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.
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.
cheryl says
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!
GK says
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.
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“Sometimes You Just Need to Have an Ugly Cry…and That’s Okay”
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Jill says
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!
Sandy says
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.
Judy says
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.
BrownVagabonder says
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.