Non-financial investments

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Talk about investments and most people think stocks, bonds, and mutual funds, plus maybe real estate and commodities like precious metals. Let's call those "financial investments." You buy them with money and you hope that they will eventually return money in the form of interest, dividends, rent, or a profit when you sell it. Financial investments are great, and everybody should have a plan for building a portfolio of them, but there are also non-financial investments, and non-financial investments can often yield a higher return.

I divide non-financial investments into two categories. One kind you buy with money, but get your return not in cash but by avoiding future expenses. The other kind may well pay your return in the form of money, but at least part of your investment is not.

Ones that you buy with money, but the return comes in avoiding future expenses

Whenever you're in a situation where you can pay money now that lets you avoid spending money later, it's possible to evaluate the expense as an investment. For example, you can buy a gift card or other sort of stored-value card, and then use it to get stuff at some future time. On the face of it, it's a terrible investment--you turn perfectly good money into crappy non-money that can only be spent at a limited range of places (and that can lose value in several different ways). On the other hand, if you can buy a $25 stored-value card for $20, your investment return may well outweigh those disadvantages.

There are investments of this sort that are huge wins.

Energy savings

Money that's invested in things that avoid future energy costs, especially the less expensive such things like insulation, weatherstripping, compact fluorescents, or a bicycle that you commute to work on, will almost certainly provide a higher return (in the form of lower energy bills) than investing the same money in stocks and bonds.

At the more expensive end of the range of such investments, such as new doors and windows, a car that gets better milage, a windmill or solar cells for home power generation, they probably don't provide a greater return than a diversified portfolio of financial investments. But they do add considerably to your diversification, and there are some scenarios in which those investments might beat the market (in particular, if the market does poorly, or if energy prices rise sharply).

All of these can pay off in non-financial terms as well. A snugger, cozier house is worth something beyond the lower energy bills, as is the fitness that comes from bicycling to work.

The key to this category of investment is that you're using (still relatively) cheap energy today to avoid the need to pay for more expensive energy in the future. I've written about this topic before in Fix energy in tangible form.

This is an especially big win if energy prices are going to continue to increase, which I think is rather likely.

Stockpiling products that you use

You can invest in stuff that you're going to use anyway, by buying it ahead when it's available at a good price. The return comes in the form of using the cheap stuff you've got instead of going out and buying the stuff when it would be expensive.

I've written before about the Huge tax-free investment returns this strategy offers. It only applies if you buy stuff that you'd buy anyway, but the investment return can easily beat anything you'll find in the stock market. This kind of investment is an especially big win during times of inflation.

It's easy to fool yourself when you're thinking about spending money this way. There is really no end to the range of possibilities where you pay now to save money later, but in most cases, the savings is small (or even imaginary). Timeshare vacation homes, for example, were sold this way, but almost never provided a return as good as putting the money into a bank account and then using it to pay for your vacations. (Many didn't provide a return as good as putting the money down a rat hole, because they left you on the hook for unending future expenses. With a rat hole, at least you can stop putting money down it.)

Is it an investment when you buy a tool that lets you do something yourself, rather than having to pay someone to do it for you? When you buy a new interview suit to improve your chance of getting a better job? When you buy a Bowflex so you don't need a fitness center membership? Maybe--but you need to evaluate it like any other investment. A new interview suit is not a liquid investment.

Ones where the return is money, but that you don't pay cash for

Working for wages or a salary isn't really investing (although proving yourself a competent, diligent worker can pay dividends in the form of a higher pay for future work). However, it's often possible to turn your work into something that pays an on-going return.

Investing only time

The purest form may be royalties on a copyright or a patent. You create a book or a song or a useful invention, after which people pay you to use it. This is so cool that it tempts people into spending huge amounts of effort with nothing but a vague hope for some future royalties.

If you evaluate it as an investment, the return per hour spent writing or performing or inventing is pretty poor for most people. The problem is that you're competing with people who will do it for free. Even if many of them are lousy at it, there so many of them that a few will probably be better than you.

The bottom line is that this sort of investment is hard to justify in economic terms, unless you have a track record of success. Still, if it's something that you enjoy so much that you'd be willing to do it for free, then by all means go ahead and do so--that's how you develop the sort of track record that lets you know that this may be a good investment for you.

Investing time and money

If you're able and willing to invest a little money along with your time, there are lots of ways to make outsized returns:

• Working at a family business (or starting your own)
• Being a landlord
• Buying run-down houses cheap and then fixing them up
• Going back to school for a degree that will let you earn a better income
• Selling your art or craft items (or garden produce at a road-side stand)

The "outsized" part of the return comes from your own labor. Don't expect to come out ahead if you buy a run-down house and then hire a contractor to fix it up for you.

Like any investment, these all have risks. There are lots of people who bought run-down houses and fixed them up, only to find that a really nice house doesn't sell for as much now as a run-down house sold for a year ago. You can tie up your capital and invest your labor, and end up with a smaller return than a savings account, a negative return, a total loss, or even worse (if your business fails but still owes money on a lease, for example).

Many people treat this sort of investment as an all-or-nothing choice. Starting a small business can easily take all your capital plus every working minute of every day to make it a success. But that's not the only way to do it. There are all manner of very small business that you can start with minimal effort and capital that can earn a good return. For some examples of that category, see Tim Ferriss's The 4-Hour Workweek.

Anything that you buy or make that either pays you a return or reduces future expenses is an investment and can be (and should be) evaluated as such. All the same considerations that apply to any investment--risk, return, liquidity, diversification, tax implications--should be taken into account when you make a non-financial investment.

Don't discount such investments, though, just because they're non-financial. Especially those first few I mentioned, such as improving your insulation and stocking up on sales, will probably pay a much better return than you can expect in the financial markets.