years of ownership. Put simply, there is no reason to buy a new car. It’s certainly not an investment (unless you have the big bucks to buy a vintage or antique model, and even that’s up for debate). A used car isn’t an investment either. You can save a little of the upfront depreciation by buying used, but all cars, new and old, depreciate each year, making them lousy investments.
They may seem like a good investment, but really, timeshares are an expense, not an asset. A good investment appreciates in value over time and/or generates a profit. If you only want your profit to be happy memories, then by all means, buy a timeshare. But if you want to make a sound financial decision, don’t even sit down for the two-hour presentation and goody bag. Much like cars and other recreational vehicles, timeshares lose their value once purchased. They also come with a plethora of maintenance fees and are hard to sell. They just aren’t like other vacation properties. Ownership is shared with multiple people, making it difficult for owners to rent out their shares for the one or two weeks they have them each year (assuming the contract even permits it). A better investment is a property you own individually. (If you’ve already fallen in to the timeshare trap, consider finding a way out at www.timeshareexitplan.com.)