If you want to grow richer, start treating all your investments as expenses. Some people question why I list retirement contributions and other investments as expenses on financial statements, so let me explain why this approach is beneficial.
Thinking of investments as expenses can accelerate wealth-building beyond the average. This mindset shift moves you from a defensive financial posture to an offensive one, which is key for increasing your financial freedom.
Here’s a breakdown using simple financial terms:
Income Statement Perspective:
Consider a family making $350,000 annually. In their budget, which parallels an income statement in business, every outlay not categorized as income is an expense. This includes retirement contributions, mortgage payments, and other similar commitments. These are recorded as expenses because they reduce your available cash—what you’d call “Net Profit” in corporate terms, or simply the cash you have left after expenses.
Balance Sheet Perspective:
On the balance sheet, investments are assets. This statement tallies up all assets and liabilities to calculate net worth. Ideally, over time, your assets, including investments, will appreciate, boosting your net worth if your liabilities remain constant or decrease.
Why It’s Controversial:
Confusion often arises because people aren’t used to seeing investments listed as expenses. They might think this suggests a high-income family is poorer than it is. However, recognizing these contributions as expenses highlights their impact on reducing taxable income and increasing net worth—key strategies for achieving financial independence.
Investing is undeniably a form of expense because it requires using your funds today to secure a more financially stable future. It’s a commitment to your future self, and while it sacrifices immediate gratification, it promises greater freedom later on. This is especially poignant in today’s economic climate, where many feel compelled to enjoy the present moment at the expense of future security.
Viewing investments as a luxury can be frustrating for those struggling with basic needs. Yet, investment opportunities have become more accessible. With platforms allowing investments in stocks and real estate for as little as $10, the barrier to entering the investment world is lower than ever.
Furthermore, just like insurance, where premiums are paid to mitigate future financial disasters, investments hedge against future financial needs and emergencies. Hence, regularly contributing to retirement plans and other investment vehicles should indeed be viewed as necessary expenses.
By embracing this perspective, you ensure you are consistently allocating funds to grow your wealth, ultimately making steps toward financial independence and the freedom to live life on your terms. So, if you’re serious about building wealth, keep those investment “expenses” high—it’s about playing offense in the game of wealth accumulation.
