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FINANCIAL FEATURE
Capital for Everyday People
Examining the di erences between expenses and capital expenditures can equal big savings in the long run.
Politicians and philosophers might disagree on how capital should be allocated, but they agree it’s the lifeblood of our economy and society. Regular people don’t usually consider themselves capital allocators, but that sort of mindset can be useful when running your personal budget.
Most simply, capital is money that makes more money. When money ows out of your bank account, it’s either for an expense (like an operating expense in business) or a capital expenditure. A capital expenditure is money that isn’t gone forever — it hangs around in another form that you hope will create money for the future.
Here are a few ways to apply capital thinking to your budget: • Markets. e purest way to turn income into capital is to invest it in the markets. Today’s investment portfolios are a modern miracle — they have incredibly low costs to enter and strong prospects to provide a real return that outpaces in ation over time (despite inevitable uctuations). • Real Estate. Real estate can work, but it’s not a capital-accumulation panacea. Buying a house with a typical down payment is highly leveraged and therefore risky. An owner-occupied dwelling produces no income and instead produces signi cant expenses like interest, insurance, and general upkeep that can soak up capital as quickly as it becomes equity. ere are lots of reasons to own vs. rent, but hoping for a quick nancial windfall is not a good reason to buy. • Vehicles. Cars quickly destroy capital via depreciation. Businesses buy vehicles to make money and embrace the tax bene ts of their depreciation as a small bene t to the necessary cost of doing business. Families don’t get to deduct depreciation, and a vehicle for a family usually represents nothing more than a way of getting around. Buying fewer vehicles and using them less — by living closer to work and school, for example — will make a huge positive impact on household capital accumulation over time. • Human Capital. College feels like an expense, but the right degree can make huge changes in lifetime capital accumulation. Not just any degree from any university will help, though — discernment is necessary these days to understand the exact purpose, utility, and value of a program. For-pro t colleges have exploited many students, and even the most prestigious universities can produce graduates with signi cant debt and minimal opportunity, knowing they might have been better served on a di erent path. • Hobbies. What’s better, running or scuba diving? Scuba diving requires training, equipment, travel, and storage space, while running requires shoes and clothes you probably already have. Even the most avid gearhead would spend far less on running than diving, and an avid runner probably enjoys the hobby just as much as a diver. Strategically nding less expensive hobbies you truly enjoy can make a huge di erence when it comes to accumulating capital.
MICHEILE HENDERSON | UNSPLASH Creating money for the future
• Collectibles. Speculative collectibles might seem to pay for themselves, but by the time baseball cards, NFTs, or limitededition anything looks like a pro table hobby, it’s probably far too late. If a major part of your hobby involves looking at price guides and auction listings to see if you’re making money, you probably won’t nd the windfall at the end of the rainbow you’re expecting.
Looking at spending and saving this way might seem overly clinical but can be eye-opening once you get used to this mindset. Working people trade their time for income. Any opportunity to steer income away from expenses into capital activities that actually store and create value will bring about a day when capital can be used to free up your time — everyone’s only truly nonrenewable resource. Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Chief Investment O cer at Telarray, a Memphis-based wealth management rm that helps families navigate investment, tax, estate, and retirement decisions.
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