I bet you never thought anyone would accuse you of over-investing your money! Typically the personal finance enthusiasts will call you out for not saving enough, or spending too much. Unfortunately, over-investment is very real, and very much alive today. The most basic definition is, investing more into a particular asset than it’s derived value. I see this in three major areas these days: Education, housing, and transportation.
Have you considered the amount of money people borrow in the form of student loans? Sure you have, because the media likes to to spin that topic nearly everyday. It’s scary that the default rate on student loans is rising faster and higher than other forms of consumer debt. The worst part, that even within bankruptcy you can never escape this specific type of debt. I had dreams of going to an ivy league school as a child, though I still attended a great school. My parents helped me a great deal on my college expenses, so I was one of the lucky few. Though I still feel obliged to tell you that taking out $100,000 in loans for a degree in Literary Arts may not be the wisest decision. Choose a school, and degree program that is in line with what you hope to make upon graduation. Spend $300,000 on your law degree if you plan on aggressively seeking out the top law firms with comparable starting salaries. Don’t spend $300,000 on a law degree if you plan on being a stay-at-home mom within a few years.
There seems to be no end to the decline in the housing market. It’s that time of the year where homeowners are just itching to update their dwellings, build additions, create elaborate landscapes, all while thinking they will inevitably increase the return on investment within their home. Unfortunately, this was rarely the case when the housing market was booming, let alone in today’s fragile state. Consider that you want to spend $10,000 adding a new bathroom to your home, statistically speaking you will only receive about $6,000 return on that investment when it comes time to sell. Thinking about turning that spare bedroom into a command post for the corporate executive in the house? A $5,000 remodel will net you only about $2,500 when you sell the home. If you plan on living in your home for a considerable amount of time, then go for it! However, if you plan on selling your house next year, or you carry consumer debt, then think twice before shelling out cash on a negative return on investment.
We have all heard the benefits of buying a used car due to the aggressive depreciation in the first three years. I have more than one co-worker who refuses to pay over $5,000 for a vehicle, and they plan on driving it into the ground. I have always been prone to having a new car every few years, a personal finance no-no, and a habit I am desperately trying to rid myself of. This isn’t to say that the used car crowd has it entirely right either. A used car, especially one over 5 years old, is going to have increasingly significant repairs needed to keep it running. Be aware of this, and be aware of when it’s time to cut your losses. Spending $3,000 to fix a vehicle versus spending $5,000 to purchase another used one is smart finance right? It might not be if that car you’re fixing is only worth $1,500. Don’t spend more on something that is worth inherently less in the open market.
I know you probably thought you would get a long-winded article on the dangers of risky stock picks, unstable funds, or currency speculation. A house, a car, and your education are all personal assets. They require investments, and an outlay of cash to acquire and maintain. Please do not take them any more lightly than you would when considering how to allocate your 401k. Over-investing is a scary trend that I see and hear about all too often these days, don’t become a statistic.