Invest or expend: there's a clear difference

Published Tuesday, September 3, 2014 in the New Brunswick Telegraph Journal and the Fredericton Daily Gleaner

I’m no financial expert, but it seems to me that many of us confuse two very different financial concepts.  That is, we don’t seem to readily appreciate the difference between expenses and investments.  That has implications for our financial well-being, but also for the well-being of the environment we all depend upon.

A clear difference

An everyday definition characterizes an expense as something that is purchased and consumed or used up.  Examples of common expenses would include groceries, gas, power and rent.

An investment, on the other hand, is something that is purchased in the hope that it will rise in value, reduce expenses or generate income.  The most common everyday example would be a home mortgage. 

A logical comparison would suggest that, given the choice, it’s better to invest money than to expend it.  Money spent on expenses is gone forever once the product or service purchased is used up, with nothing left to show for it.  But money spent on investments yields long term benefits.  

Individuals and societies with the discipline to expend less and invest more tend to be richer than those that don’t.

Barriers

However, there are a few problems with investments – or more accurately, a few barriers.  Investments generally cost more up front; they sometimes require a little work; and they usually take time to yield results.  Those barriers often lead us to avoid investments and choose expenses, even when that’s more costly in the long run.

For example, consider your morning coffee.  You can invest in a coffee maker for less than $30.  Or you can expend for a double double en route to work every day for a buck and a half.  Even factoring in the cost of ground coffee and the effort it takes to brew it, it’s easy to see that a coffee maker is a pretty good investment.  Yet it’s amazing how many of us sit idling in the drive-thru every day.  Expense trumps investment.

That’s often the case with home energy efficiency too.  Heating bills are expenses – and are often much higher than they need to be – versus insulation, which is a one-time investment that yields savings every month.  But insulating involves work, a higher up-front cost and delayed fulfillment so many of us just accept paying a higher bill each month.

Public health care is a larger-scale example of the tradeoff between expenses and investments.  Helping people get back to good health is a huge expense that consumes vast amounts of public money (and it’s not always successful).  On the other hand, wellness programs that prevent sickness in the first place are solid investments.  Unfortunately, more of our health care dollars are spent on sick care than wellness, because wellness takes time to yield results and that doesn’t always go over well in the short timelines of our political reality.

The biggest investment of all

Perhaps the most sweeping example of the investments-versus-expenses conundrum relates to climate change.  This largest environmental challenge of our generation is solvable, but the investments required – in renewable energy, a smart power grid, efficient buildings, a transportation system based on electric vehicles and more – are intimidating to governments and individuals alike.

But maybe we need to rethink our hesitation.  Post-tropical storm Arthur provided New Brunswickers with a small glimpse of the types of costs that come with a hotter planet and more extreme weather.  And unfortunately, those costs are expenses, not investments: once all the repairs have been made, we are right back where we started, only millions of dollars poorer.

The lesson?  Prevention is always better than cure, and when it comes to climate change, investing in solutions is much wiser than expending on adaptation and repairs.