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.
Jens says
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 :-)
Chris says
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..
Alice@lifeandotherweirdtales says
Great post. I will “take” with me the last paragraph: right to the point!
Layne says
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.
Great post!
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.
jerseygirl says
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
Julie says
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.
Ana says
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.