Bad Expenses and Good Expenses

Bad Expenses or Good Expenses?

Bad Expenses

Many people think that increasing expenses is a bad thing. This article is for those who believe so.

The reason I wrote this article is because too many people don't realize what their doing with their money and they think they are investing the money, but in reality they are spending the money. Some other people fear and avoid spending money, but in some cases those expenses might be an investment that could bring them more money.

This article will help you understand better and make the difference between an investment (a good expense) and real expenses (or a bad expenses).

Expenses in their essence are not a bad thing. On what do you spend your money makes the difference. Depending on what do you buy, the expenses might be good or bad. There is a simple rule on differentiating the two:

Bad expenses are expenses that take money out from your pocket.

Good expenses are expenses that put money into your pocket.

I will go further on this with some examples:

Bad expenses example 1: Let's say you buy a car for personal use. Besides the price of the car, from now on you will have to pay for gas, insurance, service and parts. Those are costs associated to the use of a car. Since that car is constantly taking money out of your pocket without putting any into your pocket, the car is considered as a bad expense.

Bad expenses example 2: Let's say you buy a big house for you and your family. Many people look at a house as an investment and they think it's an active. Under certain conditions it might be, but usually a house that you use as your home it's not an investment, it's an expense. You will find why in a second.

When you buy a house, usually you buy it on mortgage. This means that you will have to take out money from your pocket on a monthly basis. More, there are other expenses with a house like electricity, water services, sewer, assurance, and s.o. Your monthly balance will decrease after you purchased a house. Of course, the value of the house might increase over time but it will be a decrease on your monthly balance and cash-flow.

In the following table you will see what happens to your money with those two examples. We will assume that our income is 3000$ and our currently expenses are 1100$. We will add the above examples to those values.

What happens with your balance?

 
Initial values
You buy a bigger house for yourself
You buy a new car for yourself
Income
3000 $
3000$
3000$
Expenses
1100 $
1900$
1500$
Monthly cash-flow (income-expenses
1900 $
1100$
1500$
Difference
0
- 800$
- 400$
This is an example on how buying a bigger house or a new car for personal use might influence your balance. In both cases your monthly cash-flow decreases. When cash-flow decreases it is called a bad expense, because it takes money out of your pocket

Let's analyse a little the table above. Initialy we started with an income of 3000$ a month and expenses of 1100$ (food, clothes, utilities, other expenses). When we bought a bigger house for our personal use (column 3 from left), this added 800$ to our monthly expenses (mortgage, housekeeping, utilities, assurance, s.o).

Adding those expenses to our monthly balance caused our cash-flow (monthly income - monthly expenses) to decrease. This means that the following months you will receive less money in your pocket.

This is very (!!!) important because is happening each month for 10, 20 years or more. You cannot repeat that process many times. If you add other expenses or your income decreases too much you might experience bankruptcy.

If instead of a bigger house we are buying a new car for personal use, our monthly expenses increased with 400$ (example) and our cash-flow decreased. This is the cost of having and using the car and is happening each month.

Keep The Balance In Favor Of Your Good Expenses
Keep The Balance In Favor Of Your Good Expenses

Good expenses

Good expenses

We will take the same car as an example, but instead of using the car for personal purposes, we will rent the car to someone else. Let's say that we rent the car for 25$ a day for 21 days/month. That means 525$ a month will be the income from that car. If we substract the expenses, which are 400$, we will have an income of 125$ from that car. Now the car is putting money into our pocket instead of taking money out of the pocket.

By changing the use of our car we transformed it from a passive that costs money each month into an active that brings money every month.

You might not feel so good If you spend 400$ with your car each month. How many cars can you buy in that way? Not to many, as much as your income will allow you.

But if you spend 400$ a month and those money bring you 525$ a month, how many times can you repeat that scheme? Theoretically infinite.

Let's say you buy 4 cars and rent them for 525$ a month. Those three cars cost you 1600$ a month and bring to you 2100$ a month. That's a net income of 500$. With that money you could buy an additional car that you could use for yourself and still have an income of 100$ a month.

Same thing with the house example. If you rent the house to someone else for 1200$ a month and your expenses with the house are 800$, you have an additional income of 400$ from that house. If you are on profit each time you buy a house, how many times can you repeat that action? Infinitely, if other factors are not included.

As long as the product you bought pays for itself, you don't have to worry anymore if you can afford it or not. And that are GOOD EXPENSES.

An easy way to identify good expenses from bad expenses is the following:

If it puts money into your pocket each month, then it's a GOOD EXPENSE.

If it's take money out of the pocket each month, then it's a BAD EXPENSE.

If you want to buy something and don't know if it's a good expense or a bad expense, try asking yourself how many times can you repeat that process and what will happen if you repeated it 100 times or 1000 times. If the answer is "I will become a millionaire", then you have a good expense. If the answer is "I will become broke", than is a bad expense.

What happens with your balance?

 
Initial values
You buy a house and rent it out
You buy a car and rent it out
Income
3000 $
4200 $
3525 $
Expenses
1100 $
1900 $
1500 $
Monthly cash-flow (income-expenses)
1900 $
2300 $
2025 $
Difference
0 $
+ 400 $
+ 125$
Good expenses allow you to get more money on a monthly basis. If you buy a house with 800$ expenses a month and you rent it out for 1200 $ a month, you will have a monthly cash-flow increase of 400$ (income-expenses). If the same house you use it as
Generated Cash-flow is what matters the most
Generated Cash-flow is what matters the most

Cash-flow is the most important part when you spend money!

As you may see from the above examples, cash-flow is the most important thing that changes when you buy something. If you are having a bad expense your monthly cash-flow will decrease. If you are having a good expense, your monthly cash-flow will increase.

You can also buy things that are neutral to your cash-flow. Let's say you buy an armchair for your house that you pay cash. You will now have an expense that does not influences your cash-flow. Your cash-flow does not changes, just the cash you have available decreased. The monthly cash-flow is the most important because your monthly cash-flow will produce the cash you have available in the future. If the armchair you bought allows you to get a higher rent on your house when you rent it out, then this expense can be a good one because it added money to your pocket. Otherwise, it will still be a bad expense, although the monthly cash-flow does not change (expenses that are neutral to your cash-flow are still bad expenses if it does not add money to your pocket in the future).

If the same armchair you buy not with cash, but with your credit card and you do not cover it quick enough, then you will have a bad expense, instead of a neutral one. Why? Because you will have to pay monthly for your credit card expenses and this will decrease your cash-flow.

You see, you cannot consider some things bad expenses and other things good expenses. Some might say that spending money for your University degree si a good expense. It depends on what results you will get in the future with that degree. If you will earn a lot of money, then it will be a good expense. However, if you cannot find a job and you are forced to re-qualify, it will be a bad expense. It's all related to the cash-flow produced.


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If your cash-flow (all income-all expenses) increases in relation to spending money on something, then you have a good expense. If your cash-flow decreases when spending money on something, it is a bad expense.

Evaluating the effects produced on your cash-flow is an easy and safe way to distinguish between good and bad expense.

Of course you cannot eliminate entirely the bad expenses from your life, as there is a cost of living and things that you need to buy. In fact, there are a lot of bad expenses if you want to live a very decent life. There is no point in eliminating the bad expenses from your life, as most of the time they will bring joy and satisfaction to you.

The point is to balance the good expenses and bad expenses in such way that you will have a continuous income growth in your life. As your income grows, your bad expenses can grow too.

An important thing is to first spend money on good expenses, and after your income increased, you can add bad expenses proportional to the increase, but never exceeding the income increase. Let your good expenses pay for your bad expenses.

In other words, "put the horse in front of the cart and not the cart before the horse".


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Comments 4 comments

Moneyger profile image

Moneyger 4 years ago

Good hub. The thing is, most of us want instant gratification and so we spend money on things that we can see results soon enough as opposed to those that can pay back, such as investments which take a bit longer to realize the desired results.


tipstoretireearly profile image

tipstoretireearly 4 years ago from New York

Separating spending into "good" and "bad" categories makes sense. Spending money on products that appreciate in value or generate income is the road to wealth, while spending money on products that depreciate or require additional spending is the road to the poor house.


oceansider 4 years ago

Thank you for your very informative and well done article!

Your information is very helpful. You have researched your article well.

Take care!


Viviannie profile image

Viviannie 4 years ago from Timisoara, RO Author

Thank you oceansider, I am glad if you found it useful.

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