Nega-Wang - The Shortcut to Wealth

Author: Su Shifeng / Country: Mainland China
Publisher:
Publish Date: 2006-06-01
Features: The distinction between personal investment and personal consumption discusses investment and consumption. In a strict sense, only expenditures with prospects for preservation and appreciation can be considered investments. For example, for a business, almost every expenditure can be viewed as an investment because such expenditures are all aimed at preserving and appreciating assets. Unless a company is on the brink of bankruptcy and its leaders are busy dividing assets, such expenditures might qualify as "pure" consumption. For individuals, however, it's a bit different, because the purpose of a business is production, while the purpose of an individual is life and a better life. Therefore, every expenditure of an individual can be considered a form of consumption. For instance, if you buy a house, although real estate should be considered an investment because it has prospects for preservation and appreciation, if you purchase the house primarily for personal use rather than for real estate speculation or rental, then it's clear that the expenditure on buying the house should be classified as consumption. Only if you use the funds to buy a house for speculation, savings, purchase securities, or buy gold and jewelry and store them in a safe for semi-permanent use can such expenditures be considered "pure" investment.
Seeing this, you might have more questions. You mentioned earlier that "pure consumption debt" is a bad debt. So if I take out a loan to buy a house for personal use, wouldn't that make me have bad debt? The answer is clearly no. Because compared to food, clothing, and travel, housing has a huge difference—it is a durable consumption, or even a super-durable consumption. According to the laws of our country, the maximum land use rights are 70 years. That is, if the regulations do not change, the new house you buy can be lived in for 70 years. To put it bluntly, even if there is an earthquake and the building collapses, the land use rights of the house still belong to you and your neighbors. On the other hand, consumption like food, clothing, and travel cannot be compared in terms of durability to housing. Food can only be eaten once, clothing is usually only worn for one season, and travel, of course, is no different—once you come back from your trip, the consumption of travel naturally ends.
Let me give another example: For instance, if you spend 1,000 yuan to buy a refrigerator, it can be used for about 10 years. Then the annual depreciation would be an average of 100 yuan. Of course, when calculating the depreciation of fixed assets, the average straight-line depreciation is just one of many depreciation methods. Other commonly used methods include the working-hour method and the units-of-production method. However, applying these corporate asset depreciation methods to the field of personal durable consumer goods still has some problems. Because the depreciation of corporate fixed assets is mainly for cost allocation. But personal durable consumer goods are different—you don't need to account to a board of directors or shareholders, so there is no cost allocation to speak of. Everything is measured by your personal comfort, and this is something that is very difficult to quantify, and everyone's requirements for life are somewhat different.
Taking the 1,000 yuan refrigerator that can be used for 10 years as an example again. For instance, if you use this refrigerator for a month, it would be considered a second-hand appliance and might only be worth 600 yuan. But if someone really comes to you with 600 yuan, you definitely won't sell it, because in their eyes, something worth only 600 yuan might be worth 900 yuan to you, or even more. Maybe after 10 years, if the refrigerator still works, you can sell it for another 100 yuan. Given the complexity and uncertainty of depreciation for personal durable consumer goods, using the simplest straight-line depreciation method for calculation is still the most convenient.
No matter how depreciation is calculated, purchasing durable consumer goods should also be considered an investment for individuals, because their depreciation is very slow. When this product is infinitely durable, we can consider it a preservation investment. Of course, such products do not exist in reality; they only exist in theoretical assumptions.
Written here, the issue of good and bad debt in personal debt is simply explained. Let's summarize: Investment-based debt is more beneficial than consumption-based debt, and using debt for long-term consumption of durable goods is more beneficial than using it for short-term consumption. To give a more concrete and common example, taking out a loan to buy a house is much better than carrying a credit card balance past the grace period and shopping at supermarkets (note: it is past the grace period of the credit card)!
Determining whether debt is good or bad is just the beginning of personal debt management. You might already have some understanding of personal debt management—perhaps you are repaying a bank mortgage loan, or perhaps you are playing small tricks like using credit card consumption and then buying investment funds with your salary. Of course, I have no sarcastic intent here, because ten yuan and one hundred thousand yuan are both money, and having more money is always better than having less. Unfortunately, these seemingly small-profit methods can only bring you some psychological comfort, and it's hard to get rich with them—but there is still a way, because in the next chapter, I will discuss the relationship between debt and getting rich.
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