Not every dollar spent is a poor decision. Not every purchase is a bad one. Not every expense is wasted.
In Accounting terms, there is a difference between a sunk cost and an investment. A sunk cost is money wasted, never to be recovered. But an investment is very different. An investment is money spent for the purpose of long-term (or short-term) gain. And while not every investment pays off in the long-run, some rewards are worth the risk.
I have found this to be a helpful distinction as I evaluate my spending and my purchases. Some purchases are worth the expense because they result in short or long-term gain—and I am not just talking about financial returns.
For example, many people will encourage you to invest in a quality bed and mattress. Healthy sleep is important because it provides the foundation and energy for how we spend our days. This seems like wise advice. Buying a quality bed is an investment into my life.
Additionally, I would argue that healthy food, quality running shoes, and opportunities to learn are also smart investments. They may cost a little bit more, but they improve our quality of life providing valuable returns. Some might include travel on the list—I tend to agree so long as experiencing and learning from new cultures accompanies it.
As might be expected, these investments vary from person to person. For me, as a writer, a working computer might be considered an investment. But the tools of a woodworker would be very different—even more a chef or a student or an airline pilot.
Unfortunately, many of the things we are sold these days are not investments. They are merely wasteful expenses—money that can never be recouped. They become a sunk cost as soon as we leave the store.
We are constantly told to upgrade our home size, our transportation, our appearance, or our means of entertainment. We are marketed unhealthy food as convenience and fast fashion as essential to success.
We are subtly convinced by a thousand different voices these purchases will improve our lives. But they rarely do. The happiness wears off almost immediately. And our only return on investment is regret.
Even worse, many of the things we purchase rob us not only of financial resources, they also steal our time and energy and focus. They redirect our attention from things that do matter and place it squarely on things that don’t.
There is another Accounting phrase called the “sunk cost trap.” Essentially, it warns against the tendency of people to irrationally follow through on an activity that is not meeting their expectations simply because of the time and/or money they have already spent on it. If a purchase made in the past is not providing its desired result, it is sunk. And other than the lessons learned, it should not be factored into future investments.
If the possessions you have accumulated over the years have not brought the happiness and fulfillment you desired, it is time to make a change. (tweet that)
Owning less provides more money, more energy, more time, and more opportunity to pursue our greatest passions. It allows us to redirect our finite resources away from sunk costs and place them into sound investments—investments that improve not only our own lives, but the lives of everyone around us.
Thank you for this post. I am currently in the process of going through each room in my apartment and getting rid of “stuff” that I don’t need. But looking at it from this perspective of being an investment in my life will allow me to most likely get rid of more than I was originally. This helps me to stay focused on living more simple and the importance of minimizing.
“We are subtly convinced by a thousand different voices these purchases will improve our lives… And our only return on investment is regret.”
Well said! I’ve even started vicariously feeling this regret when I give a family member a birthday gift and I later realize that it may never actually get used.
What I really need to do is start giving gifts that are actually investments (from which the recipient will actually collect dividends)…
My wife and tour the USA full time, and since we don’t have much, the things we do have are quality. Clothes that are made well, comfortable, packable and versatile aren’t cheap but are well worth the expense. Electric longboards and folding bikes aren’t cheap either, but absolutely enhance our experience
We were minimalists even before we hit the road. If I ever made a big purchase(hobby stuff or similar) we bought nice and with the mental understanding that if we bought something, we paid cash and could say goodbye to that cash forever right then. IE – if it ever came time to part ways with that object, we could walk away from it, without having to make any money on it. That’s not to say we wouldn’t (especially if we had the time or inclination) but we left ourselves that out if we ever decided to pack up and hit the road and didn’t want to mess around with the hassle of selling. When we did decide to go, we ended up giving away most of our things to people we felt could use it, even when most of those things could have brought us a nice chunk of change. That’s one of those beauties of simplicity, money loses it’s meaning and power :)
Joseph Chikeleze says
Am here again. Am becoming a kinda sticky to your blog–it worths it. The knowledge I’ve accumulated so far is essentially good.
Like you said, its of no value spending more money on stuffs that brings no addition to our lives. Spending $$$ dollars on alcohol liquidates you; leaves you in the same financial tumor forever.
We should spend less to own more! Thanks once more.
Sam Turner says
The idea of sunk cost traps really spoke to me and I feel I can apply that thinking to various aspects of my life. My relationship with my fiancée ended recently, in truth it should’ve ended months ago but I spent that time trying to make it work and get value from it because I didn’t want to feel the money and time I put into it was a waste.
It’s worth learning to accept bad decisions and because only when we accept them as such can we then take control of them.
Thank you fof this excellent article, Josh.
I’d like to remember this when it comes to time. These days, it’s gotten much easier for me let go of sunk costs financially. Time is harder for me, though, I think this could be clarifying in a few spots where I’m still struggling!
I agree with the overall concept, but I think it’s unfortunate that the word “investment” is used so loosely now. I’d wager that in the recent past some advertising firm somewhere started gradually injecting this word into various ads to encourage people to justify what they are actually doing: purchasing stuff. Nothing wrong with purchasing stuff, but let’s call it what it is. A stock mutual fund is an investment. A treasury bond is an investment. Buying something at a store that instantly loses 90% of its value the minute you walk out with it is not an investment.
Tiffany @ HappyThankfulHopeful says
As an accountant, I remember my early university days when the concept of sunk costs was introduced and how it was a refreshing concept. Memories! :)
Thank you for the great post – I also think it’s a concept that can be applied to people.
It seems brutal to say, but if there are people you’re spending time with that don’t leave you feeling the happiest or best version of yourself, and you’ve tried to improve things, it may be time to cut your losses and focus your precious time with people who enhance your life, and cut your sunk costs.
“Sometimes You Just Need to Have an Ugly Cry…and That’s Okay”
I like the comparison with accounting terms – it helps put things in perspective. I definitely own (and am trying to get rid of) many things that I purchased in the past that never really provided any kind of return – my sunk costs. Sometimes though, the return is emotional, mental, spiritual, or intellectual – like the classes you mentioned. My bass guitar comes to mind. Have I ever made any money from playing? Not yet. But I would not trade a single minute that I have played it for anything because of the incredible emotional return that I get making music!
Joshua, the distinction between sunk costs and investments is so helpful. Your explanation of “sunk cost traps” especially resonated. I have wasted lots of time and energy guilting my way through something just because I spent money on it. I guess breaking with those bad investments isn’t wasteful if I learn from it. Thank you for giving me a new way to evaluate what I spend my money and time on.
Great article, Joshua :) Living in the Midwest, tires are a big deal. I recently purchased new tires and paid $25.00 more per tire for a certain brand here that produces the very best all-weather tread. My car handled like a dream all winter and the extra $100.00 may have literally saved my life. I will have these tires for a very long time. —And just to add, been doing some spring cleaning! It feels great to get rid of clutter and see the extra space. Life is much more enjoyable without all the junk laying around everywhere. I’ve been enjoying this minimalism life style so much! Thank you, Joshua. It’s great to be a part of this wonderful movement and my life has improved tremendously. I can’t believe the positive impact!!! I love it :)
Christina @ Embracing Simple says
Great post! I agree that spending more money to have quality, purposeful items instead of focusing on quantity can add to our life. For example, I’d rather have 1 pair of good quality shoes that are comfortable and I enjoy wearing for several years, rather than 10 pairs of cheap shoes that are all uncomfortable and falling apart after a few months, and contributing to clutter in my home.
I’d rather invest a little more upfront!
I also think that travel is a wonderful investment we can make in our lives. If I’m blessed enough to be able to take my children on vacations, this is something that I’m passionate about investing our time and money in.
Humans are much more afraid of losing a dollar than gaining a dollar. The sunk cost trap plays into that fear. We have already spent some money on an item, and we are afraid that will be lost if we let it go. It is great to be reminded of such psychological traps on a regular basis so we can move away from them and towards rational buying.
Sam @ Frugaling.org says
You hit it right on the nail! As someone that’s trying to eat healthy, fresh food on a frugal budget, I appreciate this message. When it comes to paying a little more for a healthier option, that saying, “What goes around comes around,” seems fitting. With the better fitting, but maybe more expensive running shoes, they might last longer, reduce podiatrist visits, and ultimately save your knees. That savings is tremendous! Face value accounting is a problem for people and businesses alike. That’s why I’m glad to see corporations like Apple Inc. moving towards total cost accounting over the life cycle of products.
What about hobbies? Usually you don’t get measurable results from putting money into a hobby. But nonetheless I would call this an investment instead of “sunk cost”. And no, I certainly don’t count “shopping” as a hobby :-)
I was just evaluating this very topic the other day but in terms of time. I feel like time (some not all) on social media is a sunk cost. I’ve found myself wandering various social media channel without a purpose only to realize I’ve lost far too much time. That was time that could’ve been spent with family or friends.
La Dash says
Excellent analogy! I would also apply that to web surfing and reading multiple news sources..
Great post. I will “take” with me the last paragraph: right to the point!
At first, I wondered whether your sunk cost analogy was going to follow through to a more logical conclusion, and thankfully you clarified the true usage of “sunk cost” later in the article.
However the second usage is the correct one and the first time you introduce the concept is just confusing. Any “sunk cost” is an investment you’ve made in the past that isn’t coming back. Period. Down payment – sunk cost. Apartment pet charge – sunk cost. Time spent on a project – sunk cost. Just because they are “sunk” doesn’t mean it’s a bad investment.
The trick here is what you point out later on. How to determine future choices. This is where knowing what costs are “sunk” is important, because it allows you the freedom to move on. Economists always encourage people to “think at the margins”, meaning that if you ignore any past investments, what is the best outcome starting right now?
Example: I purchase a used car with $2000 cash, value $3000. Great deal right?! Problem – a year later the brakes, tranny, pump, etc. start to go one after another. I can’t think about all the $$ i’ve invested into the car to make future decisions, I have to start with a clean slate.
Tracy B. says
Layne, your second paragraph is just what I was thinking. I know from my accounting courses that a sunk cost is merely money already spent; the term carries no judgment. Your other points are well stated also.
joshua becker says
I am thankful for your clarification Layne. Accounting was many years ago for me. But the take-away of not allowing sunk costs to influence future investments was always something that stuck with me.
Robert Curth says
Thanks for the sunk cost idea.The hard part is to know this in advance.
It’s too easy to not really think things through when you want to have something.
Michelle C says
I really appreciate this distinction on spending. Since travel is a big part of our lives, I appreciate you mentioning it, too. I heard a quote once, “Travel is the only thing you buy that makes you richer.” Not all travel is a worthy investment though. We hope to encourage people to be more intentional about their travel because the true value is not when it’s an escape/entertainment/indulgence, but rather when it is transformational – both for us as individuals and for the community/world we interact with.
Why does it have to be transformational? What is wrong with using that time to relax and recharge? I work a high-stress job and have a full schedule outside of work. For me, travel to a place where I can just be and enjoy peace (preferably near an ocean) is an investment worth making
I would argue that since you have a high stress job, taking a relaxing vacation is transformational. It brings you back to peace and calm which this world desperately needs.
Carina Spring says
Great post. I always say that we pay for the world we want to live in. For example, for me this means that I am willing to pay more for high quality products that last and for foods grown sustainably, but I try not to buy certain disposable products at any price (though I sometimes fail) no matter how cheap the cost. It is so true – there are good investments (for our own life quality, and/or that of our fellow humans and our planet), and good reasons to buy certain things. It’s not about never buying, but being mindful of our investments. Thanks for the reminder Joshua!
Debt Hater says
I remember learning about sunk costs in my accounting classes, interesting way to apply them to normal purchasing and investment decisions. I think sometimes it’s hard to know when something is a “sunk cost” because if you spend a significant amount of money on anything, it can be hard to let go or admit you made a mistake.
Love this. Since I’ve started on the path to minimalism, I’ve had a hard time buying anything without feeling like every purchase might be a sign that I’m reverting back to old purchasing habits. I’d like to enjoy good purchases without the guilt and this might be one way to measure them.
Daisy @ Simplicity Relished says
The idea of “sunken costs” is an excellent to evaluate our spending habits. When items are purchased and used well, I don’t consider them to be clutter– instead, they’re a sign of good decisions that have enhanced my life.