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When a company cuts a check for a new machine, however, it is booked not as an expense but an investment. That machine is going to be productive for a long while, and so a lot of businesses borrow the money for these kinds of investments.
OK, I realize I promised simple yet dragged the idea of capital expenditures vs. operating expense into personal finance, but it is a useful way to think as CFO of a household. A 2014 model car will be productive over a long period of time, and taking on debt to fund it can certainly be justified.
Where to draw the line on what’s an investment and what’s plain old consumption is a tough call, never mind what a tax accountant says. A new iPad shouldn’t go on a credit card, for example, as it could be obsolete by the time the owner really masters it.
People don’t often plan to keep a car 11.3 years, the current average age of America’s fleet, but the idea is to only use debt to fund purchases that last well beyond the last scheduled payment. As a rule of thumb, if something isn’t expected to be around and in everyday use in 10 years, it’s an expense. It’s consumption. And make every effort to avoid taking on debt to pay for consumption.
That’s it. Taxes can wait. So can Roth IRAs.
So here’s my best effort at short and memorable financial advice: Spend far less than you make. Invest what remains. And never borrow to buy what won’t last 10 years.
Can’t see how it would hurt to give it a try.